Agnelli empire in need of new shock absorber

For just over 100 years the Agnelli family has dominated Fiat. The company in turn has been the icon of industrial Italy. Planes and trains, trucks and tractors, but above all cars, Fiat has made or still makes them.

Nor have the Agnellis limited their ambitions to engineering, adding insurance, energy and publishing to a Fiat empire which is the biggest private sector employer in Italy. The family even controls Juventus, its home town football team.

Suddenly the Agnellis, led by the patriarchal Giovanni, are facing a challenge to their authority. Last year was an annus horribilis. Fiat is expected to have lost about €650m (£430m) on a turnover of €60bn, primarily because the automotive business has been haemorrhaging cash.

There have been top level departures and reports of boardroom splits. The group's debt has been downgraded to junk status by Moody's. Its share price ended 2002 at a 20-year low. Official figures yesterday showed Fiat's share of the Italian car market at an all time low.

An industrial turnaround plan, a mixture of asset disposals, hefty if temporary lay-offs and mothballed plants, has run into opposition from such unlikely bedfellows as the trade unions and the prime minister, Silvio Berlusconi.

The workers took to the streets. The most vigorous protests were in Sicily, where the Termini Imerese plant close to Palermo was seen as the most vulnerable. Mr Berlusconi, whose Forza Italia party had done well in the area, ruffled Fiat feathers with gratuitous advice about how the company should be run.

Behind the protests and the politics lies a fear that General Motors - which already owns 20% of Fiat Auto - could get the remaining 80%, leaving the maker of Lancia and Alfa Romeo, as well as the more workaday Fiats, metaphorically flying the stars and stripes.

Could it get any worse? Enter Roberto Colaninno, a bespectacled former tax clerk turned corporate raider who would like to take over the controls at Fiat, or at least take on the job of co-pilot.

He has already shown that he can rock Italy's corporate establishment to its foundations. In 1999 he used Olivetti, the typewriter manufacturer turned computer maker, to mount abid for Telecom Italia. To the surprise of many, including rival suitor Deutsche Telekom, he won.

True, his victory proved short lived. In 2001, Pirelli turned the tables and took over control of the telecoms group. But that made Mr Colaninno a cash-rich man with a determination to get back to corporate Italy's top table. So far Mr Colaninno has said little more than that he is a man with a plan. Late last week a statement on his behalf said: "The proposal which will be friendly and foresees direct involvement by Robert Colaninno in the running of the [Fiat] group will be put to Fiat's management in the coming weeks for their consideration."

Speculation abounds about a cash injection of up to €8bn which would give an investor group led by Mr Colaninno some 30% of Fiat group and cut the Agnelli holding from 34% to 20%. As to the GM connection, the Italian press says Mr Colaninno's plan involves the US carmaker taking another 20% of Fiat Auto - in return for cancellation of the option which could give it control. GM says it is supporting Fiat "any way we can".

Quite how Mr Colaninno will be able to unpick the Agnellis' lock on Fiat - the company which ultimately controls the family Fiat stake is run by Agnellis, owned by Agnellis and shares in it can only be sold to Agnellis - is given less attention. Still, the government has already given Mr Colaninno a cautious blessing. At the weekend the industry minister, Antonio Marzano, called his approach "positive".

The Agnellis are unimpressed. For them, the only plan on the table is the industrial turnaround programme which, crucially, has the backing of the company's four main lenders, UniCredito, Intesa, Capitalia and Sanpaolo.

Nor are they likely to be favourably disposed towards Mr Colaninno. Fiat was on the losing side in the 1999 battle for Telecom Italia.

But Mr Colaninno's timing is classic corporate raider. Fiat's strategy has two strands. The first is based on cutting costs and selling assets. But for the longer term Fiat knows it must turn around the car business. It needs sales. Italy has always been crucial: it accounts for about 40% of Fiat Auto sales and to date the company is losing market share. Yesterday's figures show that it won 27.3% of the Italian car market in December. In the late 1980s it would have been almost twice that figure. Its operations in emerging markets such as Poland, Brazil and Turkey have been affected by the global downturn. What it needs are cars that people want to buy.

Fiat made a mess of its most recent model launch - the Stilo - banking on consumers being prepared to pay for higher-specification cars. That strategy has been reversed but the 400,00 first year sales target was undershot by 100,000.

The company also appears to have adopted a London-bus approach to new car launches. The Stilo was introduced in late 2001. The next, the replacement for the Panda and Seicento models, is not due until June this year. The following month will see a facelift for the top-selling Punto and in autumn Fiat unveils a mini people carrier based on the Punto.

So it will be late 2004 before the success of Fiat's recovery plan can be assessed. That might make cash in the hand from Mr Colaninno and his friends more attractive. And Mr Colaninno does have friends. For example, he sits on the board of Mediobanco, once the arbiter of Italian corporate finance.

Professor Peter Cooke, head of the centre for automotive industries management at Nottingham Trent University, said a stripped-down Fiat could yet re-emerge as "a sexy, Mediterranean BMW".

"Six weeks ago I would have said GM would take over the entire [automotive] operation but now, after all the political machinations, I increasingly see an all-Italian solution emerging," he says.

But speculation surrounding the future of Fiat and the Agnellis will run and run.