ML: Welcome, Paolo, to the Stern School of Business. How’s business?
PF: Well, you know, 45 percent of our business is automotive – cars. Now, cars are picking up, because we have a new product that serves the low-end segment where we traditionally have been leaders in Europe and in the developing world. Then all the other businesses are doing well, or very well. We bought (U.S. agricultural equipment manufacturer) Case during 1999. And today that portion is close to 20 percent of our total sales business. And it is a real global company. The market is very weak, particularly in the States for agricultural equipment.
Things are fairly good in the light truck business. If you look at Fiat, you will see in general we find our specialization in smaller equipment – agriculture, construction equipment, cars, or trucks. We are the cost leaders. And we are doing very well. Now, unfortunately, in that area very often, the margins are a bit tighter.

ML: Yes, but when you draw up a bar chart showing the profit margins of, say General Electric, at 18, 19 percent and you compare that with the total Fiat, it looks like it’s unfair.
PF: I don’t think it’s Fiat, it’s the automotive business. You look at the results of Ford, GM, Toyota, Volkswagen, or DaimlerChrysler. When they have a good year they will make five percent return on sales.

ML:Is that why you’re so eagerly apparently diversifying out of the automobile business?
PF: Last year we spent about $10 billion in acquisitions – all outside of the automotive business. And the principle reason is that it is difficult to find an acquisition available in the automotive business. The real reason why, however, we are strengthening these businesses is that I believe you have to be number one, number two or you have to do something about that. So I looked at my portfolio and I saw a number of opportunities to become number one or number two on a global basis. I believe that my objective is to have a portfolio of maybe six or seven or eight businesses where we have a leadership position.

ML: Your operations are in many developing countries. Which of these many countries do you think offer the best opportunities, the optimal opportunities for Fiat?
PF: Short term, our biggest area will continue to be Latin America. We are market leaders particularly in Brazil, and also in Argentina. If you look at the longer term, you have some two billion people that one day will need a car, if you put together just India and China. So, obviously those two countries for the longer term are extremely important.

ML:International trade is very important to you. Do you worry about perhaps a rise of protectionism in different parts of the world, and the anti-globalization movement?
PF: Yes, I do worry. I’ve seen signs of anti-globalization, particularly in Europe. I didn’t see it when I was living here. And I almost feel like the intelligentsia in Europe has been pretty leftist and want to have revenge against being proven wrong when they were supporting Communism. And if there is a chance to say capitalism does not work, they're all very happy.

ML: Comment on what are some of the things that European business people tend to do better than US business people. And conversely, what are some of the things that American business people may tend to do better than the Europeans?
PF: Rather than drawing distinctions between the way the Europeans do business and the way the Americans do business you have to draw a distinction between a modern way of doing business and an ancient, old fashioned way of doing business. And you have examples of both on both sides of the Atlantic. The ancient way is highly hierarchical. Very few people make all the decisions and supposedly know everything. And a lot of people know very little and do all the action. And the modern way of working is spreading information.
If you had to take a percentage, you would see that American companies have a higher percentage of modern companies versus European companies. But when I went to Fiat I found the same principles, the same values – whether it’s creation of value, customer satisfaction, or employee involvement – that I had in GE. Maybe I see more difference in the culture of the two countries: Anglo-Saxon versus Continental culture. I think the continental culture is something about work being really punishment. (Laughter) Well, think about when Adam and Eve were sent out from the Garden of Eden they were told, you sinned and therefore you're going out and you're going to earn your bread with the sweat of your brow. Now the Anglo-Saxon culture is – work is the best way of self-fulfilling or manifesting yourself. And, you know, I always remember, in this country every time that somebody asks somebody else about his job, the first thing they ask is, “Are you having fun?” I started to say, “Are you having fun” in Europe and people were looking at me like I was crazy.

ML: Do you find that there is a spread of entrepreneurship in Europe now?
PF: I think there are as many entrepreneurs in Europe as there are in the States. The difference, again, is a systemic difference. This country has a system that will favor entrepreneurs. Venture capital is available. Until two or three years ago it was available three or four times as much as it is in Europe. Now last year I’ve just found out there's been catching up.

ML: I came back last week from the annual World Economic Forum meeting with a firm impression that the Europeans are substantially behind the Americans in using the Internet for business and information technology. Do you agree?
PF: I agree 100 percent and my concern is that the Europeans are losing ground. The Europeans are moving, but the Americans are moving so rapidly, that rather than catching up at present, the gap, in my opinion, if anything, is widening. But, you know, I believe that that is not going to last forever. European companies have a lot of highly trained technologists, so there is no reason why the same technology should not be applied.

ML: European industry is generally thought to be handicapped by very tough labor unions, by stern government control, by high wages, and by short hours. How do you cope with this sort of thing?
PF: Well, let me start with Fiat. I thought I was working hard when I was in GE. But in terms of hours of work, I work much harder in Fiat. I mean, I go in in the morning at eight o'clock and at nine o'clock everybody's there, in the evening. I think that here (in the U.S.), people are better organized. So in, say ten hours a day of work, they accomplish what you need twelve or thirteen or fifteen hours of work in Europe. The telephone system is better, the communications are better, people are used to being crisper in meetings. I believe the biggest problem is government’s excessive regulation. I think there are so many useless rules and nobody cancels the rule because a new one has been introduced. I remember when I was here and Jack Welch was complaining about the excessive number of rules here. This is heaven.

ML: You work those long hours. How do you bring balance into your life?
PF: Well, you go to the museum during the night. (Laughter) No, listen, jokes apart. In Italy, we were trained to have a broader array of interests. You study art and you study literature, you study history and you do it very intensively. So you come out from this school system – you're more prepared to enjoy the cultural life.
But in terms of finding the balance, I think it's the same thing. My father was a hard worker. But you know, at six o'clock he was home, seven o'clock he was home. He came home for lunch, had a nap, and went back to the office at three o'clock. And he was considered a hard worker. So now we have a different situation. People take off on Friday. I can have all kinds of work in the world, I take off on Friday and come back on Sunday night. So there are two days a week that I don't work.

ML: Are the other people having fun in your office?
PF: They told me, you have to make one contribution to Fiat, and maybe to the Italian working culture: you have to have fun at what you're doing. Now, in order to have fun, you must know how to do it well. When I speak with students, I tell them, think of making an investment in your future happiness, because if you just do the right work, the right preparation, you're going to be good in what you're doing and there is nothing more enjoyable than being good at what you're doing. I hate golf because I don't know how to play golf.

ML: How's the Italian economy doing this year?
PF: It's trailing the European economy, and the European economy is trailing the American economy. So it's below two percent growth this year, but there are some signs that it's picking up slightly.

ML: What's the problem?
PF: Well, I would say, “What is the key to the U.S. miracle?” must be the real question, because you never had an economy growing four or five percent without inflation. My impression is that now the growth in productivity is heavily dependent on the use of information technology. I think as soon as there is a utilization of information technology in Europe, I think you’ll be able to get similar growth.

Q & A with Students

Q: Is Europe making any demonstrable progress at reducing double digit unemployment by having greater freedom and flexibility in labor markets?
PF: The answer is, very little, very little. And the problem is that the whole system is geared at protecting people who already have a job rather than helping people find a new job. We, at GE, 10 years ago bought a government company in Italy. The best technical talent in the world, the best product in the world, yet they had 20 percent of the global market and the American competition had 60 percent. This government company was staying away from increasing the volume because they were afraid they would undertake obligations that would last forever. I think we are making progress in Italy and we have now created part- time work, which is acceptable, and temporary work. And this is going to reduce unemployment.

Q: A lot of people when they think of Fiat, they think of it as an automotive company. What would be the main forte of Fiat in the twenty first century?
PF: For a corporation, I think, you have to always ask yourself, what is my key competency? What am I good at? And no doubt Fiat has developed over a century competencies in metal mechanical work. And somehow related to transportation. So you look at trucks, you look at agricultural equipment. You look at all these things. I like the idea of expanding and having a portfolio of businesses which are leaders on a global basis, and having these businesses integrating their competencies and their resources together.

Q: Given the declining birthrate, the aging population – not only in Italy but in other countries in Europe – how much concern do you have about that?
PF: I think there are two sides to this coin. Today I think that there are people in their sixties or their seventies who can make important work contributions. So let's look at the positive side of that and enjoy it and applaud it. Then there is the fact that you have less and less working strength because people do not have children anymore. The birth rate is going down. I think that inevitably, in Europe, this will be taken care of by greater immigration.

Q: When you describe Fiat's current international thrust, you revert to talking about the auto business. Are you going to try to expand all your other businesses into the rest of the world?
PF: Yes. I start speaking of Fiat and of the beauty of all its diversification, and then my mind in some of the answers goes back to automotives. Let me tell you that we are much more diversified internationally in the non-automotive business than we are in the automotive business. Our agricultural equipment business is the best global company in the world in this respect. We are from Asia to the United States to Latin America, to Europe, all over the world.

ML: Well, good afternoon. How did you get the idea for DLJ Direct and how did you manage to start this company?
BD: The idea had come to us through Prodigy. Prodigy at that time was an IBM series joint venture. They had shopped around this idea, doing online brokerage on their service to a number of firms, including Charles Schwab and Fidelity. And at that point, prior to the 1987 crash, nothing had worked in the online world. Schwab and Fidelity turned them down. They weren't sure what they needed to do to get an online brokerage system up. And they came to the Pershing Division of DLJ, because Pershing was known for having great brokerage technology.
     So I was given the task of building a business plan, to see whether it made any sense whatsoever to do this. I listened to all the experts who said it didn't make any sense. And we said that we would do it on a very low key basis, just to see if it would work. We got management approval. I think at that point it was about half a million dollars.
Interestingly, it was the day of the crash when our first meeting was due to be held with Prodigy to get this project started. And Prodigy called up at about 10:00 o'clock in the morning. I said, well, why don't you call us in a couple of weeks. If we're still in business, maybe we can talk. I think we were able to succeed early on because we kept our costs low; we kept very focused on what we needed to do. And just gradually, it began to take off.

ML: In the early years, how did your curve go? Did you have to have eight years of going slow, to train people that could do this sort of thing?
BD: You know, at the time it seemed like it zoomed up. If you're doing 50 trades a day and then you go to 200 trades, you feel like you just quadrupled everything. But in hindsight, nothing happened, really, until 1996, when the Internet came along.

ML: And how big now is the market? How many investors actually are online?
BD: I would say, probably about 30 percent of the transactions that are occurring right now are occurring online. So, my guess would be maybe 20 million households trade online.

ML: Does that mean that most of those get online with a conventional broker?
BD: There are certain people who have transferred all their assets online. So when you talk to our customer base, there's about a third of them. Another third break it up into multiple sort of online accounts. A lot of people still like the comfort of having a full-service broker. About 75 percent of the U.S. brokerage assets are still in full-service organizations.

ML: Well I've often wondered what distinguishes your company from a full-service broker. You appear to be doing just about everything that a full-service broker does, but at a small fraction of the price.
BD: Well, that's the idea. And the idea is to try to find all the points of value that a full-service firm has. We can do it at a fraction of the cost, because we don't have the high cost distribution network of brokers. And you can scale the technology fairly easily. You're going to see that online firms look more and more like the Merrill Lynches and the Morgan Stanleys. And the Morgan Stanleys and the Merrill Lynches are going to look more and more like the online firms.

ML: But then how will the Merrill Lynches and DLJs be able to survive? Presumably that means that their brokerage revenues will go down sharply and so will their profits?
BD: Well that's where the broker has to really prove its value to the consumer. One of the great things about the Internet is it's a great place for people to find out who's adding value, who isn't adding value. A Merrill Lynch broker who has 600 accounts right now, may talk to 20 of those accounts per day. With the Internet, if they use it effectively as a communication vehicle, they can communicate with every single customer every day at any hour of the day by using customized mass e-mails. There are all sorts of ways of using the technology to make the brokers more effective. The bottom line, the broker will only keep those customers if they're adding value by improving the performance of the investor in the marketplace.

ML: What percentage of investors should deal substantially or wholly online? Fifty percent? Seventy percent?
BD: I've always said it was probably 50 percent of the population probably would do it. And that percentage would go up over time, as more and more people become very comfortable managing their own investments. If you looked back 20 years ago versus now as far as the personal finance publications, the television shows, the books, magazines – all of these things have just proliferated. And individuals are taking much more of a personal interest in managing their own finances. But I think at this point, there's still a lot of people who want to give it to someone else.

ML: Tell us some of the changes and advances that we can expect in the future. The
18-month future, the five-year future, and the far distant future.
BD: What you're going to see in the next 18 months is this issue of advice online. More and more people being able to do sophisticated asset allocation, investment selection online. I think you're going to see much more in the way of use of broad- band. I think you'll see a lot more in audio-video. I think you're going to be able to go on-line and I think you're going to be able to see analysts having conference calls with corporations, and talking directly to management.
    But you look out five years from now. Right now, in the U.S., you basically invest in U.S. securities and some ADRs in foreign companies. But in the future, I think you're going to be able to say, “You know what? I don't like the U.S. market anymore; I really think I like some of the Asian economies an awful lot more.” And the beauty of the Internet is going to be that information is going to be right there at your fingertips.

ML: Will I be able to get information only from your DLJ analysts or will I be able to get information from Merrill Lynch analysts and other analysts as well?
BD: Certainly there are going to be the proprietary studies. So at DLJ Direct, that's where you go to get your DLJ research. At Merrill Lynch, you'll get your Merrill Lynch information. But we already have other third-party providers of information on our site, where companies are aggregating other brokerage firms' information.

ML: Who are your biggest competitors, or your toughest competitors?
BD: Well, right now Schwab is clearly the best competitor in a lot of ways. They have been in the business longer. They continue to re-invent themselves as times change. Clearly the big danger in our field are the people like Merrill Lynch and Morgan Stanley and even Goldman Sachs, as they come in and bring a lot of the resources that they have as traditional investment banking firms online. Of course we're fortunate in being part of DLJ. We have all those capabilities right now.

ML: Is there going to be a shake-out in this industry?
BD: What you've seen in this stage is a vast expansion because everyone's making money and everyone's doing well. And the market is allowing there to be lots of players. When you start to see a down-turn, and it's got to be somewhat of a prolonged down-turn, then you're going to start to see more in the way of consolidation. And you're going to see some of the people who have made a lot of money, saying, “Time to sell out.”

ML: If you were just graduating from business school, and you were thinking of building a career in your field, where would you go?
BD: I think it always comes down to: Pick a business that you're going to be passionate about. Pick a business that you think has a great operating model. Don't worry about making a fast decision. Don't worry about dropping out of school and giving it all up because it's a bubble.

Q & A with Students

Q: I was curious what you thought about the viability of doing IPOs online and eventually even disintermediating the investment banks?
BD: There have been a number of companies who have started off saying, we're going to make this a democratic process. We're going to bring in the individual. We're going to get rid of the intermediaries. And yet, all of those companies look very much like a traditional investment bank when all is said and done. Because the services that an issuer needs aren’t just pricing. The piece that's big has to do with making sure everything is set with due diligence and after-market coverage. So I don't think any investment banking firm is going to get disintermediated.

Q: What do you think the DLJ brand is, and is brand more or less important now with the online brokers?
BD: DLJ Direct is a brand really started back in late 1997, when we renamed it from PC Financial Network. And our attempt is to attach it to the DLJ brand which stands for
high quality research and information analysis. We're positioning our brand as a high-end/ sophisticated, serious brand. And you've not seen us use a lot of humor. We're trying to tell people to take this seriously. This isn't a game.
    Everyone says brand is everything on the Internet. It isn't. Longer term, the ultimate winners will be the ones who have the best service with the best value.
You look at Amazon. How much advertising did Amazon do to create Amazon.com? Next to zero. It had a great product, a great positioning right from the start.
Ultimately it will get back to who has the best product and the best service, and the best value point.

M: I'm with the faculty in management. Schwab and DLJ have taken rather different approaches to partnering in the Japanese market. Given the rate of resources that you need in every single national market that you anticipate penetrating, how are you going to go about entering these markets?
BD: We have taken the approach where, in most markets, we will partner in a joint venture with someone who really understands the local markets. We knew that we would not be able to enter the Japanese market very successfully unless we had a very strong partner who put huge resources behind it. So, we partnered with a Japanese firm and were able to get out as the first U.S. broker online in Japan. They helped us from a regulatory standpoint, understanding who to talk to. They understand the cultural differences which we would have no clue about. I mean they showed me advertising. I said, that's absolutely horrible, disgusting, I'd never use it here. And they say it's great, and they're always right and I'm always wrong.

W: Where does DLJ Direct expect its new customer growth to come from?
BD: We're always happy to take them from our competitors in the discount world. But I think we're going to probably take them more from the full- service environment to a very large degree. Because they have higher assets, they're more in line with what we are looking for. We grab our assets from Schwab, from Fidelity, from Merrill Lynch, from Smith Barney. And we continue to have success against those companies.
    When you look at the new people coming online, most of those people are coming right out of college or business school. They don't have a lot of assets, so they're not necessarily who we're targeting. We're targeting people with $100,000.00 or more in investable assets.

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www.stern.nyu.edu/lectures