MILAN (Reuters) - Pity the Alfa Romeo. Despite its status as an icon of Italian style and speed, its sales are mediocre, it struggles to exceed a one percent market share in its main European market, and it is losing money.
Even though it has had the culture of motor-racing coursing through its valves and pistons since its inception nearly a century ago, years of poor-quality parts and service have deprived it of the premium status enjoyed by Volkswagen's Audi and BMW.
"While it tries to pitch itself as a premium brand, it doesn't quite make it," said Jonathan Pusket, an analyst at J.D. Power.
When the Fiat group, best known as a maker of cheap, small cars, bought Alfa in 1986, its factories were empty of ideas, with no investment in technology or product development.
Sergio Marchionne, Fiat's chief executive, last year told analysts Alfa "is the hardest asset that we have that we have to work (on)."
Now rising to that challenge is Luca De Meo -- at 40, the youngest executive within the Fiat industrial group -- who brings a badge of success from overseeing the recovery of the Fiat brand.
De Meo's thick hair and modish suits suggest he would be more comfortable riding a scooter than driving a convertible, but success for Alfa will depend on him reinventing the brand magic of the 1950s and 1960s for a younger generation.
Enzo Ferrari used to race Alfa Romeos before he started up his own company, Alfa won the first Formula One World Championship in 1950, and in its 1960s heyday, cameo appearances in movies such as "The Graduate" and "The Italian Job" showcased the soft sleekness of its design.
"People love it for its history," said Tiberio Santagatti, a director at a club of Alfa enthusiasts called Club Alfa Italia. "It's had so many racing victories."
For De Meo, that's just part of the problem.
The chief marketing officer for the group since September after three years as head of Fiat, he needs to position a premium product when his experience has been at the lower end of the market, at a time of waning consumer demand, and with no sign of a let-up in the competition.
By far the dominant brand in the premium segment of the market, Germany's BMW reported a 14.3 percent sales rise to a record 56.02 billion euros last year and has forecast more record sales volumes for 2008. Audi's sales rose 2.8 percent to 645,676, giving it a market share of 4.4 percent.
But Alfa sold 1 percent fewer cars at 142,506 in Europe, according to industry figures. Worldwide, it sold about 165,000.
"Alfa's problem is that it sells too few cars," said JP Morgan analyst Philippe Houchois. Although numbers are not broken out by brand, he estimated Alfa had a trading loss of up to 100 million euros last year. Fiat declined further comment for this article.
De Meo's track record is promising. His understanding of the car market and marketing savvy has already helped turn Fiat into a serious competitor to European car makers, with models like the Panda city car and the Grande Punto hatchback.
The latest model, the Cinquecento, was voted "Car of the Year" by Europe's automotive journalists and has been getting so many orders that Fiat has had to step up production.
Working towards a set of ambitious targets for 2010, De Meo's efforts helped the broader group confound skeptics with a return to profit after coming close to bankruptcy four years ago.
Last year Fiat, which also makes Iveco trucks and CNH tractors, turned out a record trading profit of 3.2 billion euros on 13 percent higher sales. Its car division, which includes the Alfa, Fiat, and Lancia brands, more than doubled its trading profit to 803 million euros.
Of Fiat's three car brands, analysts say Alfa has the greatest potential to produce the biggest profit margins.
"It is the one that -- if it is successful -- (is) probably going to give us the biggest benefit from a margin standpoint," Marchionne told the analysts on last year's call.
JP Morgan's Houchois said its margins could initially reach 3-5 percent, although lifting them to 5-8 percent -- the level of profitability enjoyed by Audi or BMW -- would be a stiff challenge.
While Fiat had a stream of models and a market extending to Latin America, De Meo has less room to maneuver with Alfa: it has fewer new models in the works and their market is mostly limited to Europe.
So, much is hanging on this autumn's launch of the Junior, a new model compact car. Aiming at a younger driver than the brand is currently attracting, it will be a big step for Alfa.
If it proves to be a hit, the Junior and the upcoming 149 sedan could make up nearly half of Alfa's sales volume, according to Morgan Stanley analyst Adam Jonas.
"The 149 and the Junior have got to be hits," he said. "They've got to get volumes going."
It will not be easy: some equity analysts doubt Alfa will be able to meet its unit sales target of 300,000 for 2010, let alone break even in 2008. They suspect a planned return to the United States has been postponed by a year to 2010.
But Alfa is making limited progress. De Meo's predecessor, Antonio Baravalle, had been focusing on two key markets where he wanted to re-launch the brand: the United Kingdom and Germany. The results of his efforts are starting to show, with British sales rising.
"I think they'll get there," said James Wheeler, who sells second-hand Alfa Romeos in Britain.
Reporting by Gilles Castonguay; Editing by Sara Ledwith