Thursday, Jul 05, 2007

By Kenneth Maxwell

Of DOW JONES NEWSWIRES

TYCHY, Poland (Dow Jones)--From the unglamorous setting of a former Communist factory in southern Poland, Fiat SpA (FIA) is launching a car it hopes will attract a new generation of European drivers with a sense of fun and money to burn.

Following some of its rivals, who have been reviving some of their older models, Turin, Italy-based Fiat is bringing back its cherished 50-year-old Cinquento, or "500" in Italian. But it's revving up this updated version from the entry-level 500 mini that helped modernize Italian industry in the late 1950s.

Fiat wants the 500 to echo the success of the Mini that BMW AG (BMW.XE) successfully revived in 2001, and the company wants to charge a premium in the process. Fiat's new three-door 500 mini will be offered with a range of engines and the latest in-car gadgetry offered as extras. The price is expected to be close to EUR12,000 for a basic model. Fiat didn't disclose the exact price range ahead of Thursday's launch.

But Fiat isn't BMW, and the new 500 steers Europe's fifth-biggest car maker by volume away from the cheap small cars for which it's best known.

"I'm not a fan of introducing (more) low-cost cars in Europe," Luca De Meo, chief executive of Fiat Group Automobiles SpA, Fiat SpA's auto unit, said at a conference in Prague last week. "We did it for years and we went almost bankrupt."

Thanks to a revived vehicle line up, Fiat's auto operations returned to profitability in 2006, after years of losses. But to succeed with its 500, it will have to convince customers that it's worth a BMW Mini-sized price, despite being built on the same platform as Fiat's entry-level Panda mini model.

To succeed with its 500, it will have to convince customers that the car worth a BMW Mini-sized price, despite being built on the same platform as Fiat's entry-level Panda mini model.

"I like the look of it," said Alice Giovannini, a marketing executive in Milan. But price is still a factor, said. "This is a Fiat and it may not be the greatest quality car. If it's going to cost me EUR12,000, I want everything in there: air conditioning, MP3 player, all that stuff."

Fiat is rolling out its entry in the market for hip, upscale cars in a time when many of Europe's automakers are seeking ways to bolster their lineup of models. Toyota Motor Corp. (TM) and other Asia-based auto makers are capturing an increasing share of the European market, particularly for low-cost, mass-market vehicles.

And the overall market is moribund - European Union car registrations, a proxy for new-car sales, are down 0.8% for the first five months of the year, according to the European Automobile Manufacturers Association.

That's put pressure on Fiat and other auto makers to differentiate their products, and has increased the appeal of the higher-end, higher-margin market over the mass market. But giving a brand a hip new aura can be tricky. Fiat's new product takes aim at the same market as BMW's hot-selling Mini. But Volkswagen AG's (VLKAY) revival of its famous Beetle in the late 1990s may prove instructive: though welcomed in some markets, sales momentum faded over the years, with critics saying the car cost too much. VW cut prices in 2006 to sustain demand.

De Meo said in Prague last week that Fiat has already received orders for 25,000 of the new 500 cars, and projects sales of 58,000 for 2007 and about 120,000 in 12 months. Fiat is also introducing a variety of marketing techniques to help stimulate demand. Potential customers can go to the Internet to custom-order the versions they want, a step that appealed to a potential customer like Giovannini.

Industry observers said Fiat will probably do well with the 500 in Italy, but are skeptical about its success elsewhere.

"People don't buy the BMW Mini just because of nostalgia for the old Mini," said Stuart Whitwell, joint managing director of London-based brand valuation consultancy Intangible Business. "They're also buying a BMW, they're getting a quality car.

"Though it may well do well in Italy and some other parts of southern Europe, I don't think it's iconic enough to do well in other markets," he said.

Fiat dominates the Italian market, making about one in every three new cars registered. But some say Fiat may find it difficult to sell significant volumes of a premium-priced mini in other markets.

"The crux of the discussion on the 500 is price," said Sanford Bernstein analyst Stephen Cheetham. "Will consumers think it is special enough to pay a premium versus all the other perfectly competent entry level cars on the market? It's possible in Italy where the reserve of goodwill for Fiat is strong, but we'd suspect it's a lot tougher elsewhere." Cheetham has a sell rating on Fiat shares.

To keep production costs down, Fiat is building the 500 at a factory in Tychy, Poland, near the Czech border. The company has been making cars in Tychy since it struck a deal with Communist authorities in the early 1970s.

The advantages of making cars in Poland rather than Italy are striking in terms of labor costs. According to Italy's national statistics institute Istat, the average gross monthly wage in Italy in 2006 was EUR2,870. Poland's GUS statistics agency says the average monthly private sector wage in 2006 was 2,644 zlotys, or EUR705.

That attraction hasn't been lost on other car makers. Hyundai Motor Co. (005380.SE) chose the Czech Republic for its first car-making plant in Europe, and began construction in April with plans to invest EUR1.1 billion and produce 300,000 cars a year there by 2011.

Last year, Toyota said it will invest another EUR145 million in its Polish gearbox production plant, and France's Renault said earlier this year that it is stepping up production of its Logan no-frills sedan at its Dacia subsidiary in Romania.

The Tychy plant is central to Fiat's plans. The company plans to make at least 120,000 of the 500s a year, equal to more than 5% of the company's overall global production of just under 2 million vehicles in 2006. Tychy will also within two years be making Ford Motor Co.'s (F) revival of its own Ka mini at the plant as part of an alliance between the two car makers. The upgrades will make Tychy factory Europe's the largest automotive plant, with a total capacity of half a million vehicles a year.

-By Kenneth Maxwell, Dow Jones Newswires; 39-02-5821 9901; kenneth.maxwell@dowjones.com

(END) Dow Jones Newswires

05-07-07 0400GMT