Chrysler says Fiat takeover complete


Just over a decade ago, German auto giant Daimler bought Chrysler for $38 billion, an alliance that promised to reinvent the auto industry but instead ended in tears.

On Wednesday, Chrysler, bankrupt and downtrodden, got a new European boss and, along with it, what could be a last chance. After months of planning and negotiating, Italian automaker Fiat finally gained control of Chrysler, and its leader, Sergio Marchionne, took the chief executive position at the U.S. company as well.

The arrangement marks Chrysler’s exit from bankruptcy, stripped of debt and with a cleaner balance sheet. The deal gives Fiat an initial 20% stake in the Auburn Hills, Mich., carmaker and the chance to eventually own it outright.


And it didn’t cost Fiat a penny.

As an exercise in deal making, Marchionne’s performance has been nothing short of masterful. But whether it made good business sense isn’t certain.

In creating the world’s sixth-largest carmaker, Marchionne is betting that he can pull Chrysler out of its sales nose dive on the force of the small, fuel-efficient vehicles Fiat excels at building. At the same time, he’s hoping to expand Fiat’s reach, bringing brands such as Alfa Romeo back to a market it abandoned years ago, and in doing so make the brand a global power.

“This alliance must be a constructive and important step toward solving the problems impacting our industry,” Marchionne said Wednesday in announcing the merger. “We now look forward to establishing a new paradigm for how automotive companies can operate profitably going forward.”

If it works, the Chrysler-Fiat alliance could serve to vindicate Marchionne’s belief that such consolidation is the key to the future of the auto industry and show that his ability to turn a money-losing Fiat around was no fluke.

But if it fails, the results could be dire for both companies in the face of an economic downturn and fierce competition from still larger, richer automakers including Toyota Motor Corp., as well as agile, low-cost competitors from Asia.

“This is going to be a very tough road for them both,” said Bruce Belzowski, associate director of the University of Michigan’s Transportation Research Institute. “Do they have enough money and the right products, and can they do it fast enough? It could get very messy.”

Chrysler, which has already received $8.6 billion in federal funding, will get as much as $6 billion more in financing as it exits bankruptcy, including $2 billion paid to creditors in exchange for forgiving their debts.

But if that money proves insufficient -- and with Chrysler losing $100 million a day, according to Treasury officials, and its U.S. sales down 46% this year, that’s not hard to imagine -- the new alliance could have a problem.

In testimony before a Senate committee Wednesday, Ron Bloom, a key member of President Obama’s auto task force, said the government did not plan to give any further aid to Chrysler or General Motors Corp. beyond the billions of dollars that have already been lent or committed.

“It is our belief that this will be the last trip to the well,” he said.

In any case, the automakers insist they won’t need it.

Under terms of the merger, Fiat must help Chrysler produce the smaller, more fuel-efficient cars that it sorely lacks and that some believe it needs to increase its sales.

For Fiat to increase its 20% stake to 35% -- the remainder is split between the U.S. government, the government of Canada and the United Auto Workers union -- it must help Chrysler produce a new gas-sipping four-cylinder engine in the U.S. based on an existing Italian-engineered motor used in models such as the popular Fiat 500.

It also must produce a Chrysler vehicle based on a Fiat platform within the U.S. that is capable of 40-mile-per-gallon fuel efficiency.

But Rebecca Lindland, auto analyst at IHS Global Insight, questions whether turning to fuel-saving small cars is the solution.

“This isn’t what Chrysler customers have been buying, and there’s no guarantee that’s what they want to buy,” she said, noting that Chrysler’s strength has been in trucks and minivans.

The demand issue

There’s also a branding problem. After nearly a year of negative headlines, Chrysler’s name has been thoroughly dragged through the mud, and consumers are turning away from its vehicles faster than those of any other automaker.

A study released Wednesday by industry research firm AutoPacific showed that 58% of respondents believe that Chrysler should have been allowed to fail.

Americans “do not have confidence that government involvement will bring the cars and trucks they want to buy to showrooms, nor that these vehicles will be more fuel-efficient,” said George Peterson, president of AutoPacific.

The alternative, to replace the Jeep, Dodge or Chrysler badges with a Fiat logo, has its own issues. When Fiat left the country in the mid-1980s, it had a terrible reputation for quality. And although many younger consumers may not remember that, they would have to be introduced through marketing to a new brand, which is an expensive proposition.

Regardless, since no Fiat-designed vehicles are expected in the U.S. for at least 18 months, Chrysler has to make the best of its current products.

To do that, it must quickly restart its factories and scramble to start production of its 2010 vehicles, which has been on hold since it shut down its plants April 30.

In recent weeks, Marchionne has pledged some significant housekeeping at Chrysler, and current Chief Executive Bob Nardelli, along with Vice Chairman Tom LaSorda, are exiting. But to manage the considerable tasks immediately at hand, Marchionne is keeping a few executives from the old company around.

Chief among them is Jim Press, former Chrysler vice chairman and president, who will have the title of deputy chief executive and special advisor.

Press, among other things, was responsible for the automaker’s sales and service operations. As such, he played a crucial role in Chrysler’s decision to eliminate 789 of its 3,200 dealers, a move he will defend before Congress on Friday.

Another key challenge for the Chrysler-Fiat alliance is overseas markets. About 97% of Chrysler’s sales come from within North America. For the merger to succeed, it must radically increase foreign sales while signing up hundreds of new dealers to franchise agreements in markets including Latin America.

That plays into Marchionne’s oft-stated belief that the only way to survive in the current auto industry is by producing and selling cars in a variety of markets, and to do it in sufficient volume to realize economies of scale when it comes to costs.

Eyeing production

Joining Chrysler lifts Fiat’s total production to about 4.5 million units a year, but that’s short of a 5-million-vehicle cutoff that Marchionne has said is necessary for long-term survival.

Fiat had been bidding to become the world’s second- or third-largest automaker by acquiring General Motors Corp.'s Opel division, which makes 1.7 million vehicles annually. But that deal fell through as Canadian parts maker Magna International Inc. led a consortium that was selected to buy the unit.

If Marchionne can’t boost production with Chrysler -- and that will be tough considering that the U.S. market is expected to remain significantly depressed for several more years -- he may be forced to seek more acquisitions.

One possible target, said Lindland, is in Asia. Both China and India are full of small but rapidly growing carmakers that could give Fiat access to the world’s fastest-growing markets as well as extremely low-cost production.

“If Marchionne is going to follow through with his strategy, he’s going to have to keep looking around the world,” she said.

But, she said, there is another option. If things don’t improve fast enough for Chrysler, which has been losing increasing sums of money every month, Fiat could simply walk away, as Daimler did after nine unhappy years running the company.