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BORSA ITALIANA
7.61 EUR +0.07 %
NYSE
9.63 USD +2.34 %
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BORSA ITALIANA
7.61 EUR +0.07 %
NYSE
9.63 USD +2.34 %
Search

Risks and Uncertainties

Risks associated with global financial markets and general economic conditions

The Group’s earnings and financial position may be influenced by various macroeconomic factors – including increases or decreases in gross domestic product, the level of consumer and business confidence, changes in interest rates on consumer and business credit, energy prices, the cost of commodities or other raw materials and the rate of unemployment – within the various countries in which it operates.

For example, the global economic recession in 2008 and the first half of 2009 had a negative impact on the Group’s earnings. Weak economic conditions resulted in a significant decline in demand for most of the Group’s products. The current economic weakness in the eurozone, including Italy, cast serious uncertainty on the possible evolution of the economic activity in this region in the foreseeable future. In Europe, despite the measures taken by several governments, international and supranational organizations and monetary authorities to provide financial assistance to euro area member states of the European Union in economic difficulty and to face the possibility of default by certain European countries on their sovereign debt obligations, concerns persist regarding the debt burden of certain eurozone countries and their ability to meet future financial obligations, the overall stability of the euro and the suitability of the euro as a single currency (or, in more extreme circumstances, the possible dissolution of the euro entirely), given the diverse economic and political circumstances in individual member states of the eurozone. These potential developments could adversely affect the businesses and operations of the Group.

Following the acquisition of control of Chrysler in 2011, nearly 45% of Group’s on-going revenues are generated in the NAFTA region. Substantially all of Chrysler’s vehicles sales occur in North America (U.S. and Canada). Although Chrysler is seeking to increase the proportion of its vehicle sales outside of North America (directly or through Fiat), it anticipates that its results of operations will continue to depend substantially on vehicle sales in the principal North American markets, particularly the U.S. Any significant deterioration in the economic conditions in the U.S. and/or Canada may consequently adversely affect Fiat Group’s result of operations, financial position and cash flows.

In general, the sector in which the Group operates have historically been subject to highly cyclical demand and tend to reflect the overall performance of the economy, in certain cases even amplifying the effects of economic trends. Given the difficulty in predicting the magnitude and duration of economic cycles, there can be no assurances as to future trends in the demand for or supply of products sold by the Group in any of the markets in which it operates.

Additionally, even in the absence of slow growth or recession, other economic circumstances – such as increases in energy prices, fluctuations in prices of raw materials or contractions in infrastructure spending – could have negative consequences for the industry in which the Group operates and, together with the other factors referred to previously, could have a material adverse effect on the Group’s business prospects, earnings and/or financial position.

Risk associated with the high level of competition and cyclicality of the automobile industry

Substantially all of the Group’s revenues are generated in the automobile industry, which is highly competitive and encompasses the production and distribution of passenger cars, light commercial vehicles and the related components and production systems. The Group faces competition from other international passenger car and light commercial vehicle manufacturers and distributors and components suppliers in Europe, North and Latin America. These markets are highly competitive in terms of product quality, innovation, pricing, fuel economy, reliability, safety, customer service and financial services offered.

Competition, particularly in pricing, has increased significantly in the Group’s industry sector in recent yars. In addition, partly as a result of the contraction in demand for automobiles, global production capacity for the car industry significantly exceeds current demand. This overcapacity, combined with high levels of competition and weakness of major economies, could intensify pricing pressures.

Fiat has a relatively high proportion of fixed costs and may have significant limitations on the ability to reduce fixed costs by closing facilities and/or reducing labor expenses. Fiat’s competitors may respond to these conditions by attempting to make their vehicles more attractive or less expensive to customers by adding vehicle enhancements, providing subsidized financing or leasing programs, offering option package discounts, price rebates or other sales incentives, or by reducing vehicle prices in certain markets. In addition, manufacturers in countries which have lower production costs have announced that they intend to export lower-cost automobiles to established markets. These actions have had, and could continue to have, a negative impact on Fiat’s vehicle pricing, market share, and operating results. Offering desirable vehicles that appeal to customers can mitigate the risks of stiffer price competition, while offer of vehicles that are perceived to be less desirable (whether in terms of price, quality, styling, safety, or other attributes) can exacerbate these risks.

In the Automobiles business, sales to end customers are cyclical and subject to changes in the general condition of the economy, the readiness of end customers to buy and their ability to obtain financing and the possible introduction of measures by governments to stimulate demand. The sector is also subject to constant renewal of the product offering through frequent launches of new models. A negative trend in the automobiles business could have a material adverse impact on the business prospects, earnings and/or financial position of the Fiat Group.

Should the Group be unable to adapt effectively to external market conditions, this could have a material adverse effect on its business prospects, earnings and/or financial position.

Risks associated with the ability to offer innovative products

The success of the Group’s businesses depends, among other things, on their ability to maintain or increase their share in existing markets and/or to expand into new markets through the development of innovative, high-quality products that provide adequate profitability. In particular, a failure to develop and offer innovative products that compare favorably to those of the Group’s principal competitors in terms of price, quality, functionality and features, or delays in bringing strategic new models to market, could result in reduced market share, having material adverse effects on the Group’s business prospects, earnings and/or financial position.

Risks associated with the policy of targeted industrial alliances

The Group has engaged in the past, and may engage in the future, in significant corporate transactions such as mergers, acquisitions, joint ventures and restructurings, the success of which is difficult to predict. There can be no assurance that any such significant corporate transaction which might occur in the future will not encounter administrative, technical, industrial, operational, regulatory, political, financial or other difficulties (including difficulties related to control and coordination among different shareholders or business partners) and thus fail to produce the benefits expected of it. The failure of any significant strategic alliance, joint venture, merger or similar transaction could have an adverse effect on the Group’s business prospects, earnings and/or financial position.

Risk associated with the alliance with Chrysler

The acquisition of a controlling interest in Chrysler and the related alliance is intended to provide both Fiat and Chrysler with a number of long-term benefits, including sharing new vehicle platforms and powertrain technologies, as well as procurement benefits, management services and global distribution opportunities. The alliance is also intended to facilitate both parties penetration in several international markets where the companies’ products would be attractive to consumers, but where one of the parties does not have significant penetration.

The ability to realize the benefits of the alliance is critical for Fiat and Chrysler to compete with their competitors. If the parties are unable to convert the opportunities presented by the alliance into long-term commercial benefits, either by improving sales of our vehicles and service parts, reducing costs or both, the Group’s financial condition and results of operations will be materially adversely affected.

Additionally, any adverse development in the Chrysler investment and the related alliance could have a material adverse effect on the Group’s business prospects, financial condition and results of operations. Therefore, if the investment and the related alliance do not bring their intended benefits or changes in circumstances at Fiat or Chrysler occur, there may be a material adverse effect on the Group’s business prospects, financial condition and results of operations.

Risks associated with selling in international markets and exposure to changes in local conditions

The Group is subject to risks inherent to operating globally, including those related to:

  • exposure to local economic and political conditions;
  • import and/or export restrictions;
  • multiple tax regimes, including regulations relating to transfer pricing and withholding and other taxes on remittances and other payments to or from subsidiaries;
  • foreign investment and/or trade restrictions or requirements, foreign exchange controls and restrictions on repatriation of funds;
  • the introduction of more stringent laws and regulations;
Unfavorable developments in any one of these areas (which may vary from country to country) could have a material adverse effect on the Group’s business prospects, earnings and/or financial position.

 

Risks associated with operating in emerging markets

The Group operates in a number of emerging markets, both directly (e.g., Brazil and Argentina) and through joint ventures and other cooperation agreements (e.g., Turkey, India, China and Russia). The Group’s exposure to these countries has increased in recent years, as have the number and importance of such joint ventures and cooperation agreements. Economic and political developments in emerging markets, including economic crises or political instability, have had and could in the future have material adverse effects on the Group’s business prospects, earnings and/or financial position.

Risks associated with relationships with employees and suppliers

In many countries where the Group operates, Group employees are protected by various laws and/or collective labor agreements that guarantee them, through local and national representatives, the right of consultation on specific matters, including downsizing or closure of production units and reductions in personnel. The laws and/or collective labor agreements applicable to the Group could impair its flexibility in reshaping and/or strategically repositioning its business activities. The Group’s ability to reduce personnel or implement other permanent or temporary redundancy measures may be subject to government approvals and the agreement of the labor unions. Industrial action by employees could have an adverse impact on the Group’s business activities.

Furthermore, the Group purchases raw materials and components from a large number of suppliers and relies on services and products provided by companies outside the Group. Some of these companies are highly unionized. Close collaboration between a manufacturer and its suppliers is common in the industries in which the Group operates and although this offers economic benefits in terms of cost reduction, it also means that the Group is reliant on its suppliers and is exposed to the possibility that difficulties, including those of a financial nature, experienced by those suppliers (whether caused by internal or external factors) could have a material adverse effect on the Group’s business prospects, earnings and/or financial position.

Risk associated with increase in costs, disruption of supply or shortage of raw materials

Fiat uses a variety of raw materials in its business including steel, aluminum, lead, resin and copper, and precious metals such as platinum, palladium and rhodium. The prices for these raw materials fluctuate and at times in recent periods, these commodity prices have increased significantly in response to changing market conditions. Fiat seeks to manage this exposure, but it may not be successful in hedging these risks. Substantial increases in the prices for raw materials would increase the Group’s operating costs and could reduce profitability if the increased costs will not be offset by changes in vehicle prices. In addition, certain raw materials are sourced only from a limited number of suppliers and from a limited number of countries. The Group cannot guarantee that it will be able to maintain arrangements with these suppliers that assure access to these raw materials, and in some cases this access may be affected by factors outside of Group’s control and the control of its suppliers. For instance, the recent earthquake and tsunami in Japan have negatively affected commodity markets, and any similar event may have severe and unpredictable effects on the price of certain raw materials in the future. As with raw materials, the Group is also at risk for supply disruption and shortages in parts and components for use in its vehicles.

Any interruption in the supply or any increase in the cost of raw materials, parts and components could negatively impact Group’s ability to achieve growth in vehicle sales and improved profitability.

Risks associated with environmental and other government regulation

The Group’s products and activities are subject to numerous environmental laws and regulations (local, national and international) which are becoming increasingly stringent in many countries in which it operates (particularly in the European Union). Such regulations govern, among other things, products – with requirements relating to emissions of polluting gases, reduced fuel consumption and safety becoming increasingly strict – and industrial plants – with requirements for emissions, treatment of waste and water and prohibitions on soil contamination. In order to comply with such laws and regulations, the Group employs considerable resources and expects it will continue to incur substantial costs in the future.

In addition, government initiatives to stimulate consumer demand for products sold by the Group, such as changes in tax treatment or purchase incentives for new vehicles, can substantially influence the timing and level of revenues. The size and duration of such government measures are unpredictable and outside of the Group’s control. Any adverse change in government policy relating to those measures could have material adverse effects on the Group’s business prospects, earnings and/or financial position.

Risks associated with management

The Group’s success is largely dependent on the ability of its senior executives and other members of management to effectively manage the Group and individual areas of business. The loss of any senior executive, manager or other key employees without an adequate replacement or the inability to attract, retain and incentivize senior executive managers, other key employees or new qualified personnel could therefore have a material adverse effect on the Group’s business prospects, earnings and/or financial position.

Risks associated with financing requirements

The Group’s future performance will depend on, among other things, its ability to finance debt repayment obligations and planned investments from operating cash flow, available liquidity, the renewal or refinancing of existing bank loans and/or facilities and possible recourse to capital markets or other sources of financing. Although the Group has measures in place that are designed to ensure levels of working capital and liquidity are maintained, further declines in sales volumes could have a negative impact on the cash-generating capacity of its operating activities. The Group could, therefore, find itself in the position of having to seek additional financing and/or having to refinance existing debt, including in unfavorable market conditions with limited availability of funding and a general increase in funding costs. Any difficulty in obtaining financing could have material adverse effects on the Group’s business prospects, earnings and/or financial position.

Risks associated with Fiat indebtedness as a result of the acquisition of control of Chrysler

Even after the acquisition of control by Fiat, Chrysler continues to manage financial matters, including funding and cash management, separately. Additionally, Fiat has not provided guarantees or security or undertaken any other similar commitment in relation to any financial obligation of Chrysler, nor does it have any commitment to provide funding to Chrysler in the future. 

In any case, certain bonds issued by Fiat include provisions that may be affected by circumstances related to Chrysler. In particular these bonds include cross-default clauses which may accelerate Fiat’s obligation to repay its bonds in the event that a “material subsidiary” of Fiat fails to pay certain debt obligations on maturity or is otherwise subject to an acceleration in the maturity of any of those obligations. As a result of Fiat’s acquisition of control over Chrysler, Chrysler Group LLC is a “material subsidiary” and certain of its subsidiaries may become material subsidiaries of Fiat within the meaning of those bonds. Therefore, the cross-default provision could require early repayment of the Fiat bonds in the event Chrysler’s debt obligations are accelerated or are not repaid at maturity. There can be no assurance that the obligation to accelerate the repayment by Chrysler of its debts will not arise or that it will be able to pay its debt obligations when due at maturity.

Risks associated with Fiat’s credit rating

The ability to access the capital markets or other forms of financing and the related costs are dependent, amongst other things, on the Group’s credit ratings. Following downgrades by the major rating agencies in the first quarter of 2009 and during 2011, Fiat is currently rated below investment grade, with ratings on its long-term debt of Ba2 (Ba3 for senior unsecured bonds) with negative outlook from Moody’s Investors Service Inc., BB with credit watch negative from Standard & Poor’s Ratings Services (a subsidiary of The McGraw- Hill Companies, Inc.), and BB with negative outlook from Fitch Ratings Ltd. The rating agencies review their ratings at least annually and, as such, the assignment of new ratings to Fiat during 2012 cannot be excluded. It is not currently possible to predict the timing or outcome of any rating review. Any further downgrades would increase Fiat’s cost of capital and potentially limit its access to sources of financing with a consequent material adverse effect on Fiat’s business prospects, financial condition and/or results of operations.

Chrysler has been assigned a corporate credit rating of B2 (with a positive outlook) by Moody’s Investor Service and B+ (with a stable outlook) by Standard & Poor’s. Because Chrysler is more highly leveraged and has a lower corporate credit rating than Fiat, it is possible that consolidation of Chrysler’s financial information into Fiat’s financial information could result in a rating review of Fiat and potentially a lower credit rating.

Risks associated with restrictions arising out from Chrysler’s debt instruments

In connection with the refinancing transactions finalized at the end of May 2011, Chrysler entered into a credit agreement for the senior secured credit facilities (including a revolving facility) and an indenture for two series of secured senior notes. These debt instruments include covenants that restrict Chrysler’s ability to make certain distributions, prepay other debt, encumber assets, incur additional indebtedness, engage in certain business combinations, or undertake various other business activities.

The credit agreement governing the senior secured credit facility and the indenture governing the secured senior notes contain restrictive covenants that limit Chrysler’s ability to, among other things:

  • incur or guarantee additional secured indebtedness;
  • pay dividends or make distributions or purchase or redeem capital stock;
  • make certain other restricted payments;
  • incur liens;
  • sell assets;
  • enter into sale and lease-back transactions;
  • enter into transactions with affiliates (as defined in the relevant contractual documents), including Fiat;
  • effect a consolidation, amalgamation or certain merger or change of control (except for the acquisition of control by Fiat);

These restrictive covenants could have an adverse effect on Chrysler’s business by limiting its ability to take advantage of financing, mergers and acquisitions, joint ventures or other corporate opportunities. In addition, the Senior Credit Facilities contain, and future indebtedness may contain, other and more restrictive covenants and also prohibit Chrysler from prepaying certain of their indebtedness. The Senior Credit Facilities require Chrysler to maintain borrowing base collateral coverage and a liquidity threshold. A breach of any of these covenants or restrictions could result in an event of default on the indebtedness and any of the other indebtedness of Chrysler or result in cross-default under certain of its indebtedness.

Furthermore, the indenture governing the VEBA Trust Note limits the ability of Chrysler’s subsidiaries to incur debt.

If Chrysler is unable to comply with all of these covenants, it may be in default, which could result in the acceleration of its outstanding indebtedness and foreclosure on mortgaged properties. In this case, Chrysler may not be able to repay its debt and it is unlikely that it would be able to borrow sufficient additional funds. In any case, even if new financing is made available to Chrysler in such circumstances, it may not be available on acceptable terms.

In addition, compliance with certain of these covenants could restrict Chrysler’s ability to take certain actions that its management believes are in Chrysler’s best long-term interests. Should Chrysler be unable to undertake strategic initiatives due to the covenants provided for by the above instruments, Fiat business prospects, financial condition and/or results of operations could be harmed.

Risks associated with fluctuations in currency and interest rates and credit risk

The Group, which operates in numerous markets worldwide, is naturally exposed to market risks stemming from fluctuations in currency and interest rates. The exposure to currency risk is mainly linked to the difference in geographic location between the Group’s manufacturing activities and its commercial activities, resulting in cash flows from exports denominated in currencies that differ from those associated with production activities. The Group uses various forms of financing to cover funding requirements for its industrial activities and for financing customers and dealers. Moreover, liquidity for industrial activities was also principally invested in variable-rate or short-term financial instruments. The Financial Services companies normally operate a matching policy to offset the impact of differences in rates of interest on the financed portfolio and related liabilities. Nevertheless, changes in interest rates can result in increases or decreases in revenues, finance costs and margins.

Consistent with its risk management policies, the Group seeks to manage risks associated with fluctuations in currency and interest rates through the use of financial hedging instruments. Despite such hedges being in place, sudden fluctuations in currency or interest rates could have a material adverse effect on the Group’s business prospects, earnings and/or financial position.

The Group’s Financial Services activities are also subject to the risk of insolvency of dealers and end customers, as well as unfavorable economic conditions in markets where these activities are carried out, which the Group seeks to mitigate through the credit approval policies applied to dealers and end customers.

Risks associated with the availability of adequate financing for Chrysler’s dealers and retail customers

In the United States and Canada, Chrysler’s dealers enter into wholesale financing arrangements to purchase vehicles from Chrysler and retail customers use a variety of finance and lease programs to acquire vehicles. Insufficient availability of financing to dealers and retail customers contributed to sharp declines in Chrysler’s vehicle sales during 2008, and was one of the key factors leading to Chrysler’s bankruptcy filing.

Chrysler’s lack of a captive finance company may increase the risk that dealers and retail customers will not have access to sufficient financing on acceptable terms and may adversely affect vehicle sales in the future. Furthermore, most of Chrysler’s competitors operate and control their own captive finance companies: as a result, they may be better able to implement financing programs designed principally to maximize vehicle sales in a manner that optimizes profitability for them and their captive finance companies on an aggregate basis. Since Chrysler’s ability to compete also depend on access to appropriate sources of financing for dealers and retail customers, its lack of a captive finance company could adversely affect its results of operations. In addition, unless financing arrangements other than for retail purchase continue to be developed and offered by banks to retail customers in Canada, Chrysler’s lack of a captive finance company could present a competitive disadvantage in Canada, since banks are restricted by law from providing retail lease financing in Canada.

In connection with the 2009 restructuring of the U.S. automotive industry, and with the assistance of the U.S. Treasury, Chrysler entered into an auto finance relationship with Ally Financial Inc. (hereafter “Ally”); the agreement with Ally extends through April 20, 2013, with automatic one year renewals unless either party elects not to renew. Ally historically was the captive finance company of General Motors Company, one of Chrysler’s main competitors.

Pursuant to this agreement, Ally is neither obligated to provide financing to dealers, nor is Ally required to fund a certain number of vehicle sales or leases for customers. On the other hand, Chrysler must offer all subvention programs to Ally, and it is required to ensure that Ally finances a specified minimum percentage of the units sold by Chrysler in North America under rate subvention programs in which it elects to participate.

Chrysler expects Ally to provide services comparable to those Ally provides to its other strategic business partners, including General Motors. Nevertheless, Chrysler’s ability to fully realize the value of their relationship with Ally may be adversely affected by a number of factors, including General Motors’ historic and ongoing relationship with Ally, and General Motors’ current equity ownership in Ally.

To the extent that Ally is unable or unwilling to provide sufficient financing at competitive rates to Chrysler’s dealers and retail customers, and dealers and retail customers do not otherwise have sufficient access to such financing. As a result, Chrysler’s vehicle sales and market share may suffer, which would adversely affect its and Fiat’s financial condition and/or results of operations.

Risks associated with Chrysler’s pension plans

Chrysler’s defined benefit pension plans are currently underfunded and its pension funding obligations may increase significantly if investment performance of plan assets does not keep pace with increases in obligations. These funding obligations may increase based upon the future returns on the assets placed in trusts for these plans, the level of interest rates used to determine funding levels, the level of benefits provided for by the plans, investment decisions that do not achieve adequate returns and any changes in applicable law related to funding requirements. Chrysler’s defined benefit pension plans currently hold significant investments in equity and fixed income securities, as well as investments in less liquid instruments such as private equity, real estate and hedge funds. Due to the complexity and magnitude of certain of their investments, additional risks may exist, including significant changes in investment policy, insufficient market capacity to complete a particular investment strategy, and an inherent divergence in objectives between the ability to manage risk in the short term and inability to quickly rebalance illiquid and long-term investments.

To determine the appropriate level of funding and contributions to Chrysler’s defined benefit pension plans, as well as the investment strategy for the plans, Chrysler is required to make various assumptions, including an expected rate of return on plan assets and a discount rate used to measure the obligations under the defined benefit pension plans. Interest rate increases generally will result in a decline in the value of fixed income securities while reducing the present value of the obligations. Conversely, interest rate decreases will increase the value of fixed income securities, partially offsetting the related increase in the present value of the obligations.

If the total values of the assets held by Chrysler’s defined benefit plans fall and/or the returns on these assets underperform the relevant assumptions, Chrysler pension expenses and contributions could increase and, as a result, could materially adversely affect the Group’s financial condition and/or results of operations. If Chrysler fails to make required minimum funding contributions, it could be subjected to reportable event disclosure to the Pension Benefit Guaranty Corporation, as well as interest and excise taxes calculated based upon the amount of funding deficiency.

If Fiat’s ownership in Chrysler were to exceed 80%, Fiat may become subject to certain US legal requirements making it secondarily responsible for any funding shortfall in certain of Chrysler’s pension plans in the event Chrysler were to become insolvent. Chrysler’s organizational documents contain certain protections designed to ensure that Fiat will not inadvertently become subject to these obligations.