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Are Fiat Chrysler Automobiles’ Margins Improving?

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Fiat Chrysler’s margins

In the auto industry (XLY), Fiat Chrysler Automobiles (FCAU) has a bad reputation for having low margins. In 4Q15, the company reported adjusted EBIT (earnings before interest and tax) of 5.3 billion euros, with an expanded margin of 7.1%. Although it reflects an improvement from 4.2% in the corresponding quarter of the previous year, the company’s margins remain lower than those of peers Ford Motor Company (F), Toyota (TM), and General Motors (GM). In this article of the series, we’ll look at FCAU’s current margins and the company’s plans to improve its margins going forward.

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For 2015, FCAU reported a low net profit margin of just 0.3%, lower than the previous year’s 0.6%. Net profit margins for 4Q15 also shrank, to 0.9% from 1.5% in the corresponding quarter of the previous year. The company’s bottom line was affected by the costs related to an increased number of vehicle recalls and one-off charges to shift production within North America. Now, let’s take a look at how Fiat Chrysler plans to improve its profit margins in the coming years.

Plans to improve margins

According to the company, it plans to achieve better profit margins by working on the following key factors:

• working on costs, function, and efficiency in the manufacturing footprint in the coming years
• reducing production costs by realigning capacity, which should help the company bring down the fixed cost per vehicle
• bringing changes to the product portfolio and positioning, with more focus on trucks and UVs (utility vehicles)
• cutting incentives, making less cash-back or cheap-financing deals available

As noted earlier, the auto industry has witnessed more demand for pickup trucks and utility vehicles than small cars in recent years, especially in North America. During the earnings call, FCAU’s chief operating officer Richard Palmer said that “in order to continue to capitalize on this market shift, we have made some plans to shift some of our production capacity to be able to fulfill the demand of truck and UV going forward.” Note that for automakers, margins from pickup trucks and UVs remain higher than those from small cars.

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