2018 Sergio’s last YEAR as CEO FCA(PID:38480814375) Source
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Fiat Chrysler Replaces Its Iconic Moneymaker, The Jeep Wrangler Dec.18.17 | About: Fiat Chrysler (FCAU) Anton Wahlman Anton Wahlman Long/short equity MARKETPLACEAuto Insight For Wall St. (2,852 followers) Summary FCA brings to market the all-new Jeep Wrangler in January 2018. I drove a pre-production unit, and it’s a quantum leap over its predecessor. The Jeep Wrangler is a 250,000-a-year franchise globally and widely believed to be FCA’s most profitable product line. In addition to the “regular” Wrangler, the pickup truck version arrives one year later, and could add another 200,000 - 250,000 per year in most profitable unit sales. This Jeep pickup launches FCA into the midsize pickup truck segment, which Ford also is expected to enter in 2019 with the Ranger. Both versions of the all-new Jeep Wrangler should immensely help FCA’s gross margin dollars, gross margin percentage, and net profits. Of all the car designs in the world today, the Jeep (Fiat Chrysler)(FCAU) Wrangler may be the most iconic. It launched the Jeep brand as a military vehicle in 1941. It got doors (!) in 1983, and is made in Toledo, Ohio, from where it is exported to 150 countries. An all-new Jeep Wrangler doesn’t come often. They’ve been spaced about a decade apart. So when the all-new Wrangler hits U.S. dealerships in January 2018, it’s a very big deal. I got the chance to drive an early production version for a day in early December. Actually, I got to drive a few different versions of this all-new Jeep Wrangler, but more on that in a moment. When approaching this all-new iteration of the iconic American product for the first time, I put my hand on my heart, said The Pledge of Allegiance and sang America The Beautiful. I looked up into the sky and saw the clouds form in the images of General Patton and General Macarthur. I felt as if I was going to land on a foreign beach in the middle of World War 2. The first impression of the all-new Jeep Wrangler is that it looks almost exactly like the old one. That’s a feature, not a bug. It would be no more appropriate to make changes to the American flag, than to the Jeep Wrangler’s basic looks. However, this first impression is deceiving. The all-new Jeep Wrangler is indeed all-new, from the ground up. It’s just meant to look like the old one, at first glance. Actually, the angle from which you can best see that this is an all-new Jeep, is from the rear. I drove behind someone in the new Wrangler for a few minutes, and it’s clear that it’s all-new. It’s a lot more square, including the rear lights, and the rear glass is much larger. It looks like it has shed weight, which it has: A couple of hundred pounds, to be approximate. The interior is not to be confused with the old Wrangler. From the inside of the doors, to the instrument panel, to what’s between the seats, the Jeep Wrangler is now fully modern. It’s got all the features and creature comforts that you expect from the most modern cars. Unlike, say, Tesla (TSLA), the all-new Jeep Wrangler has Android (GOOGL) Auto and Apple (AAPL) CarPlay. It’s also got one of the cleverest things I have seen in any car interior - two entirely new ways to store your smartphones. One is in a very clever gap to the side of the hand brake. The other one is in a slot between the center cup holders, where you can also opt to place your key. Each of these two additional smartphone slots are rubber lined, so that the phones won’t slide around or rattle. In total, this now means you can put in four smartphones, also utilizing the two cup holders. This is genius, and I hope every car copies it. Or does FCA have a patent on it? One more thing in the realm of FCA’s technology leadership: The new Wrangler also may be the very first vehicle to have not just USB ports, but also USB-C, which is the way you charge most higher-end Android smartphones as well as Chromebooks. On the whole, the new Wrangler’s interior is just about flawless. The seating position was very good, and it’s now also easier to step in and out of the vehicle. It simply shouldn’t be compared to the old Wrangler at all. It’s like night and day - 100% of it for the better. Much better. How does the new Wrangler drive? I have a confession to make. I did not like driving the old Wrangler, other than in extreme off-road situations. The car was just too old and didn’t handle well on-road. I wouldn’t want to use it as a daily driver. The all-new Jeep Wrangler? It’s the complete opposite! The only minor complaint I had was that the steering is very, very light, and too imprecise for my taste. However, not devastatingly so. Think about what this does to the addressable market for the Jeep Wrangler. Until now, the Wrangler was a severe penalty box compared to most other SUVs on the market. It was not a competitive daily driver. Now, in contrast, the Jeep Wrangler can compete for a far larger share of the SUV market because it is very pleasant to drive on-road, not just for its off-road prowess. No longer does it feel like much of a compromise. The engine? The base engine will be FCA’s 3.6 liter gasoline V6 that sits in a long list of FCA products from Jeep to Dodge to Chrysler to RAM. It’s got a good character, and works well with the new eight-speed automatic transmission (I did not drive the manual one). However, the major surprise was the four-cylinder engine, which will be available closer to June 2018 for a $1,000 upcharge. This engine is built in Italy and has its origins with FCA’s heritage as the owner of Alfa Romeo and Maserati. You also may recall that FCA was the owner of Ferrari (RACE) until a couple of years ago. FCA would protest loudly and claim it’s technically inaccurate, but I’ll say it anyway: One might argue that this Italian four-cylinder engine has a heritage that traces first to Alfa Romeo, and then more distantly to Maserati, finally culminating at Ferrari as its family patriarch. No, this isn’t a Ferrari engine - but you cannot be blamed for imagining traces of a family lineage. As good as the V6 was to drive - and I had no complaints - the Italian four-cylinder engine is simply better. You should spend the extra $1,000 for it. It spooled up quickly and simply behaved extremely well. There will be two additional powertrains as well: Diesel in 2019 and plug-in hybrid in 2020. I imagine the plug-in hybrid won’t be paired with the V6 or the diesel, but rather with a four-cylinder gasoline engine. I also imagine a 11-14 kWh battery located immediately behind the rear seats, on top of the rear axle. The new engines and transmissions, combined with the lighter body and improved aerodynamics, mean that fuel economy is greatly improved over the outgoing Wrangler. Jeep has yet to release final EPA-certified numbers, but it estimates that the V6 versions should see a 3 MPG improvement over the 2017 Wrangler. That Italian four-cylinder? Probably even better. The Wrangler has been famous for offering ways to fold the front windshield, removing the doors, and various open-top abilities. The problem was always that it could take literally hours to do all of those things. In the new Wrangler, all of those voluntary tasks have been made dramatically faster. I don’t mean cutting the time by half. I mean cutting the time in some cases 90% or 99%. The extreme off-road versions of the Wrangler will continue to be called the Rubicon, and it is now even more off-road capable than before. You can fit larger wheels with greater ease, and the various drivetrain components are more off-road worthy. This is the new Wrangler price list, exclusive of $1,195 delivery charge: 2-door base: $26,995 2-door Rubicon: $36,995 4-door base: $30,495 4-door Sahara: $37,345 4-door Rubicon: $40,495 There will of course be numerous ways to add to these prices with a long list of optional equipment. If you want to pay more than $50,000 for your next-generation tricked-out Jeep Wrangler starting in January 2018, you should have no problem doing so. But I would recommend waiting a few months until 2Q 2018 when the Italian-built engine becomes available. What does this mean for the FCA shareholder? FCA has been making approximately 250,000 Jeep Wranglers per year in its Toledo, Ohio, factory. Actually, the Toledo factory is divided into two separate factories. One of these factories will continue to make the old Wrangler for another few months, probably until April 2018. The reason for this is to avoid a gap in supply. The new Wrangler is made in the other Toledo factory, which was making the Jeep Cherokee until April 2017. The Cherokee production was moved to a factory in Michigan instead. So what will happen to the other Wrangler factory, where the old one continues to be made until April 2018? It will be re-tooled thereafter, to start making the pickup truck version of the Jeep Wrangler, starting perhaps as early as the fourth quarter of 2018, with U.S. retail sales beginning perhaps around January 2019. This is a big deal for the FCA shareholder. Unlike General Motors (GM), Toyota (TM) and Nissan (OTCPK:NSANY), FCA does not currently sell a midsize pickup truck. The U.S. midsize pickup truck market grew a whopping 25% in 2016, although the growth rate slowed to a mere 1% for the first eleven months of 2017. It is the midsize pickup truck business that makes GM larger than Ford, for the first 11 months of 2017, in terms of U.S. pickup truck unit sales. Without it, Ford’s F-series now handily outsells the Chevrolet Silverado and GMC Sierra combined. What could the Jeep pickup truck mean in terms of sales for FCA? The RAM full-size pickup truck now is on a path to end 2017 with 500,000 sales in the U.S. alone. Canada is on track to just exceed 100,000 RAM pickup truck unit sales in 2017. So that’s over 600,000 for these two countries alone. The part of the Toledo factory making the Jeep pickup truck should have an annual output that could potentially reach 250,000 units. If you add 250,000 to RAM’s full-size truck sales, FCA’s pickup truck business starts to approach the total size of the GM and Ford equivalent businesses. If FCA can pull this off, that would be huge. Then again, every step along the way from zero to 250,000 of these additional trucks will bring incremental profits for FCA. Why such leverage from even a small volume? That’s because the incremental development cost from the “regular” Wrangler to the pickup truck version should be relatively minimal, for as far as these things go. Obviously you are still down a billion dollars or whatever for the factory retooling and the incremental development, but for the potential of selling up to 250,000 of the highest-margin product, that is a very good deal. Let’s take a look at the current Jeep Wrangler and RAM pickup sales in the U.S. and Canada, and assume that FCA can achieve a “steady-state” sales of the Wrangler pickup truck that would be only 20% smaller than the non-pickup Wrangler: FCA Jan-Nov USA Canada total RAM pickup 455816 93192 549008 Jeep Wrangler 176822 16249 193071 Jeep "pickup" 141458 12999 154457 TOTAL 774096 122440 896536 As you can see in the table above, for 11 months alone, this “pro-formas” to almost exactly 900,000 sales in only two countries. Considering that December is usually a large month, it could basically be a million for the full year. Some of these products also will be sold in almost 150 countries worldwide, not just North America. Fellow real and would-be investors, this could be a huge business starting in 2019 and certainly in 2020! And these are FCA’s highest-margin products to boot. Conclusion: FCA shareholders, rejoice! What have we learned in this article? Four main things: FCA’s most iconic product, the Jeep Wrangler, arrives in all-new format in January 2018 and it is nothing short of spectacular. It’s a quantum leap better than the old one, which already was a sales and margin success. Given that it’s now a great product not only off-road, but also on-road (for the first time in its history), it also greatly expands its addressable market. The pickup truck version of the all-new Jeep Wrangler could arrive one year after the “regular” one, and it could have a capacity of 250,000 units per year, just like the regular Wrangler. So that's half a million units in total for the Wrangler family. The pickup truck version of the Jeep Wrangler effectively throws FCA into the U.S. midsize truck segment with a highly differentiated product. When combined with the regular Wrangler and the RAM pickup truck, it is realistically a 1 million unit per year business in the U.S. plus Canada combined, not even counting all the other countries around the world. This will do wonders for FCA’s gross margin dollars, gross margin percentage, and net profit. Small wonder FCAU stock now trades right near its highs, over $18 per share.
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