Paolo Cantarella's dramatic resignation as Fiat Group chief executive is symptomatic of the company's failure to turnaround its ailing automotive division. Chairman Paolo Fresco takes on his responsibilities. Cantarella's announcement comes as Fiat Auto starts implementing a £1.5bn turnaround plan, funded by major Italian banks. The strategy aims to cut costs, accelerate new model launches and restructure the retail network.

Its importance cannot be under-estimated - failure would force the Fiat Group to consider exercising a put option with General Motors, which holds a 20 per cent stake in the automotive division. It also puts Fiat Auto chief executive Giancarlo Boschetti's reputation on the line - if he succeeds, he will become a national hero.

Fiat is carrying a debt level of around £10bn, which is attracting annual interest of around £500m. Analysts are nervous and are predicting a difficult 12 months with losses approaching £640m.

GM executives are already assessing Fiat Auto to value its worth and potential liability under the put option, which kicks in from 2004. Former Ford Premier Automotive Group chief executive Wolfgang Reitzle claims GM will take full control of Fiat Auto as early as this year and company insiders claim a strategy has been put in place.

“There are a lot of rumours about Fiat's put option with GM, but they are all guesses,” says Boschetti. “Fiat Auto will continue to be a core business as long as it doesn't damage the company.”

But he adds a note of warning: “Fiat Group can't afford to continue pouring money into Fiat Auto - we must improve the situation quickly otherwise shareholders will pursue their own interests.”

Speculation has been fuelled by GM's consideration of Fiat's ailing Fidis financial services division. The carmaker looks set to acquire a 51 per cent stake in the business, merging it into its GMAC credit arm, which would derail a similar bid from three Italian banks.

Fiat, which hopes the deal will improve Fidis' credit rating and reduce debt, says GM has first option. Fiat has revised its European sales expectations for the year after a poor start. Stilo has been a disappointment, retailing 70,000 year-to-May, although the company points out it is not offering a full product range.

An entry-level model, the Actual, and an estate will be launched in September. These are expected to boost sales to 226,000 for the year - against Fiat's original target of 260,000 - rising to 300,000 in 2003.

Fiat, Lancia and Alfa Romeo models will take a nine per cent share of the European car market this year, down from the 9.6 per cent target. By 2004, though, Fiat expects its brands to take a 10 per cent share. Operational breakeven is scheduled for 2003, with the business returning to profit the following year.