Fiat to Join in US Manufacturing Renaissance
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The chairman of Fiat SpA (NASDAQOTH: FIATY.PK) since 2004, Sergio Marchionne, has been driving to reorder and globalize the company. Part of that plan involved Fiat itself taking majority control of US automaker Chrysler, of which it now owns 58.5 percent. He plans to bring Chrysler public again by 2014, most likely in the form of Fiat listing on a major US exchange.
Just last week Mr. Marchionne revealed his plan for the other part of Fiat – Fiat Industrial, which was spun off from Fiat in January 2011. He plans to merge this trucks and capital goods company with its US unit, CNH Global (NYSE: CNH), of which it already owns 88 percent. CNH manufacturers farm and construction equipment. The new company, valued at about $13 billion, is to be listed on the New York Stock Exchange.
This is major event in the industry. The merged company will become the world's third largest capital goods firm as measured by revenues and will employ 67,000 people around the world. The new Fiat Industrial or whatever it's called will trail only its peers Caterpillar (NYSE: CAT) and Sweden's Volvo in size.
The logic behind the move makes sense for Fiat Industrial and CNH shareholders. Right now, both companies trade at a “holding company discount” and at a discount to peers including Scania, MAN, Deere and Caterpillar. CNH Global currently trades at just over three times estimated 2012 earnings while Fiat Industrial trades at 4.3 times forecast 2012 earnings. This compares to five or six times 2012 earnings for their peers.
In addition, the company should benefit from increased liquidity for its stock and cheaper longer-term access to the credit markets. But another reason behind the deal is the same as it was for Fiat's purchase of Chrysler...Mr. Marchionne sees a renaissance in American industrial might. His beliefs are epitomized in the Chrysler Clint Eastwood ad which emphasize the resurgence in American industry.
And there has been a resurgence, at least as far as Chrysler is concerned. It, like other automakers, has seen sales surge recently. The fact is that thanks to impressive productivity growth and slow growth in wages, the United States has become a more attractive location for manufacturing companies. Some firms have even begun “reshoring” manufacturing jobs from China back to the US, thanks to rapidly rising wages there. When adjusted for productivity, U.S. wages will be only 2.5 times Chinese wages versus 4.6 times in 2006, according to the Boston Consulting Group. In addition, firms like Caterpillar are finding that an extended global supply chain generates some of its own problems due to higher energy costs.
Caterpillar has been one company that has been reshoring jobs. Another prime example of a company that has been investing back in the United States is General Electric (NYSE: GE). Since 2009, the company has created 13,500 new jobs in this country with 11,000 of them in manufacturing. In fact, GE is betting $1 billion on its domestic appliance business. This business, together with its lighting business, accounts for 6 percent of General Electric's revenues. GE is moving its appliances business back onshore because it found out, in the words of the chief executive of GE Appliances Chip Blakenship, that “over time [offshoring] wasn't that sustainable a business model”.
Overall, the United States has added 429,000 factory jobs in the past two years, barely replacing a fifth of the jobs lost during the recession. And since the labor market bottomed at the start of 2010, the US has added manufacturing jobs faster than any other developed economy (edging out Germany).
The move of Fiat Industrial to the US may mean more jobs domestically, adding to a manufacturing rebirth. But keep in mind, it's all relative. According to the Boston Consulting Group, companies moving their manufacturing to the US may create roughly another million new jobs by 2020. That compares to the approximately 5.4 million manufacturing jobs lost since the turn of the century. With the growth of the emerging economies and their populations, that may be the best that can be expected from US manufacturing.
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