Fixing Fiat

Shortly after 8:00 a.m. on the cold, bleak morning of January 24, Umberto Agnelli picked up the phone in his villa in the leafy La Mandria suburb northeast of Turin to place a series of calls that, for months, he had dreaded having to make. In quick succession he dialed the president of the Italian Republic, the mayor of Turin and the speakers of the Chamber of Deputies and Senate in Rome. For each he had a simple, brief message: His brother, Gianni Agnelli, the ailing patriarch of the family that had presided over Italian business, social and political circles for a century, was dead.

Then Umberto climbed into his Lancia Thesis sedan and sped into Turin to Corso Dante, where his grandfather had founded a tool shop 104 years earlier named Fabbrica Italiana di Automobili Torino, known to all today by its acronym, Fiat. Awaiting his arrival were dozens of relatives -- 70 in all -- who had assembled that morning, in an extraordinary and uncanny quirk of timing, for a meeting planned weeks in advance to ratify Umberto as the new head of the family, succeeding his sick brother. Among them were Gianni's widow, Marella, and his grandsons John and Lapo Elkann, who had kept vigil all night beside his bed, leaving his side after the city coroner declared him dead.

All sat in rows of plain plastic folding chairs in the echoing central nave of Fiat's Centro Storico, a two-story factory converted into a museum dedicated to the company that once accounted for 6 percent of the gross national product of the world's sixth-biggest economy. Displayed around them on the marble floors were many of the automobiles that had made the family rich: the 15-horsepower Tipo from 1910, the compact Cinquecento from the 1950s and the elegant Balilla, the Fascist-era people's car and Mussolini's favorite ride.

At 9:00 a.m., in his first official act as head of Giovanni Agnelli & Co., the limited partnership that groups the family's interests in a series of companies that control Fiat through a 30.4 percent shareholding, Umberto rose to ask his family for a handout. He did not have to tell them why. Gianni, dashing playboy and industrial magnate, who passionately loved his family and his company, had left both in a mess. Following a loss of E4.2 billion ($4.6 billion) last year, Fiat shares traded recently at E5.5, their lowest level in decades.

"Fiat has given so much to this family over the past century. Now we must give something back," Umberto declared.

Then he asked his relatives to reach into their pockets to help revive Fiat -- the first time since the company's founding that the family would personally inject cash. Giovanni Agnelli & Co. needed E250 million -- or just under E4 million from each person in the room -- to play its part in a Fiat bailout.

The meeting lasted just half an hour. After, family members streamed out into the street, where a throng of television reporters respectfully kept their distance -- extending the deference that has always been accorded to the country's uncrowned royal family. The Agnellis climbed into their Lancias and their Alfa Romeos and drove off to prepare for a funeral. Umberto's driver took him straight across the Po and up the winding Strada San Vito to Villa Frescot, the family's palazzo near the top of the Revigliasco hill, to look on his older brother for the last time.

"FIAT IS A CHANCE," UMBERTO AGNELLI TOLD Institutional Investor a few weeks later, in early March, during the first interview he had granted after officially taking over as chairman of Fiat. "I mean you can't buy it lower than it is now, and it has some very good opportunities for turning around and becoming a very good business again. Sure it is a risk, but it is one worth taking. That is what the family has been told and why a great majority are still willing to play the game."

Like Italy itself, the past is never too far from the present at Fiat. Umberto Agnelli sits in the very corner office, room 444, in Fiat's Lingotto headquarters, that his brother occupied for almost 40 years. Umberto has replaced the furnishings, packing up his brother's cherished Jean Dubuffet painting of a car. But even the artifacts he has replaced them with -- from the motor controls of a vintage yacht to the Sony plasma screen "to watch Juventus games" -- hint at the shared interests of the two brothers in sailing and soccer.

Umberto, who served as Fiat CEO during the 1970s, knows that the family and company have reached a major crossroads. For generations they were one and the same. The Agnellis were Fiat, and Fiat was Italy. Theirs was the wealth, the power and the glory. These ties inevitably loosened as the descendants of company founder Giovanni Agnelli, il Senatore, multiplied; few family members today work at the company or any of its affiliates. The interest of most is restricted to cashing dividend checks.

Not Umberto, who clearly wants to save the company. Doing so would confirm his managerial prowess, it would allow him to step into the sunlight from the long shadow cast by his brother, and it would restore much destroyed wealth to his siblings, cousins, nieces and nephews. Yet if he succeeds, it's far from clear that the futures of the family and the company will continue to be intertwined. In fact, it is more likely that Agnelli's purpose in saving the car company is to make it healthy enough to sell.

Some in the family still regret that Gianni did not sell Fiat Auto at the top of the market, when it was worth $13 billion or more, of which their share was more than $3 billion. Instead, he sold 20 percent to General Motors in March 2000. Since then, $10 billion has eroded from the company's value. Gianni, who controlled 30 percent of Giovanni Agnelli & Co., had the most to gain from a sale, but he also had the most invested in the mythos of the company. Confidant of prime ministers and popes, consort to princesses and actresses, Gianni embodied both the post­World War II industrial miracle of Italy and the country's famed dolce vita; a fashion setter with his wristwatch worn over his cuff, the collars of his button-down shirt left unfastened, Gianni presented in every way la bella figura. He was a true romantic; he could not bear to cut the ties to the auto business -- or to the past.

Umberto is cut from very different cloth, right down to the dark cardigan he unfashionably sports underneath his suit coat. Unlike Gianni, family members say, he is less emotionally attached to Fiat. He is seen as commonsensical, a pragmatist who will do what is best for the family. And that, they say, all but certainly means selling the company once he has fixed it up.

"Umberto is a man of the table," says one of his nephews, Rome-based fashion designer Prince Egon von Furstenberg. "He is good with numbers and figures. Certainly, he has less of the charm that Gianni had, but he is more down-to-earth."

Umberto will need all of his skill with numbers and figures. After a decade of massive expansion and diversification -- blessed by Gianni and executed by a series of hired managers -- the company is in deep distress. Fiat SpA, the holding company, comprises 12 far-flung industrial sectors, from robots to tractors to Italy's biggest daily newspaper, Corriere della Sera. By far the biggest -- and most troubled -- remains Fiat Auto, which sells cars under the Fiat, Alfa Romeo, Autobianchi and Lancia brand names. The carmaker's market share in Europe has fallen from 14 percent in the mid-1990s to 8.2 percent last year, down from 9.5 percent the year before. Its E2 billion of operating losses in the past two years ate up all of the E1.5 billion of operating income generated by the rest of the company. Add in one-time restructuring costs, asset write-downs and interest payments, and Fiat SpA has lost E5 billion in the past two years alone.

Fiat, like all automakers, must steer through the sharp twists and turns of the economy. When it rode high in the 1990s, thanks to a dominant position in the profitable Brazilian market -- where it has a 26 percent market share -- and to Italian government incentives for consumers to buy cars, executives chose to diversify to insulate it from economic ructions. It amassed a pile of debt that costs some $800 million in annual interest today, while underinvesting in plant and equipment as well as, crucially, research and development.

As a result, Fiat failed to update its lineup. Its one big model launch, the Stilo in 2001, flopped. Fiat executives estimate that the automaker must invest E2.5 billion to roll out new models and update existing ones. Meanwhile, new businesses suffered. CNH Global, the maker of tractors and industrial equipment created by the purchase of Case by Fiat's New Holland subsidiary, saw operating profits slide 22 percent last year. At Iveco, its truck business, they plunged 62 percent, amid fierce competition. Comau, Fiat's robotics arm, and Magneti Marelli, an auto-parts maker, both lost money.

Fiat's finances put it at the mercy of its creditors, particularly its six main banks -- Banca Intesa, Banca Nazionale del Lavoro, Capitalia, Banca Monte dei Paschi di Siena, Sanpaolo IMI and Unicredito Italiano. They lent E3 billion that they can convert to equity, potentially wiping out the Agnellis' controlling stake, if Fiat does not pare its debt and prove its viability.

Umberto climbed behind the steering wheel with a straightforward plan for survival: Bring in a new executive team, cut costs, reinvest in R&D and raise E5 billion in new money to see the company through to 2005, when he thinks it will have retooled enough to make a profit again.

Acting swiftly, Umberto installed respected former Pirelli executive Giuseppe Morchio as CEO. The fast-talking Genoan built Pirelli's small fiber-optics business, selling it to Corning for $3.6 billion at the height of the bull market in 2000 (and famously pocketing a bonus of $150 million for himself). He has begun a plan to cut costs by more than $1 billion and streamline Fiat's dealer network.

To mollify the banks, he and Agnelli are shedding assets: They will raise E4 billion by selling off two of Fiat's best-performing companies: insurer Toro Assicurazioni, to De Agostini; and aeronautics components business FiatAvio, to Carlyle Group. The sales will buy time to restructure and roll out new car models. They will also give Morchio room to jump-start cooperation talks with General Motors Corp., with whom Fiat jointly makes power trains and purchases parts and raw materials around the world. Morchio must nurse Fiat Auto back to health before he can discuss a merger with GM -- an eventuality many executives within both companies expect will happen in the next few years.

Even with the asset sales, Fiat will need another E2 billion. Umberto wants to raise this through a recapitalization, which is where his family comes in. To maintain their interest in Fiat, held through a complex structure of investment vehicles (see chart, page 57), the family will need to participate in capital increases through their chain of holdings, ultimately requiring Giovanni Agnelli & Co. to put the E250 million on the table.

Agnelli is reorganizing the family's cascade of companies; he began with a E1 billion transfer of assets between two holding companies. And he will almost certainly simplify the Agnelli group by merging one or more of its listed vehicles. One result of his engineering is that, while the family is being asked to add more money to save Fiat, their see-through investment in the company will be reduced to about 18 percent from 25 percent.

So far Umberto has deftly managed his appeal to relatives. But his is a weaker position than his brother's. Gianni's charisma allowed him to ram through strategic initiatives, management changes and deals. When charisma alone did not suffice, Gianni could wield his commanding 30 percent slice of Giovanni Agnelli & Co., as well as a veto, over all other members. With just 10 percent and no veto powers, Umberto must forge consensus.

The family is certainly not unanimous. One relative who is none too interested in liquidating personal assets to help bail out Fiat Auto is Countess Noemi Marone Cinzano, a 46-year-old Londoner and the daughter of Laura Nasi, one of five children born to Umberto's aunt, Caterina. Her father was an heir to the Cinzano vermouth fortune. "All the older generation -- those closest to Gianni like Umberto and their sisters -- supported him completely," she says. "Now that he is gone, in a way they are kind of brainwashed and think, 'We belong to the family and this is something we have to do.' But not all of the younger generations think quite the same way."

On the other side of the fence is Benedetto Camerana, a 39-year-old architect who is designing the Olympic village for the 2006 winter games in Turin; the grandson of one of Umberto's first cousins, he favors the recapitalization. "The period where the family's power over the Italian economy counted -- when we were buying this and that and creating a network of dominance -- is now over," says Camerana. "Wielding power costs money. Now the game is being played on our terms -- and one of them is to see higher dividends and good results."

Such differing views, of course, are all part of a natural transition in the family and company. It is coming now because Gianni, who died at 81, held sway for nearly 60 years.

"The same thing that happened to the Rockefellers and others is happening in our family," acknowledges Umberto. "People who are my son's age [27] are working outside the Fiat companies. They are preparing themselves for careers outside. Sure they are lucky enough to have something that gives them some extra possibilities in life, because they have dividends that come from the family business. But that is the way they are looking at it."

FOR ALL OF ITS RECENT TROUBLES, FIAT WAS, from its start, a notable success. Il Senatore, a former Piedmontese cavalry officer, was one of the first Europeans to recognize the potential of the motorcar. He started producing them near the site now occupied by Fiat's Centro Storico in 1899 -- three years before Henry Ford, who became a lifelong friend, founded Ford Motor Co.

In short order, Fiat became one of Europe's biggest car manufacturers. By 1910 it was churning out 500 Tipo 1 cars a year from Corso Dante. The production demands prompted Agnelli in 1916 to begin building Lingotto, a sprawling factory designed to employ the assembly line methods practiced at Ford's Highland Park complex. Lingotto, and the test track with parabolic curves that still circles its roof like a halo, today serves as Fiat's executive headquarters and houses an 11-screen cinema, acres of office space, Turin's biggest shopping mall and the Renzo Piano­designed Agnelli Gallery of Art.

From the beginning, Fiat's founder wanted to ensure continued family control of the business. In 1927 he created Istituto Finanziaro Industriale to group his shares in the company and prevent Fiat's ownership from fragmenting upon the death of his two children, Edoardo and Caterina. This proved wise, as both died before Agnelli's own death in 1945. Without IFI, his 12 grandchildren, including Gianni and Umberto, would have had to divvy up control.

"The Senator's vision was that his patrimony would go to IFI, which would control this empire, rather than having a series of family pieces divided up," says Gianluigi Gabetti, 78, the trusted 32-year family lieutenant and chairman of IFIL Finanziaria di Partecipazioni, the Agnellis' principal investment vehicle. "This combination of the spirit of a private institution and the use of a public vehicle shows family capitalism can evolve, still remaining private while using the mechanisms of the capital markets."

Fiat ratcheted up production after Lingotto, then the largest European manufacturing facility, opened in 1923. From 1925 to 1929 it produced 190,000 cars --- nearly three quarters of overall Italian car production -- the majority of which were sold for export.

In the 1930s the group focused on the relatively undeveloped domestic market, launching the Balilla -- named after Mussolini's fascist youth organization, which was used to promote the car. The timing was savvy, as Mussolini's strategy of self-sufficiency made it increasingly difficult for Fiat to export its products.

To compensate for slowing sales abroad, Senator Agnelli pegged more of Fiat's fortunes to the regime and to the King of Italy, who became godfather to his namesake, Umberto. The colonial conquest of Abyssinia that year, and later of Albania and Greece, required tanks, trucks and other transport built by Fiat. To compensate for this increase in demand, the automaker began work on another factory, Mirafiori, on Turin's outskirts. It opened in 1939.

During World War II, Fiat briefly collaborated with the Nazi war machine, then switched allegiance to the Allied powers that liberated Italy. Gianni was wounded on the Russian front fighting for the fascists before returning to Italy. In a hint of his charisma, he was able to convince the Allies to not only keep Fiat in business but also to send some Marshall Plan funds its way.

With his grandfather's death in 1945, Gianni, just 24, took over as de facto head of the family, but he was not active in the company. Instead, the Agnellis entrusted management to the imperious Vittorio Valletta, while Gianni enjoyed what many refer to as his "regency," earning headlines as a notorious playboy, then as a married jet-setter.

It was a glorious time for Fiat, which profited handsomely from Italy's postwar reconstruction. Italians moved from largely agrarian occupations into the factories of the major cities. Fiat and its suppliers gave them jobs and small, cheap automobiles to spend their salaries on. In three decades Italy boasted the world's highest per capita car ownership, and Fiat dominated the market.

In 1966 Gianni assumed the chairmanship of the company, replacing the aging Valletta, who died a year later. The good times were ending. Agnelli's arrival coincided with the beginning of Italy's anni di piombo -- or years of lead -- characterized by student uprisings and labor strife.

Gianni asked his brother to lend a hand. Umberto had already worked for a few companies within the Agnelli empire, starting as chairman of Juventus when he was just 22. Now, in 1968, Gianni made him head of Fiat's international business unit, a role that suited Umberto, with his impeccable French and English. (The brothers were raised by a series of governesses, including English nannies, after their father's seaplane crashed in 1935, when Umberto was one.) In 1970 Umberto, who like his brother had studied law, became CEO.

The 1970s were a wretched time for Italy and Fiat, which were devastated by the 1973 energy crisis. Facing their worst financial crisis since the war, the Agnellis in 1976 accepted a $450 million investment from the government of Libyan dictator Muammar Qaddafi, who was introduced by legendary Lazard financier Andre Meyer. Fiat gave the Libyans board representation until they sold their 15 percent stake a decade later.

Meanwhile, the country was increasingly being radicalized by the communist left, which targeted Italy's biggest company, leading the two brothers to seek more prominent roles in the country's affairs. Gianni became the head of Confindustria, the all-powerful federation of employers. Umberto campaigned for and won a Senate seat as a Christian Democrat in 1976. (His campaign manager was a young family friend, Luca di Montezemolo, today the chief executive of Ferrari and one of the confidants Umberto recently brought onto Fiat's board.) For the next three years, he divided his time between Rome and Turin, leaving Fiat in the hands of professional managers, including a rising young financial expert, Cesare Romiti, an acolyte of Enrico Cuccia, the wily genius who ran Mediobanca, the Milanese investment bank that dominated Italian finance. Romiti arrived in 1974 and quickly built a power base within the ranks, aided by the increasing amount of time the Agnellis spent in the capital.

Gianni and Umberto, who personally signed Romiti's first contract, did not trust the gruff Roman and his close connections to Cuccia. Over the next decade Romiti distinguished himself with his take-no-prisoners dealings with unions and the company's white-collar workforce alike, earning him the sobriquet il schiaffegialeoni -- the lion tamer -- and endearing himself to Fiat's bankers.

By the time Umberto returned to the company full time in 1979, Fiat and Turin were crippled by strikes and labor unrest, which culminated in the assassination of a top executive that fall. Productivity and profitability plunged. Umberto's plan to chop 78,000 jobs in May 1980 met fierce resistance, and ultimately he became unable to govern the company or its relations with the unions. Floundering financially, the company needed additional assistance from financial markets. It turned to Mediobanca. The price? Gianni agreed to push his younger brother aside, making way for Romiti, who became CEO in 1980.

Fiat regained its footing in the 1980s, as the economy slowly recovered. With Gianni's encouragement, Romiti spearheaded a global expansion program, notably building Fiat's presence in Brazil, where it had opened for business in 1976. The Agnellis' influence in Rome, meantime, helped keep Italy's automobile market closed to the cheaper models sold by Japanese and other producers that were hurting the big American car manufacturers. Intermittent devaluations of the lira enabled Fiat to increase its market share outside Italy, and government initiatives favoring small, fuel-efficient cars, Fiat's specialty, allowed the company to hold half of the domestic market up until the mid-1990s.

All of this gave the succession of outside managers who have run the company with limited oversight from the family since 1996 the confidence to take the group in new directions. In that year Gianni reached Fiat's mandatory retirement age of 75 and became honorary chairman. Romiti remained chairman until he, too, turned 75 in 1998. Fiat then recruited as chairman Paolo Fresco, who as a vice chairman at General Electric Co. had looked after the company's international interests. A Fiat board member for two years, he conferred an additional touch of international respectability to the group, which was later cemented when he brought GE supremo Jack Welch onto the Fiat board in 1999.

Fresco, who declined to be interviewed for this article, elevated Fiat Auto's longtime boss Paolo Cantarella to CEO and used the cash Fiat's car business generated in the booming 1990s to open new plants in emerging markets like Brazil, China, Argentina and India to sell locally. To diversify Fiat while pursuing a GE-style strategy of market domination, the two Paolos went on a massive shopping expedition. First they bought out for cash the minority interests in subsidiaries Toro, robotics arm Comau and components maker Magneti Marelli. In 1999 New Holland, the tractor maker, paid $4.3 billion in cash for its American competitor, Case. Comau purchased a U.S. rival, Pico.

At home, Fresco and Cantarella used Fiat's clout to enter the energy business. Even as the first evidence of Fiat Auto's flagging fortunes started to emerge in the summer of 2001, Fiat launched a E5.8 billion bid for Montedison, the former Gruppo Ferruzzi agrochemicals empire. The ambitious deal for, and subsequent breakup of, Montedison -- executed in tandem with French electrical monopoly Électricité de France -- allowed Fiat to take control of the country's second-biggest power company, Edison, without having to inject cash. Since then, Fiat's difficulties and the demands for a recapitalization at Edison have forced Fiat to mortgage its shares in the power group to its banks.

By early 2002, even though it was becoming clear to investors that Fiat was running into trouble, management wanted to keep diversifying. When La Fondiaria Assicurazioni became the subject of a takeover battle, Fresco pleaded with his banks to finance a deal that would allow Fiat to gain control of the insurer, according to one bank chief executive. The banks refused to do so.

All these moves took management's eye off the car business, sapping it of resources and investment needed to research and develop new model launches. During the late 1990s Fiat spent a quarter of the amount on R&D than did the resurgent Volkswagen. That meant that when it became clear that the Stilo -- a model designed to compete with Volkswagen's Golf -- was a disaster, Fiat had little in the pipeline to pick up the slack.

The Stilo's troubles were exacerbated by a lack of foresight in predicting the economic downturn's nasty impact on European and Brazilian car sales. The group only turned its attention to cost-cutting in mid-2002, shortly after Fiat's banks forced Cantarella to resign. His concerns about the company growing, Umberto convinced Ga-briele Galateri di Genola, his lieutenant at IFIL and IFI for 15 years, to take the job as chief executive and sort things out. To push through an emergency 8,100-worker job cut, including the closure of a Sicilian plant, the group had to ask the government to officially recognize Fiat as an enterprise in crisis in October.

Thus the end result of Fiat's empire building was not, sadly, the creation of General Electric all'italiana. Apart from CNH's position in tractors and heavy equipment and Iveco's share of the European market for light trucks, the company does not dominate any of the sectors it set out to conquer when Fresco arrived. From car manufacturing and financial services to aeronautics and energy, bigger, more focused competitors squeezed Fiat all over the globe. At the same time, the E33 billion of gross debt racked up during its spending spree, combined with continuing losses in its automotive arm, have hampered Fiat's ability to maneuver. Its stock has plunged to 20-year lows, and its debt has been junked by Standard & Poor's.

UMBERTO'S RETURN TO CENTER STAGE AT FIAT marks a strange -- and tragic -- turn of fate. A decade ago, Umberto's oldest son, Giovanni Alberto, was anointed to lead Fiat and fill Gianni's shoes as head of the family. But the dashing, Brown University­educated Giovanni Alberto -- often compared in the press to another young scion and Brown University graduate, John F. Kennedy Jr. -- died in 1997, at 33, from a rare form of abdominal cancer. Three years later Gianni's son, Edoardo, threw himself from a bridge on the Turin-Savona highway.

Though removed from the company, Umberto remained at the center of the family's power and wealth, shifting to managing the Agnellis' other holdings through three family investment vehicles. These were IFI, founded by il Senatore in 1927; IFIL, begun as a wool company in 1919 and acquired by the Agnellis in the 1950s; and Exor, begun in 1980s as the international investment arm of IFI. In 1987 Gianni, perhaps also fearing a division of the company's interests in the event of his death, grouped all of the family's IFI holdings under the umbrella of Giovanni Agnelli & Co., which is presided over by seven limited partners representing each of the branches of the family. As an added insurance policy, Agnelli gave himself a veto over the other limited partners. (This veto was abolished at the last meeting of the partnership in March.) Giovanni Agnelli & Co. owns 60 percent of Exor and 100 percent of IFI's ordinary shares (its preferred shares are publicly held). IFI, in turn, owns 60 percent of IFIL and 25 percent of Exor; IFIL owns 30 percent of Fiat.

Umberto made his mark at IFIL, diversifying the family's investments away from Fiat into hotels, tourism, food, telecommunications, banking and other sectors. Today IFIL owns important stakes in Italy's top tour operator, Alpitour; Juventus, the famous football club; Sanpaolo IMI bank; and retailer Rinascente. Under Agnelli and Gabriele Galateri -- who last month was named CEO of Mediobanca -- IFIL later turned its attention abroad, buying French holding company Worms & Cie., which owns the Arjo Wiggins paper business, a slice of Swiss industrial testing and certification company SGS Société Générale de Surveillance Holding and a variety of financial services companies. Exor, meantime, traded in international trophy assets, acquiring stakes in Rockefeller Center and famed Bordeaux vineyard Château Margaux, as well as less glamorous businesses like the Riverwood International Corp., a paper company.

Even after recently increasing its position in Fiat by acquiring IFI's shares in the company, IFIL today derives just 30 percent of its net asset value from Fiat, compared with more than 80 percent when Umberto arrived in the early 1980s. Though Fiat still largely determines the performances of IFI and IFIL, they have managed to modestly outperform their biggest asset; Fiat shares have plunged 70 percent over the past decade. IFIL and IFI, whose preferred shares are publicly traded, lost half their value. Exor, largely under Gabetti's management, has been a major source of profits for the family, even during Fiat's worst years. For the past two years, Exor has liquidated assets to continue paying the family dividends. Despite Fiat's problems, Giovanni Agnelli & Co. paid E15 million in dividends to 70 of il Senatore's adult descendants last year. In the past four years, it has paid them a total of E72 million in dividends and other special cash disbursements.

Umberto, like Gianni, remained aloof from Fiat during its great successes in the late 1990s. More recently, as Gianni fell victim to prostate cancer, Umberto began to put pressure on the company. He helped convince Galateri to take over as CEO of Fiat last summer, and although he did not sit on the company's board, he was represented there by IFIL director general Daniel Winteler. In December, as Fiat's troubles spiraled, Umberto decided he needed to take drastic steps. He convinced his dying brother that management needed to be changed. The two brothers summoned Fresco and Galateri to Villa Frescot, where Umberto told them he thought the company needed urgent action, including their resignations. Galateri was relieved, says a person familiar with his thinking. He is an expert financial engineer, and after just a few months on the job, it became apparent to him and his mentor, Umberto, that Fiat needed an industrial operator, not a banker.

Umberto's activism led to an unexpected -- and atypical -- bout of family infighting, when his calls for the resignations were rebuffed by Gianni's handpicked heir, his 27-year-old grandson John Elkann. Known as Yaki, Elkann was put on the Fiat board five years ago by his grandfather, who had also joined Fiat in his early 20s. He was placed under Fresco's wing to prepare for his eventual stewardship of the company. That "was kind of a shock for him," says Camerana, his cousin, the Turin-based architect. "He never had time to be a happy young rich kid or live la dolce vita like Gianni. He was immediately made the dauphin."

Fresco looked after Elkann's education, arranging a job for him at GE's auditing department in Connecticut. This quasiapprenticeship to Fresco appears to have made it difficult for Elkann to balance his allegiances to his mentors and to his family and shareholders, say people close to the young executive.

The independent directors -- Welch, former Swiss president Flavio Cotti and onetime Lazard Frères senior partner and former ambassador to France Felix Rohatyn -- were loyal to Fresco. So were Fiat's banks, which reacted with horror at the mention of the man Umberto proposed to take Galateri's place, Enrico Bondi. Running Montedison in the early 1990s, Bondi carried out Cuccia's orders to save that conglomerate from bankruptcy by forcing its banks to swap billions of loans into equity at huge losses. The banks, fearing a similar fate at Fiat, rallied around Fresco.

That the banks and the independent board members would act this way was not surprising. The shock came when Elkann actually backed them against the wishes of his great-uncle. "He was supportive of our views, but he was in an obviously delicate position himself. None of us wanted to really push him given the position he was in," says Rohatyn.

After a week of fighting among board members, shareholders and banks, a compromise was finally reached when Fresco agreed to step down by Fiat's annual meeting this month. The banks played the key role in reaching the compromise. Their E3 billion of convertible debt gives them great leverage: Converting it at current share price levels would force them to take losses, but it would ultimately allow them to dilute the Agnellis' holding and take control of the company.

The banks played this card during the December board fight. They threatened to delay an ongoing discussion to acquire 51 percent of Fiat's Fidis finance arm. This sale was designed to help reduce Fiat's gross debt by E6 billion, to about E27 billion -- one of the conditions the banks, in a sop to ratings agencies, had imposed as part of the convertible debt agreement inked in May 2002.

Bondi's name was scratched from the list, and a new search was commissioned, which brought in Morchio. The Fidis sale closed in March. When it became clear in February that the family wanted Umberto to roll up his sleeves at the family business and become chairman, Fresco accelerated his departure.

"We all felt that the controlling shareholders were entitled to the final decision on the management but that the board should be consulted beforehand and the successions should take place in an orderly way, which is ultimately what happened," recalls Rohatyn, who along with Welch left the board when Fresco quit in February.

THE DAY AFTER DRAMATICALLY ASKING HIS family to put up money to save Fiat, Umberto Agnelli took his place standing to one side of the closed wooden coffin adorned with white roses from Villa Frescot's gardens that held Gianni's body. He was flanked by his son Andrea, his sister Susanna, Yaki, Lapo, their sister Ginevra and Gianni's widow, Marella, to greet those who came to pay their respects at the wake in the spartan lobby of the steel-and-glass structure Gianni built atop Lingotto to house his art collection.

One by one, the mourners came. More than 100,000 people shuffled along the street and up the ramps that once took finished automobiles from the roof's test track to waiting freight trains. Paolo Fresco wiped tears away as he sat down to commiserate with former World Trade Organization chief Renato Ruggiero. Ferrari boss Luca di Montezemolo arrived with Formula One driver Michael Schumacher. The entire Juventus squad paid their respects. Romiti, Umberto's nemesis, embraced Yaki and affectionately pinched his cheek before swiftly shaking Umberto's hand. The two did not make eye contact.

But the vast majority of those who streamed into the Renzo Piano­designed gallery, known as the jewel box, were ordinary Italians who owed their livelihoods to Fiat. "Non abbandonarci" -- don't leave us -- was the oft-repeated refrain from many who shook hands with Umberto, his sisters and nephews at the wake, and who were interviewed by state channel RAI at what Gabetti described as "the biggest [funeral] since Winston Churchill's."

On the following day a funeral cortege brought Agnelli's coffin through the city, past thronged sidewalks. Later the Agnellis hung their heads together in prayer at Turin's cathedral. Mourners included Italian President Carlo Azeglio Ciampi, who mingled with Henry Kissinger and other dignitaries. Prime Minister Silvio Berlusconi pulled up in an Audi and was booed by the crowd outside.

"Those few days were very emotional and very intense," says Count Brandino Brandolini d'Adda, a wine maker in eastern Italy, whose mother, Cristiana, is one of Umberto's older sisters. "As a result, the family feels quite close to its heritage in the car business, and we feel very responsible for what we represent to the country as a whole."

Umberto Agnelli clearly feels the weight of this burden. When discussing Fiat Auto's future, his usual smile disappears into a frown. His voice deepens and he reaches for another Marlboro. But unlike his brother, who to the end opposed any notion of selling Fiat Auto, Umberto is widely viewed by the people who know him well as a pragmatist. His challenge is not to keep Fiat in the car industry, as would appear to be the wish of many of the mourners at his brother's wake. He must ensure that the Agnellis continue to have a choice in the matter.

As it stands today, selling Fiat Auto is simply out of the question, even though the company has the right to force GM to buy the 80 percent it does not own beginning next year. This is not because the Italian public would vilify the Agnellis for selling to the Americans. To some degree, Fiat's recent problems have prepared Italians for this. "A company with Italian leadership might be more sensitive to local needs. But there is a point where what really matters is whether the company is in a position to invest, create jobs and wealth, whether or not its headquarters are in Detroit or Turin," Sergio Chiamparino, the mayor of Turin, says in an interview.

The more difficult job will be convincing GM. The U.S. automaker has made it clear that it will fight any exercise of the put agreement reached in 2000 while Fiat is guzzling cash. A deal would be bogged down by litigation for a year, maybe longer. The damage that would do to Fiat Auto and its workers -- knowing GM didn't want them, and nor did the Agnellis -- is not a gamble Umberto can afford to take.

He has only one really clear choice -- he must turn the business around. That is why he and Morchio are moving rapidly to whittle Fiat down to its very basic industrial activities: the carmaker, Ferrari/Maserati sports cars, Iveco trucks and CNH farm machinery and industrial equipment.

"There are many talented people throughout the Fiat group, but their attention has not been focused exclusively on the main operations of the business," says Morchio, a hyperactive executive who rarely finishes one sentence before moving to the next. "I am here to make sure, at all costs, that this happens and that the money that goes into Fiat does not simply spill out of a hole on the other side of the company."

Other disposals -- robotics firm Comau, auto-parts maker Magneti Marelli, the Teksid foundries arm -- will follow when market conditions improve. Fiat executives say these sales could raise an additional E2 billion. Eventually, all of Fiat's core operating divisions could be spun off or merged with rivals. That would allow current shareholders, particularly IFIL, to retain interests, even controlling ones, in the businesses. This appears to be the almost certain destiny for Fiat Auto: an eventual integration with its American partner. But this will only happen if Umberto can put it back into shape.

"If [Fiat and GM] work well together, we can take advantage of the two companies' strengths," says Agnelli. "My hope is that if things go really well, we could have the possibility of perhaps putting the companies even closer together in five or ten years. That would be the best result, but before then we must have valuable equity."

Umberto won't speculate on how the two companies might come together. But in private many Fiat executives see the automaker relinquishing the put agreement in exchange for a capital injection from GM that would give it a bigger shareholding in the Italian car business. As part of this, the two would lay out a road map for integrating Fiat Auto and GM Europe over time.

Fiat is not the only party with an incentive to make this happen. Savings from Fiat-GM joint ventures have already exceeded their targets, says Richard Wagoner, the GM chief executive who engineered the Fiat deal. "The principle at stake in this is that there are a whole lot of companies living off market shares somewhere around 8 percent to 12 percent in Europe. This is a situation that cannot continue forever," Wagoner told II in an interview at the Geneva Motor Show in March, where he met Umberto for the first time. "We are all under enormous pricing pressures and facing overcapacity -- there is a need to respond to this on the cost side of the business."

If Fiat Auto and GM do eventually merge -- and Umberto is able to lock in a value close to the E12 billion implied by the price GM paid for its 20 percent three years ago -- the Agnellis will get to play an important role in the world's biggest automobile company. But it would hardly be the kind of dominating role that the family has been accustomed to for a century.

When Gianni was alive, such an eventuality was not to be contemplated. Under Umberto anything is possible as long as it makes economic sense for him and his family. In that sense, the Agnelli family has indeed entered a new, pragmatic era.

"I think the family realizes that management is not an art, it is a method, and I think they realize we will try to put the method back inside the company and that should give them results," says Agnelli.

The family has, for the most part, rallied around Umberto's plans for Fiat and their finances. For an Italian clan of its size and with members so varied in their interests, such harmony is surprising.

Most critically, Umberto has patched up his differences with Yaki, who is the legal representative of his grandfather's 30 percent of the family investment vehicle. The young Agnelli heir, after working for the past two years at Fiat's Turin headquarters, is taking a step back, giving his more experienced relative the space to run Fiat. Though Yaki will remain on the boards of Fiat and two family holding companies, he is leaving the family business for a spell. Umberto says he may apprentice at an investment bank in New York, where another of his cousins, Alessandro Nasi, is an associate at J.P. Morgan Chase & Co. Nasi says he is helping Yaki line up interviews.

"The best thing these kids can do is try to find a career that they enjoy and can excel at in the best possible way," says Agnelli about the younger generation. His son Andrea is now working for Altria in Switzerland. "The Fiat institution, and the wealth that comes from it, is something that helps them do what they want to do. If they want to come back to Fiat eventually, having demonstrated their skills somewhere else, they will be welcome -- but only if it is in the interest of Fiat to have them."

Umberto has tossed in a few sweeteners to bring the rest of the family on board for his proposed recapitalization. To begin with, by transferring IFI's stake in Fiat to IFIL, the family's see-through investment in Fiat actually falls to about 18 percent from 25 percent, reducing their exposure to the troubled company. This means that only about E45 million of the money the Agnelli family kicks into the capital increase is actually destined for Fiat's coffers.

And he has other concessions to offer. Since Umberto announced the capital increase at Giovanni Agnelli & Co. in January, Exor has accelerated the sale of some of its assets. In late March, for example, Exor announced a plan to merge Riverwood International, which it bought with buyout firm Clayton, Dubilier & Rice, into a publicly traded rival, Graphic Packaging International Corp., controlled by the Coors family. This will make it possible for Exor to sell down its stake. All told, these moves may allow Agnelli to assure his relatives that while they may be putting money up today for Fiat, they will receive cash back from the liquidation of Exor's investments -- perhaps even as soon as later this year.

Still, even with all of these inducements, not all of Umberto's relatives are participating in the capital increase. "Why take money from selling a building or a home to put it in Fiat? It is not like your stock is guaranteed. It has to come from someplace. If I thought I had a great return on my money, I might do it," says von Furstenberg, who despite his wealth still drives around Rome in a Fiat Punto compact.

The younger Agnellis may no longer feel a powerful attachment to Fiat, but many Italians consider the company a vital part of their national identity. Prime Minister Berlusconi has mentioned a possible government bailout for Fiat (while suggesting that he could do a better job of managing the group). Milan's financial circles buzz with speculation that the Treasury might inject funds into a Fiat research arm -- skirting European Union prohibitions on state aid -- if the company's problems worsen.

"Given all of Fiat's troubles, from debt burdens to operating losses, when Gianni died I feared the coup de grâce had been delivered," says Turin Mayor Chiamparino. "But the will of the family to participate in the revival of the company gives a great deal of comfort. The city has a lot riding on Umberto Agnelli to make things right."

Umberto, the pragmatist, understands the complex relationship between Fiat and Italy; some of the first calls he made after his brother's death were to political leaders like Chiamparino. He heard the citizens at Gianni's wake plead, again and again, "Non abbandonarci." Gianni never would have sold the company, but Umberto will steer the smartest economic course.