Italy Autos Report Q4 2012

Following four consecutive years of contraction in the new vehicle sales market, new vehicle demand inItaly is showing no signs of recovery. Passenger car sales declined by more than 20% year-on-year (y-oy)in the first seven months of 2012, while commercial vehicle sales fell by 37% y-o-y during the first sixmonths. We believe consumer and business sentiment will remain subdued over the course of the yearand forecast a 15% contraction in the passenger segment and a 10.6% contraction in the commercialvehicle segment in 2012. BMI believes Italian GDP will contract 2.3% in 2012. Vehicle sales will remainsubdued and we do not expect vehicle sales to return to their 2007 peak by the end of our 2016 forecastperiod.

Thanks to signs of improving competitiveness in the Italian labour market over the last six months, thereis a degree of muted optimism in the production segment. Fiat abandoned national collective bargainingon January 1 2012, while Mario Monti's government has agreed to plans making it easier for firms to fireemployees and tackle the segmented labour market. We believe that, while these developments are stepsin the right direction, more needs to be done for Italy to regain industrial competitiveness.

We see these developments posing potential upside risks to our cautious outlook for total vehicleproduction to reach approximately 878,500 units in 2016, but we are holding on to this forecast until Fiatunveils concrete production and investment plans for Italy.

Fiat has revealed it is looking to increase Maserati sales as much as 10-fold (to 50,000 cars a year by2015) in a move which will not only see the luxury vehicle division playing a bigger role in thecompany's turnaround plan, but will also address some of the production issues in Italy. To a large extent,these expansions are aimed at tapping into growing global demand for luxury SUVs. In addition to theUS, these vehicles are popular in key emerging markets such as China and Russia, where improvedincome levels have prompted vehicle owners to upgrade to luxury SUVs.

Domestically, however, Fiat's high-end sports car brands Ferrari and Maserati are struggling to maintaintheir market share as Italians become increasingly cautious about making these big purchases amid risingcar taxes and highly publicised tax fraud spot checks. The government has stepped up its fight on taxevasion with spot checks on supercar drivers, as well as higher taxes on large cars. As a result, Ferrarisales slumped 57.8% in Italy and Maserati sales plummeted by 75.4% y-o-y over the 7m12 period.