Jeep’s currency play: How Renegade stands to gain
Timing is everything. And for Fiat Chrysler, the timing for the rollout of its newest Jeep model could not be any better.
The Jeep Renegade, which goes on sale at showrooms next month, is expected to deliver strong revenues and hefty profits for the automaker.
While its positioning in the popular small SUV category and the strength of the Jeep brand are two reasons behind the industry’s bullish projects, the Renegade—which is produced in Europe and sold predominantly in the U.S.—is also poised to reap the benefits of a strong dollar.
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“I can’t imagine better timing for the Renegade,” said Michelle Krebs, senior analyst with AutoTrader. “It’s going to add to the momentum at Jeep.”
It’s momentum Fiat Chrysler CEO Sergio Marchionne has built over the last five years. He’s taken the brand from relatively modest sales that came almost exclusively from North America, and has built it into a fledgling powerhouse that racked up sales of more than 1 million vehicles globally last year.
That global component is the reason why the Renegade could be even more profitable than Marchionne and his team had forecast when they laid the groundwork for where to build the new SUV in late 2012.
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At the time, Marchionne had a problem with too much unused capacity at Fiat plants in Italy, where weak European auto sales and high labor costs were making the Italian plants uncompetitive. So he persuaded the labor union to make work rule concessions that would increase productivity. In exchange, Fiat Chrysler committed to building a small SUV at the Fiat plant in Melfi, Italy.
The result? A win-win for autoworkers in Italy and Fiat Chrysler’s bottom line. Here’s why.
Fiat Chrysler is paying line workers and some local parts providers in euros, at a time when the currency is trading at one of its weakest levels in years. Meanwhile, Fiat Chrysler will sell the new Jeep Renegade primarily in the U.S., and the dollar is exceptionally strong right now. That exchange rate will give the new Renegade fatter profit margins than if it were built in the U.S., where costs would be higher.
“I doubt anybody knew this would happen,” said Matt Stover, auto analyst with Susquehanna International Group. “Currencies move minute by minute, while auto product cycles move every five years, so I would doubt Sergio and his team had any idea this would work out the way it did.”
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To his point, around the time Fiat Chrysler was negotiating with labor unions in Italy, the euro was more than 10 percent stronger than it is now.
Adding to the Renegade’s profitability projections is that it’s a new model coming from a hot brand, which meets demand in a popular segment.
“We’re seeing a lot of demand for smaller SUVs right now,” Krebs said. “And right now, the Jeep brand is very aspirational for almost all segments of buyers.”
The Jeep Renegade will start at just under $18,000 with the top-end models starting at $26,795.
Questions? Comments? BehindTheWheel@cnbc.com.