Fiat: Open Innovation in a Downturn (1993-2003)

In the midst of a worse than expected economic downturn, Italy suddenly discovered that one of its companies had reached the status of worldwide excellence. Fiat Group Automobiles SpA (Fiat), the wellknown Italian carmaker, was able to weather the economic storm and astounded the world with its expansion plans and its partnership with Chrysler during such a climate. President Obama and his auto industry task force claimed on March 30, 2009, that “Chrysler’s best hope for revival lies in a proposed partnership with Italy’s Fiat SpA.” One month later, on April 30, President Obama announced that “Chrysler and Fiat have formed a partnership that has strong chances of success. It’s a partnership that will save more than 30,000 jobs at Chrysler, and tens of thousands of jobs at suppliers, dealers, and other businesses that rely on this company.” Although the future prospects of Chrysler are still far from clear, the deal unquestionably testifies to the reputation that Fiat has gained on an international level. What is remarkable is that Fiat was not appointed by President Obama as Chrysler’s ideal partner because of its abundant cash flows or the cost-efficiency of its production system. One of the main driving factors behind the deal was the superiority of the Italian carmaker’s clean, fuel-efficient engine technologies. As Mr. Obama stated on April 30, “Fiat has demonstrated that it can build the clean, fuel-efficient cars that are the future of the industry, and as part of this agreement, Fiat has already agreed to transfer billions of dollars in cutting-edge technologies to Chrysler to help them do the same. Fiat is also committed to working with Chrysler to build new fuel-efficient cars and engines right here in America.” In the late 1980s, Fiat initiated projects in these technologies focused on diesel engines. Their most valuable outcome was the Common Rail direct fuel injection system. Common Rail brought about a revolution in diesel engine technology as it significantly reduced fuel consumption and energy emissions, while simultaneously improving performance and the driving experience. In the early 1990s, Fiat started working on petrol engines and developed a new family of VVA (Variable Valve Actuation) technologies (Uniair), which offered a range of benefits including increased power (+10%), improved low-end torque characteristics, lower C02 emissions (-20%), and cost reduction through sheer design simplicity. In the second half of the 1990s, a new generation of the Common Rail system (known as Multijet) was also engineered, which significantly reduced fuel consumption and improved performance with respect to traditional Common Rail engines. These technologies, which lay at the very heart of the Fiat-Chrysler deal, were mostly developed during the 1990s by Centro Ricerche Fiat (CRF), the Fiat Group company in charge of R&D and technology development, under the visionary leadership of Gian Carlo Michellone, CRF’s CEO from 1989 to 2005. Mr. Michellone radically turned around CRF’s organization and innovation strategy in the early 1990s when the Italian carmaker—along with many other players in the automotive industry—was going through troubling times. This revolution allowed the Fiat Group to keep its “innovation engine” running despite the heavy downturn in the industry and to: maintain and reinforce its in-house R&D activities; build and enlarge its networking capabilities within the automotive sector and across different industries; and complete and advance the development of the fuel-efficient engine technologies. As a recent article suggests, Fiat’s excellence today is the result of an “extreme makeover” engineered and steered by Sergio Marchionne since his appointment as CEO of the Fiat Group in 2004. This was the first time that a Fiat Group CEO came from outside the automotive industry (Marchionne was CEO of SGS—Société Générale de Surveillance when he came on board) and this domain change helped him challenge existing routines and practices. Fiat’s brand identity was effectively restored and brought back to the long forgotten glory years. This was the result of a combination of a variety of internal factors, management capabilities, external circumstances and perhaps luck. What is unquestionable is that the fuel-efficient engine technologies developed by CRF under Mr. Michellone’s tenure were one of the essential ingredients of the success of the new car models launched in the Marchionne era This article focuses on the organization and innovation strategy devised by Gian Carlo Michellone for CRF during the 1990s, which resembled and anticipated most of the underpinnings of what would become known as the open innovation paradigm5 that originated from Henry Chesbrough’s work. The CRF case is interesting because it demonstrates how open innovation can provide a strategic approach that enables a firm to protect its innovation capabilities from the risk of severe resource rationalizations during periods of crisis, and to confer a starting point to replicate them once the downturn is over. A recent article by Chesbrough and Garman thoroughly explored this aspect.6 Starting from the premise that companies that continue to nurture their innovation capabilities during economic downturns are better positioned when growth returns, Chesbrough and Garman illustrate how an open innovation strategy can help firms reduce the costs required to support their R&D activities while, at the same time, preserving future growth opportunities. Furthermore, the history of CRF allows us to discuss a number of organizational solutions a firm might adopt in order to implement an open approach to innovation. This topic is currently being debated in the wealth of literature on open innovation, where an increasing number of authors are studying the organizational implications and the adoption process of open innovation.