[FOUNTAIN]Echoes of Daewoo

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[FOUNTAIN]Echoes of Daewoo

Last week Fiat, Italy's largest automaker, officially announced that it was experiencing a crisis. To survive, Fiat needs to lay off 5,100 workers. Labor unions have blocked roads near Fiat factories in Milan and Turin, and in Sicily, in protest of the decision. Meanwhile, Fiat management has hinted of restructuring plans. Italians are in a state of shock, for Fiat is the "pride of Italy."

Giovanni Agnelli (1866-1945) founded the company in 1899, in Turin. Fiat stands for "Fabbrica Italiana Automobili Turin," after the firm's first automobile factory, in Turin. Fiat made profits through two World Wars by providing military supplies and by joining restoration operations during post-war periods. Fiat released small cars in 1936, much earlier than Japan did. The smaller cars swept the European market, making Fiat one of Italy's most prominent corporations. Production of Fiats accounted for 5 percent of Italy's gross domestic product.

The failure of Fiat stems from two areas. First, the company lost competitiveness, a factor caused by the Italian government's overprotectiveness. Since the 1970s, Italy has maintained one of the most rigorous closed economic policies in Europe. That was done to prevent Japanese cars from poaching the domestic market. A cozy relationship between Gianni Agnelli, grandson of the founder, and the Italian government, resulted in such policies. But in 1990, Italy was forced to open its markets to foreign products. The domestic market share of Fiat cars dropped from 70 percent to 30 percent after foreign brands rushed in. The company went into the red in 1997 and debts climbed to $6.5 billion.

Another factor contributing to Fiat's downfall has been problems in naming a successor. Edoardo Agnelli, the great-grandson of Fiat's founder, died in a car crash. Another heir committed suicide after suffering mental problems. And a third died of stomach cancer. During the 36-year-plus reign of Gianni Agnelli, the company seemed to age with its leader, losing strength to mount a viable comeback.

The future of the company is now in the hands of General Motors of the United States, which acquired 20 percent of Fiat in 2000. Today's Fiat is similar to Daewoo Motor after the financial crisis struck Asia in 1997. Strikes and massive layoffs riddled Daewoo. We know what eventually happened to that Korean giant. One wonders if Fiat will become a second Daewoo.

The writer is the chief of Forbes Korea.

by Sohn Byoung-soo

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