The King And His Cars

It's been a bad year for Giovanni Agnelli, the ailing king of Italian industry. This spring the Rome press was writing eulogies for the Fiat founder after he failed to appear in public for several weeks. Worse, false news of his death sent Fiat stock soaring on the hope that the faltering conglomerate, Italy's largest private employer, would be better off without him. As it happened, the 81-year-old tycoon was in New York undergoing treatment for a prostate condition; he returned this month to new rumors, this time that he had come home to die. More likely, he's come home in a last ditch attempt to save his empire.

Once the pride of Italy, Fiat looks increasingly like just another old family business, out of step with a changing Europe. On a continent where trade barriers are falling and brand loyalty has increasingly little to do with nationality, Fiat's flagship auto business is losing market share--even at home--to foreign rivals. For decades it was Europe's largest and most profitable carmaker, but Fiat is now 6.6 billion euros in debt and lost 549 million euros last year alone. How to save this Italian icon is a subject of hot debate from the prime minister's office to Parliament and the inner sanctums of Fiat and the Agnelli family. The question: should Fiat sell the car business to General Motors, which is already a part owner? The latest drama came after Fiat chairman Paolo Fresco praised the "absolute loyalty" of CEO Paolo Cantarella, who resigned just days later, citing the best interests of Fiat.

The confusion reflected the national disarray over industrial policy. Normally an advocate of modernizing the Italian economy, Prime Minister Silvio Berlusconi has suggested a new subsidy for the car "industry"--a dodge around European rules against propping up individual companies. Fiat is the Italian car industry. It is also the nation's largest private employer, accounting for 5 percent of GDP. To many Italians, selling Fiat Auto to General Motors would be like giving up espresso for American coffee. That's why Berlusconi might swallow market principles to save Fiat Auto. He could also spin the bailout as a blow of sorts for reform: Italian business schools use Fiat as a model conglomerate, in part because it has been relatively free of corruption.

The loudest opponents of a bailout are Italy's powerful unions, which typically fight to keep local industry in Italian hands. In this case, they believe Berlusconi (himself a major industrialist) and Agnelli are working to undermine the unions. Fiat has already announced that more than 3,000 jobs will be cut at its Turin car plants over the next four months, and the unions fear Berlusconi would demand deeper cuts in return for a bailout. The unions thus prefer an American takeover as the lesser of two evils. Giorgio Airaudo, secretary of the main Fiat union, says that "12,000 jobs are really at risk. The entire industrial system is in danger with government intervention."

The Agnellis helped found Fiat, which spun off brands like Lancia, Ferrari and Maserati. In 1936 they introduced a subcompact to Europe, revolutionizing the market decades before the Japanese pulled a similar feat in America. Today they run a global conglomerate with 1,063 companies in everything from farm machines to publishing. But their first love is still cars, and they continue to introduce new models, including the Lancia Thesis earlier this month. Says one analyst: "If all they end up owning is a bunch of unglamorous insurance, energy and industrial businesses, they will be just another rich Italian family."

The Agnellis' influence has been on the wane for some time. The family could once boast that foreign heads of state visited Fiat headquarters in Turin as often as they visited the government in Rome. The first real sign of weakness came in 1999, when the Agnellis tried and failed to defend a key ally from what was then the largest hostile takeover ever seen in Europe. The 37 billion europurchase of Telecom Italia by Olivetti split the "drawing room," the mythical room where Italian industrialists govern the national economy, and left Fiat on the losing side. Its allure is falling. Less than half of Fiat's core investors bothered to attend the last annual shareholders' meeting.

Giovanni Agnelli appears ready to expend every last ounce of his clout to save the car business. The company is considering a plan to sell 11 other businesses for around 4.7 billion euros, to cut debts and hold onto the auto unit. But Goldman Sachs has warned that saving the money-losing car plants could sink Fiat as a whole. And Giovanni's younger brother and company vice chairman, Umberto, hints he'd consider selling the auto unit, exposing the family rift. "The situation is indeed critical," the CEO of Fiat Auto, Giancarlo Boschetti, recently told NEWSWEEK. "We have no time to lose." If Agnelli sells his car plants, he will be damaging his legacy. But if the king of Italian industry saves the plants, people around him worry that he will be damaging his company even more.