In 2009, following the worldwide credit crisis, several US-based car manufacturers, such as Chrysler and General Motors, approached bankruptcy and needed to be bailed out by the US government and private investors. Italy-based Fiat Group SpA. decided to help rescue Chrysler by acquiring 20 to 35 percent of the car manufacturer’s shares. In exchange, Fiat would get access to Chrysler’s vehicle platforms and manufacturing facilities, which could eventually help the Italian manufacturer re-enter the US market. Following the initial rumors about private negotiations between Fiat and Chrysler and Fiat’s (coinciding) announcement that it would not pay a dividend for 2008, Fiat’s share price dropped by more than 25 percent in one week. The question arose whether Fiat’s performance was really stronger than Chrysler’s.

The following tables show the financial statements of the Fiat Group SpA. for the fiscal years 2006–2008.

In all three years, Fiat earned a return on equity in excess of 12 percent. Decompose Fiat’s return on equity and evaluate the drivers of the company’s performance during the period 2006–2008. What trends can you identify in the company’s performance?

What has been the likely effect of the credit crisis on Fiat? (To simplify the analysis, classify Fiat’s customer financing assets as non-operating investments; revenues of these financing activities are included in interest income.)

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Income statement ( millions) 2008 2007 2006 Revenue 58,421 57,550 50,755 Cost of sales -48,646 -48,168 -42,991 Selling, general, and administrative costs -5,075 -4,924 -4,697 Research and development costs -1,497 -1,536 -1,401 Other income (expenses) -23 88 105 Trading profit 3,180 3,010 1,771 Gains (losses) on the disposal of investments 20 190 607 Restructuring costs -165 -105 -450 Other unusual income (expenses) -245 -166 -47 Operating profit/(loss) 2,790 2,929 1,881 Interest income 1,188 1,301 1,372 Interest expense -1,526 -1,651 -1,782 Other financial income (expenses) -427 9 14 Result from investments 162 185 156 Profit before taxes 2,187 2,773 1,641 Income taxes -466 -719 -490 Profit from continuing operations 1,721 2,054 1,151 Profit from discontinued operations 0 0 Profit or loss 1,721 2,054 1,151