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The Ferrari Spin-Off Is Exposing Fiat Chrysler’s Weaknesses

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Ciao, bellaPhotograph by Jewel Samand — AFP via Getty Images

Ferrari made a flat debut in Milan on Monday as the luxury sportscar maker completed its divorce from Fiat Chrysler Automobiles, leaving the parent to fight its future alone.

Fiat Chrysler (FCAU) shed a third of its market value as a result of Ferrari’s spin-off, putting the world’s seventh largest carmaker’s operational challenges in focus, including a high debt pile, product delays, and calls for a merger that remain rebuffed.

FCA’s CEO Sergio Marchionne, who is also Ferrari’s chairman, said on Monday that other carmakers had approached him proposing a merger, since his offer to team FCA up with U.S. rival General Motors (GM) to create synergies and cut costs was repeatedly rebuffed. But he said the new options were not sufficiently attractive.

He repeated his call for consolidation in the industry, which he said was inevitable, but said it may not happen during his tenure which is due to end in 2018.

FCA is pocketing more than $4 billion from Ferrari’s offering and spin-off and its own shares have leapt 70% since Marchionne promised in October 2014 to hand out a big chunk of Ferrari’s shares to FCA investors.

But it will now have to make do without the fat profits of the luxury unit that contributed 12% of FCA earnings in 2014.

“Longer term … we remain cautious on FCA’s fundamental prospects, particularly its heavy dependence on [North America] at a late stage in the U.S. cycle; its heavy investment needs to modernize its product, technology and production portfolio; and its still heavily indebted balance sheet and negative working capital position,” Stuart Pearson, an analyst at Exane BNP Paribas said in a note.

Marchionne confirmed FCA’s targets to 2018, centered around a revamp of its Alfa Romeo, Jeep, and Maserati brands. The group will present an updated product plan later this month to address weaker growth in some markets.

In spinning off Ferrari, Marchionne has sought to position the supercar maker as a luxury goods business to win the high-flying trading multiples of companies such as Hermes and Prada.

But New York-listed Ferrari shares are down 20% since their Wall Street debut in October and some analysts questioned whether the small-volume, capital-intensive carmaker will be able to sustain the high valuations going forward.

“Though Ferrari will be the most profitable stand-alone auto maker, its gross and EBIT margins are still around 20% and 5% lower, respectively, than luxury peers,” Arndt Ellinghorst, an analyst at Evercore ISI said in a note.

Italian Prime Minister Matteo Renzi had personally campaigned for a secondary listing in Milan to reaffirm the carmaker’s links with Italy.

“Ferrari’s listing is a symbol of an Italy that is fearless and sees globalization as an opportunity,” Renzi said at the listing ceremony on Monday.

Marchionne, who rang the opening bell in Milan along with other top Ferrari and FCA executives, vowed to keep production of the red cars with the prancing horse logo in Italy and said the carmaker would start to distribute generous dividends.

“The spin-off gives Ferrari the necessary independence to uphold the uniqueness of its models and its brand and to fully realize its potential,” he said.

Ferrari’s free float increased to around 67% on Monday after the parent distributed its remaining 80% stake in the company to FCA shareholders.

Marchionne said the company was unlikely to grow through acquisitions which would dilute the brand, but rather via other highly selective luxury items with the prancing horse logo.