Fiat’s Sergio Marchionne may not exactly be putting his money where his mouth is, but he is staking his reputation as a consummate dealmaker. Last month he declared that the immediate prospects for the car industry were so dire that only big producers, with sales of more than 5.5m a year, would be viable in the long term — and that Fiat, despite its recent renaissance, was not even halfway there. This week he took a big, bold step intended to ensure the Italian firm’s survival by, of all things, forging a strategic alliance with Chrysler, an American firm on the edge of extinction.
Late last month Mr. Marchionne made a telephone call to Cerberus Capital Management, the private-equity firm that, to its infinite chagrin, acquired an 80 percent shareholding in Chrysler from Daimler in mid-2007. The deal he proposed was nothing less than a lifeline. Chrysler had just been saved from immediate bankruptcy by a $4 billion emergency loan from the American government. But it must produce evidence of a plausible recovery plan by February 17th to avoid having to pay the money back by late March, let alone getting hold of a further $3 billion it says it needs. With sales in December falling by more than 50 percent, year-on-year, a nearly empty new-model pipeline and a damning verdict from Consumer Reports about the quality of its existing products, Chrysler had run out of options—until Mr. Marchionne’s call.
Under the terms of the deal, which is still only a memorandum of understanding, Fiat will take a 35 percent stake in Chrysler in exchange for supplying it with its highly fuel-efficient powertrain technology. Fiat will also make available to Chrysler its small and medium-sized vehicle platforms to be rebadged or reskinned as Chryslers in North America. And it will help Chrysler in overseas markets, such as Europe and South America, where its presence is minimal. Fiat dealers, for example, will sell Jeeps in Brazil and Italy. In the longer term, the two firms will co-operate on a new rear-wheel-drive large-car platform, for use by Alfa Romeo as well as Chrysler. Critically, Fiat will send in a hit squad of executives who know a thing or two about turning round ailing carmakers.
With Fiat’s help, Chrysler might just be able to convince a sceptical administration that it has a plan to rectify three of its most glaring weaknesses: an over-reliance on gas-guzzling trucks and sports-utility vehicles, almost total dependence on the North American market and a perilously thin senior management team. The deal will apparently only go ahead if Chrysler gets the $3 billion additional loan that it is seeking from the American government.
What Fiat gets in return, apart from its “gifted” equity stake (which currently has a book value of precisely zero), is a cheap bridgehead into America, a market it abandoned over 20 years ago, ironically around the time a previous attempted tie-up with Chrysler came to nothing. One or two Chrysler factories will be converted to build the hot new Fiat 500 (pictured) and two new Alfas, to be sold by Chrysler dealers. With a combined production capacity of more than 4m vehicles a year, Fiat will also get some vital scale economies for its platforms, powertrains and the electrical components made by its Magnetti Marelli subsidiary. Comau, Fiat’s industrial-automation arm, will sell Chrysler the kit to retool its factories.
Fiat has little to lose. If Chrysler stages a miraculous recovery with its help, Mr. Marchionne would have pulled off something similar to Carlos Ghosn’s Renault-Nissan alliance at almost no cost other than diverted management time. With a rumoured option to increase its stake in Chrysler to 55 percent, the deal is potentially transformative for Fiat. And if things do not work out and Chrysler slides into bankruptcy, Fiat has no liability exposure but would be in pole position to pick up the assets it needs to implement its North American strategy at fire-sale prices.
As for Chrysler, it gets something it has not had for a long time—a narrative not entirely devoid of hope. A reality check is, however, in order. As Adam Jonas of Morgan Stanley points out, there is no certainty that American customers will flock to buy rebadged small Fiats. “Chrysler needs more than just small cars—it needs help with its entire product range,” he says.
There is also the question of time. It is highly unlikely that even with exemplary execution those American manufactured “Chrysler-Fiats” can hit the market before late 2011. Fiat may have thrown Chrysler a lifeline, but the American firm may be too far gone, and the storm too fierce for it to make much difference.