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Forcing Chrysler into Fiat’s arms

The Obama administration on Monday gave Chrysler Corp. an ultimatum: join forces with Italy’s Fiat within 30 days or prepare to enter Bankruptcy Court.

Over the weekend, the president’s automotive task force concluded that Chrysler couldn’t survive on its own, despite the $4.3 billion that taxpayers have pumped into the company since December.

The Auburn Hills, Mich., firm, which announced in January that it was in merger talks with Fiat, had asked for a $5-billion loan. Federal officials said they would consider approving a $6-billion loan -- but only if Chrysler strikes a deal with the Italian automaker, a task some analysts consider nearly impossible in such a tight time frame.

“I think the government has made it clear that they view Chrysler as expendable,” said John Wolkonowicz, a senior automotive analyst at IHS Global Insight. “This deal is up to Fiat. Chrysler will take any life preserver in the storm.”

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The administration said that a “quick and surgical” bankruptcy to help the company shed debt might be the best way to restore the smallest and weakest of the Big Three to health.

“The situation at Chrysler is more challenging,” said President Obama, whose advisors appear to be losing patience with company management’s ability to right the ship.

In addition to joining forces with Fiat or another partner, Chrysler would have to ask its creditors, and probably its suppliers, employees and dealers, to grant much larger concessions than those proposed in a previous restructuring plan, according to Treasury Department documents released Monday.

“Chrysler has to get significant concessions from the union and retirees, and they have to dump dealers plus make a deal with Fiat, all in 30 days -- probably not going to happen,” Wolkonowicz said.

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Chrysler in January announced negotiations to give at least a 35% stake in the company to Fiat in exchange for the Italian giant’s global reach and its fuel-efficient small-car technology, valued around $10 billion. Fiat would get access to the U.S. market, the world’s largest, where its vehicles have been absent for 20 years. The automaker, based in Turin, Italy, would not put cash into the transaction or assume any of Chrysler’s debt.

Still, the U.S. government’s harsh assessment of Chrysler may be motivating Fiat to be more prudent. Sources said Monday that the Italian company’s initial stake in Chrysler might drop to 20%, according to the Wall Street Journal.

“It’s a clear indication they’re trying to be more conservative in getting involved,” said Jesse Toprak, a senior auto analyst for Edmunds.com.

Fiat has expressed interest in eventually purchasing a majority stake in Chrysler. That won’t be permitted until Chrysler repays the government loans, Obama said. The government also added a stipulation that Fiat would have to build fuel-efficient vehicles in the U.S. The first joint model between the two companies would probably arrive in 2011.

With Chrysler teetering, experts said the U.S. company needs Fiat more than the Italian automaker needs Chrysler.

“I would say this [deal] is our focus,” Chrysler spokesman Todd Goyer said. “There’s nothing else to talk about.”

The companies have pitched the merger as a pact that would bolster their product lineups and distribution, while saving assembly and supplier jobs in the hard-hit U.S. auto industry.

“Our alliance will not only make Chrysler a stronger company financially, but it will also help preserve American jobs, significantly accelerate Chrysler’s efforts to produce fuel-efficient vehicles, and lead to a more rapid repayment of U.S. taxpayer dollars,” Sergio Marchionne, chief executive of Fiat Group, said Monday.

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Fiat could regain its toehold in the country, where it has been itching to launch its Alfa Romeo models, while opening doors for Chrysler in Europe. Fiat’s small, sleek models would also fill a hole in Chrysler’s truck-heavy, gas-guzzling mix. But experts said the two companies would be strange, and deeply flawed, bedfellows whose chances of producing blockbuster vehicles were slim.

The product would have to be fast-tracked through production, at least a yearlong process, Toprak said. Then, the cars would have to boost profits fast enough to keep Chrysler afloat even as consumer demand is crumbling. And Chrysler still has “substantial hurdles to resolve” before an agreement is made, said the American automaker’s chairman and chief executive, Bob Nardelli.

Chrysler has plenty of other problems. The company released a statement Monday morning mistakenly referring to a Fiat “deal” and had to later clarify that negotiators have only agreed to a “framework.”

Cerberus Capital Management owns 80% of Chrysler but has been reluctant to cough up rescue funds. The private equity firm, which took over the majority stake from Germany’s Daimler in 2007 for $5 billion, said it wanted to avoid violating its fiduciary responsibility to its other investors.

According to a person familiar with automotive task force strategy, Cerberus will lose its stake anyway if the Fiat deal goes through and Chrysler lands government aid. Daimler, which still owns a nearly 20% stake in Chrysler, bought the company in 1998 for $36 billion.

In 2008, Chrysler sales dropped 30%. Domestic sales plunged 55% in January and 44% in February. In October, the company cut 5,000 salaried workers and contract employees, leaving 54,000 employees as of December. An effort in the fall to merge with GM fell through.

In a report released Monday, the administration took issue with Chrysler’s weak brand, its tiny slate of new products and its limited purchasing and production scale. Among the criticisms: Chrysler performs poorly in quality checks and its heavy North American focus means it’s more vulnerable to local economic fluctuations and can’t take advantage of developing markets.

The report also pointed out that Chrysler’s customers tend to have lower credit scores and no longer qualify to buy new cars, and that the company missed out on the boom in small car sales and wouldn’t be able to meet future fuel-efficiency standards with its existing crop.

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But Fiat also has scratches on its shining armor. Its name is often mocked as an acronym for “Fix It Again, Tony” because of its reputation for shoddy construction. As demand slowed and fourth-quarter profits plunged 71%, the company cut costs by occasionally suspending production.

Still, Fiat has largely been profitable and would not suffer from abandoning negotiations, Wolkonowicz said. “I tend to think the government’s assessment of Chrysler would be a deal breaker if I were Fiat,” he said. “It sounds like hooking up with a loser. If they decide to let Chrysler go its own way, Fiat wouldn’t be much worse off.”

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tiffany.hsu@latimes.com

david.pierson@latimes.com


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