MILAN (Reuters) - Fiat SpA FIA.MI sharply cut its performance targets for the next two years, saying languishing sales in austerity-hit Europe may lop off a third of its previous projections for 2014 trading profit.
The sharp downturn in Europe has forced Chief Executive Sergio Marchionne to focus on bolstering Fiat's operations on Europe instead of buying more shares in Chrysler Group LLC, the U.S. automaker in which Fiat has a 58.5 percent stake.
Marchionne, who runs both Fiat and Chrysler, repeated his plans to merge the two automakers into a single car company by 2014 or 2015, but said Europe took center stage.
"Our primary objective right now is that of fixing the European environment," Marchionne told analysts and reporters on a conference call on Tuesday.
The Italian automaker now expects its 2014 trading profit to be between 4.7 billion to 5.2 billion euros, down from its earlier forecast of 7.5 billion euros. Net industrial debt in 2012 could hit 6.5 billion euros, up to 1 billion euros above the previous projection.
The Turin-based company also expects to sell 4.6 million to 4.8 million vehicles in 2014, not the 6 million it forecast in a five-year plan outlined in 2010, back when Europe seemed ready to recover from the global financial crisis.
Fiat, which reported slightly better-than-expected third-quarter profits on Tuesday, said again that it did not plan to shut European factories, unlike some of its competitors.
Instead, it promised to increase investment and return its European operations to profitability in 2015-2016 by developing "global brands Alfa Romeo, Maserati, Jeep and the Fiat 500 'family'". Marchionne acknowledged the risk involved in investing and avoiding factory closures, while the European market was shrinking.
"This is truly not for the faint hearted," he said. "We never shied away from the challenges of making Chrysler into a viable carmaker. I think we need to do it one more time, to find a permanent solution to Europe's quandary."
Under Marchionne, Fiat took management control and a 20 percent stake in Chrysler when the U.S. automaker emerged from a government-funded bankruptcy in 2009.
Since then, Chrysler's revival has kept Fiat afloat in the current European crisis, allowing it to keep all its Italian plants open, although they are running below capacity.
Fiat shares fell sharply after the profit warning and closed down 4.7 percent in Milan at 3.93 euros.
"The share is being buffeted by the lowered targets, though honestly, it's all just a natural consequence of the unfolding crisis on the European markets," said an Italian fund manager, who spoke on condition of anonymity. "Thank God there's Chrysler. Fiat without Chrysler would be in real trouble."
Earlier in the day, Fiat posted a third-quarter trading profit above analysts' forecasts, as a jump in sales at Chrysler offset a growing loss in Europe, where the carmaker sees no recovery until 2014.
Fiat reported a trading profit of 951 million euros against market expectations of 910 million euros. Its trading loss in Europe was 238 million euros, double the level of a year ago.
Fiat's bearish outlook hammers home the problems facing European carmakers as they struggle to stem losses from high fixed costs in a shrinking market.
Marchionne, who unsuccessfully bid for General Motors Co's (GM.N) European division, Opel, in 2009, said he had not discussed the business with GM since then. He also denied a report that he had proposed a three-way tie-up with GM and France's PSA Peugeot Citroen (PEUP.PA) earlier this month.
According to the anonymously sourced Bloomberg report, Marchionne approached GM and PSA Peugeot Citroen, which are already pursuing an alliance in purchasing, logistics and future vehicle development.
"I wasn't the guy talking to Opel about anything," Marchionne said on a conference call, when asked to comment on the report. "We haven't had conversations since ... 2009."
Europe's sovereign debt crisis, government spending cuts and high unemployment have hit consumer spending and sent demand plunging, with new car registrations in the region showing their sharpest contraction in September for 12 months.
Last week, U.S. rival Ford Motor Co (F.N) said it would shut plants in Belgium and Britain, with the loss of thousands of jobs.
PSA Peugeot Citroen has accepted state aid and even Germany's Volkswagen AG (VOWG_p.DE), previously more resilient to crisis than its mass-market rivals, posted a big drop in quarterly profits.
Fiat's bottom line continues to be bolstered by Chrysler, which posted an 80 percent rise in quarterly net income on Monday, as well as by strong results in Brazil.
In Italy, total car sales have declined to levels not seen since the 1970s and Fiat has responded by cutting back on spending - a strategy that has drawn criticism from trade unions, politicians and even some other business leaders.
Additional reporting by Danilo Masoni, Stephen Jewkes, Cristiaan Hetzner, Deepa Seetharaman and Bernie Woodall; Editing by Alastair Macdonald, David Stamp and Andre Grenon