Why Did Fiat Chrysler’s Margins Expand in 1Q16?

The Italian-American automaker Fiat Chrysler Automobiles (FCAU) has a bad reputation for having low-profit margins. Among its peer group, which includes General Motors (GM), Ford (F), and Volkswagen (VLKAY), the company’s margins are the lowest. In this part of the series, we’ll look at Fiat Chrysler’s margins in 1Q16 and their key drivers.

In 1Q16, FCAU reported a net profit of 478 million euros, or about $543 million. This was 58% higher than analysts’ estimate of 303 million euros, or about $344 million. With this, the company managed to post an expanded net-profit margin of 1.8%, higher than analysts’ estimate of 1.1%. This reflects a significant expansion of the net profit margin of 0.3% in the first quarter of 2015.

As noted earlier in this series, in the first quarter of this year, the company’s heavyweight vehicle brands, especially Jeep and Ram, performed well in North America. This was one key reason behind Fiat Chrysler’s margin expansion in 1Q16.

Heavyweight vehicles such as utility vehicles and trucks tend to have higher margins than small cars. Additionally, the company’s steps to increase its vehicle prices in markets including Australia and Brazil have helped to protect profits in those regions.

As you can see in the chart above, Fiat Chrysler’s margins are gradually expanding in line with its 2018 business plan. However, the company’s margins are still much lower than those of mainstream automakers (VCR) General Motors (GM), Ford Motor Company (F), and Toyota (TM).

In its 4Q15 earnings release, the company reiterated its plan to focus on margin expansion. The company outlined several steps being taken to protect and expand its margins in the coming years:

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

Continue to the next part of this series to learn how Fiat Chrysler’s luxury car brand Maserati performed in the first quarter of 2016.