May 1 (Bloomberg) -- Fiat SpA’s Sergio Marchionne, after five months of trans-Atlantic negotiations on a partnership with Chrysler LLC, helped wring concessions from unions and convinced President Barack Obama that his turnaround strategy will revive the U.S. carmaker. Now comes the hard part.

The 56-year-old chief executive officer signed the agreement yesterday as Chrysler announced its government-backed plan to go into bankruptcy protection and shed debt. Fiat will take a 20 percent stake, leaving Marchionne to resuscitate Chrysler amid the worst auto slump in decades, revamp its product line and maintain a pledge to Fiat investors not to invest cash.

“It won’t be an easy job,” Volkswagen AG CEO Martin Winterkorn said after an event in Rome this week. “I can say from experience that to manage several brands successfully and obtain synergies is a very difficult thing.”

As part of the deal to get as much as $10.5 billion in financing from the U.S. and Canadian governments, Chrysler filed for bankruptcy in New York. The company, the third-largest U.S. automaker, will put its best assets, such as its Jeep and Dodge Ram brands, in a new company that wouldn’t be burdened by current costs and debt.

Chrysler would emerge slimmer and armed with Fiat’s small- car technology, giving it a “new lease on life,” Obama said yesterday. Much of the pressure to make that a reality will depend on Marchionne, who was brought in by Italy’s Agnelli family to rescue Fiat five years ago.

New Chief

One of the first agenda items will be new management, including replacing CEO Robert Nardelli. There may be an Italian-American team to manage Chrysler, said Serge Escude, a Milan-based Cassa Lombarda analyst.

Fiat’s CEO told daily La Stampa, which is owned by the Italian carmaker turning Chrysler around won’t be easy. “We can’t make any mistakes now, the whole world is watching us and the responsibility is enormous,” Marchionne was quoted as saying in the interview published today.

Marchionne, born in Italy and raised in Canada, had said he’d be willing to head the alliance and vowed yesterday to spend “a great deal of time meeting with Chrysler employees and touring its facilities.”

He has an uphill fight. Chrysler, controlled by private- equity firm Cerberus Capital Management LP, received $4 billion in government aid in January and was promised $6 billion more if costs and debt were cut enough. After the initial loan, U.S. auto sales plunged to a 27-year low in February and dropped 37 percent in March.

Chrysler’s sales slumped 46 percent to 453,871 vehicles last quarter as customers deserted its light trucks and four-by- fours. The Chrysler brand is leading the decline. Daimler AG’s 1998 acquisition of Chrysler turned into a costly misadventure, culminating in its sale nine years later for about one-fifth of the $36 billion purchase price.

‘Extremely Ruthless’

“The only brand really worth keeping is Jeep,” said Stephen Pope, chief global strategist at Cantor Fitzgerald in London. “Beyond that they should stick to small cars -- Marchionne will have to be extremely ruthless because he can’t afford any white elephants.”

Marchionne may emulate Renault SA’s purchase of Nissan Motor Co., Japan’s third-largest carmaker. Unlike Chrysler under Daimler, Nissan has kept significant autonomy and still helped its controlling shareholder cut costs through joint parts purchasing and by sharing some vehicle platforms.

“Renault-Nissan has proved the most successful auto alliance because Renault didn’t try to take the whip hand to Nissan,” said Mark Fulthorpe, an analyst at U.K. automotive consulting firm CSM Worldwide. “Chrysler needs the right technology, but they’re still the ones with the best eye for the U.S. market so I don’t think Fiat will go charging in there.”

Alfa Romeo

Fiat has been trying to bring its main brands back to the U.S. after a 14-year absence and held talks with the Detroit automakers last year on possible cooperation on production of Alfa Romeo cars.

Rather than cash, Fiat is offering technology that has produced models such as the Panda and 500, the two top-selling cars in Europe in the small-vehicle category. In exchange, it will get a stake in the new Chrysler that can rise to 35 percent after performance goals are met and then even higher as the loans are repaid.

The two companies plan to develop seven new small cars together, Chrysler said in February, forecasting $7.4 billion in savings through 2016 and $1 billion in additional earnings from 2012. Marchionne said a month later that the first new model would be introduced in 2011.

“The real Fiat-Chrysler bet is that Americans can be convinced to buy smaller, cleaner cars,” said Guiseppe Berta, associate professor of contemporary history at Milan’s Bocconi University and author of the 2006 book “Fiat after Fiat: The History of a Crisis.”

Even if American consumers do embrace small cars, they may demand models that are different from Fiat’s European offering, Cassa Lombarda’s Escude said. While the retro-styled Fiat 500 may succeed in some areas, people in places like the Midwest or California may spend too much time driving for the spartan interior to be comfortable, he said.

Volkswagen Challenge

Volkswagen’s Winterkorn, speaking at an awards ceremony in Rome April 29, told reporters Fiat’s partnership with Chrysler “is trying to assure a future for Fiat, and through an increase in volumes to obtain a reduction of costs.” The executive said he agrees with Marchionne’s view that an auto company can’t survive if it doesn’t produce at least 5 million vehicles.

That’s going to present another challenge. With about 54,000 employees, Chrysler is going to need more money to restructure its 30 North American plants. That can’t be done overnight, and ultimately, Fiat will also have to put in some money, said Pierre Bergeron, a Paris-based credit analyst at Societe Generale.

Marchionne, seeking to pare back Fiat’s own 6.6 billion- euro debt load, has insisted the Italian automaker won’t inject cash into Chrysler. Fiat raised 1 billion euros in financing this year from its banks, less than originally planned. Its bonds were cut to junk status in March.

“It’s not that Marchionne doesn’t want to put cash into the alliance, he just doesn’t have any,” said Christophe Boulanger, a credit analyst at Calyon in London.

Fiat also is interested in General Motors Corp.’s Opel division, which needs to find an investor because it’s running out of cash as its parent faces potential bankruptcy by June 1.

“Now we have to concentrate on Opel,” Marchionne said in the La Stampa interview. “They are our ideal partners.”

To contact the reporters on this story: Laurence Frost in Paris at lfrost4@bloomberg.net; Marco Bertacche in Milan at mbertacche@bloomberg.net

Last Updated: May 1, 2009 06:44 EDT