Sept. 14 (Bloomberg) -- To save Chrysler Group LLC, Chief Executive Officer Sergio Marchionne has to create a mid-size sedan that can compete with the world’s best. It’s a three- to five-year job, and he may have two years to do it.

Chrysler, which got a $15 billion government bailout, may be out of cash in 24 months if he doesn’t return the Auburn Hills, Michigan-based company to profitability. Developing a car to rival perennial top sellers Toyota Camry and Honda Accord would normally take at least three years, analysts say.

Marchionne, 57, the CEO of Fiat SpA who brought that company back from near ruin, stepped into the toughest challenge of his career by taking control of Chrysler. Failure may mean not only the demise of the third-largest U.S. automaker and tens of thousands of jobs, it may prevent Marchionne from turning Turin, Italy-based Fiat into a global player.

“He’s going to have a much harder time than at Fiat,” said Maryann Keller, president of consulting firm Maryann Keller & Associates in Stamford, Connecticut. She’s covered the industry since 1972 and said the question is “whether they have time to fix the product problem before they run out of money.”

Like Carlos Ghosn, who runs Nissan Motor Co. and Renault SA, Marchionne juggles jobs. Along with his CEO posts, he’s chairman of CNH Global NV, Fiat’s Amsterdam-based farm-equipment unit, and is vice chairman of Zurich-based bank UBS AG. He is also chairman of SGS SA, a goods-inspection company in Geneva.

He sleeps three to four hours a night, works weekends and takes five days of vacation a year, said people who know him. He carries a small backpack with two BlackBerry devices and two iPhones -- one each for Chrysler, Fiat, CNH and UBS -- plus a fifth handset for emergencies, according to people who have worked with him.

Time Shortage

Marchionne declined to comment for this story. Spokespeople at Chrysler and Fiat also declined to comment.

This week Chrysler will show its updated Dodge Caliber five-door hatchback at the Frankfurt Motor Show. The car will have a new interior and a diesel engine designed for the European market. It will be the first demonstration of how the Fiat-Chrysler collaboration will work.

This month, Marchionne will present his plan for products and marketing to the nine-member board. The proposal will map out how to develop the Dodge, Chrysler, Jeep and Mopar parts brands. It will recommend what vehicles to build and where.

“We don’t have a car that can compete in the largest segment of the market,” said one Chrysler board member. “Our challenge is time. Do we have enough time to bring forth new products and continue to improve our existing products?”

Juggling Jobs

The company must sell at least 1 million cars in the U.S. to break even, people familiar with the matter said. It’s a hurdle Chrysler may not clear this year after topping 2 million as recently as 2007, according to researcher Autodata Corp. of Woodcliff Lake, New Jersey. Chrysler can make about $1 billion operating profit for every 100,000 additional vehicles it sells, one person said. According to bankruptcy documents, Chrysler lost $16 billion in 2008, the most recent numbers available. Without a quick turnaround, it has about 24 months of cash left, said one person familiar with the finances.

Chrysler may gain time if a rebounding U.S. economy pushes auto sales higher, giving it a better chance of exceeding its breakeven point. U.S. auto sales ran at less than a 10 million annual rate during the first half of 2009 after finishing at more than 16 million every year from 1999 through 2007.

Marchionne, who bought a condominium in Birmingham for his Michigan visits, is trying to turn around Chrysler after two previous owners failed. Daimler AG sold 80.1 percent of Chrysler to Cerberus Capital Management LP in August 2007 after an unsuccessful nine-year merger.

Flipping Back

His attention to detail amazes colleagues. In 2004, he visited CNH’s Chicago-area offices. Near the end of two days of 10-hour slide presentations, he halted the proceedings and asked the presenter to flip back four slides and explain a numerical discrepancy, according to a person who attended.

The presenter admitted the mistake. The room full of executives sat up, stunned that their boss caught such minutiae after 20 hours of PowerPoint, this person said.

Fiat has a 20 percent stake in Chrysler and can get up to 35 percent by reaching performance milestones set in the bankruptcy agreement such as building a car in the U.S. that gets 40 miles per gallon or more. The United Auto Workers union retiree health care trust owns more than two-thirds of Chrysler, and the U.S. and Canadian governments own the rest.

Accord Rivalry

The Italian company didn’t provide any cash for its stake, instead contributing engine, transmission and vehicle designs Chrysler valued at as much as $10 billion. Marchionne has said Fiat’s technology infusion will be the basis for Chrysler’s new products.

Chrysler will use a Fiat design to build at least one model in the U.S., according to bankruptcy documents. Marchionne said on a July 22 conference call the first products with Fiat origins won’t be for sale in the U.S. until the end of next year.

“For a major program, based on an existing platform, anything less than three years is good work,” said Andrew Close, an analyst with IHS Global Insight in London. “For a brand new car, four years or more is typical.”

Mid-sized sedans like Accord and Camry, the most popular models in the U.S., are the largest segment of the car market. A competitive offering is essential to be viable, said Keller.

Japanese Dominate

The last mid-sized American car to be No. 1 in the U.S. was the Ford Taurus in 1996, which lost the title the next year to the Honda Accord. A Japanese car has topped the list ever since. Toyota Motor Corp. of Toyota City, Japan, sold 437,000 Camrys in the U.S. last year; Tokyo-based Honda Motor Co. moved 373,000 Accords. This year, the top-selling domestic car, the Chevrolet Impala, ranks eighth.

Chrysler’s mid-size sedans, the Chrysler Sebring and Dodge Avenger, have been panned by critics. Combined they sold 133,626 last year. Chrysler plans to close the plant in Sterling Heights, Michigan, that makes them. Chrysler’s Dodge, Chrysler and Jeep vehicles ranked among the bottom 10 brands in the J.D. Power & Associates Initial Quality Survey for 2009.

Adding to Chrysler’s urgency is a consumer shift toward smaller vehicles as volatile gasoline prices and rising U.S. fuel-economy standards push buyers toward passenger cars, which now outsell light trucks in the U.S. As of August, the sales breakdown this year is 53 percent cars, 47 percent trucks, according to researcher Autodata Corp. As recently as 2007, that ratio was 53 percent trucks to 47 percent cars.

Trade-Ins

In the government’s just-ended program to get consumers to trade in older gas-guzzlers for new fuel-efficient vehicles, 6 percent of purchases were Chrysler-made, 13 percent were Hondas.

Chrysler’s U.S. market share is 9.2 percent, down from 11 percent a year earlier. Kristin Dziczek, an analyst at the Center of Automotive Research in Ann Arbor, Michigan, said Chrysler needs Fiat-based products to prevent further erosion.

“If fuel prices rise and there’s a car-buying resurgence next year, and they don’t have anything out there, they could be getting down into the 6 percent market share range,” said Dziczek. “Then they’re toast.”

Chrysler has long sold more light trucks than cars. Its minivans and Dodge Ram pickups are best sellers. Chrysler cars average 28.3 miles per gallon, which is lower than the average at Dearborn, Michigan-based Ford Motor Co., Detroit-based General Motors Co. or Toyota. Honda has the highest average of major automakers in the U.S. at 36.5.

Staging Revolution

“He needs to stage a revolution at Chrysler and turn it from a maker of light trucks to a maker of passenger cars and probably electric cars,” said Pierre Bergeron, a credit analyst at Societe Generale SA in Paris.

Fiat has focused on small cars. Its most recognizable model, the Cinquecento or 500, is just under 12 feet long -- about 6 inches shorter than the Mini Cooper, and almost 3 feet shorter than the Dodge Caliber, Chrysler’s smallest. It also gets more than 40 miles to the gallon in city driving.

Marchionne, who was born in Italy, educated in Canada and speaks Italian and English fluently, is already changing Chrysler’s philosophy.

“You can’t just keep shoving stuff down the customer’s throat,” he said in an interview June 30. “You don’t put as much iron on dealers’ lots -- you make quality products that people will wait a day to get.”

Marchionne introduced a production system at Chrysler developed at Fiat that made the Italian company more efficient, said Michelle Hill, a researcher with management consultant Oliver Wyman. Chrysler’s financial, purchasing and information technology systems are being aligned with Fiat’s to save costs, a person familiar with the situation said.

Cultural Change

“He wants a cultural change,” said Ken Lewenza, president of the Canadian Auto Workers union. “He’s demanding more accountability. He’s giving workers more responsibility, and trying to get people working with a sense of pride. There are people in the plants from Fiat, measuring, engaging, following it up.”

Fiat was on the brink of collapse when the Agnelli family, which controls 30 percent of the Italian conglomerate, hired Marchionne in 2004 to be the fifth CEO in two years. It had lost 8 billion euros ($11.7 billion) in four years and was facing a debt payment it probably couldn’t make. Marchionne fired top managers and sped up development.

At Fiat, Marchionne could be both generous and tough. He would throw weekend barbecues for his team at Fiat headquarters after flying in a load of steaks, fries and beer from the U.S., said a person who attended. He plays cards and drinks with executives on a Fiat corporate jet, where he sleeps when his travel schedule is intense.

Skimming Layers

He made one executive work until midnight on his birthday - - and then sent him a birthday cake. The executive was gone from the company within two months, a person familiar with the matter said.

As he did at Fiat, Marchionne began his tenure at Chrysler by skimming off layers of management and promoting younger leaders into top positions.

On June 10, the day he took over Chrysler, Marchionne installed a new set of 23 managers -- average age just under 45 -- he’d identified during visits to Auburn Hills. According to people familiar with his early days at Chrysler, Marchionne, in his usual black sweater, would walk the 5.3 million-square-foot headquarters complex, introducing himself to executives and sometimes smoking Muratti cigarettes.

Some of his 23 direct reports were promoted several pay grades. Peter Fong used to be the sales manager of the mid- Atlantic region and is now the top sales executive. Others changed jobs entirely. Mike Keegan was in charge of sales incentives; now he plans auto production.

Fiat’s Risks

Marchionne also visited some U.S. plants, fired the top managers and promoted the people under them.

Fiat has marked its stake in Chrysler at zero on its balance sheet, meaning it won’t book any losses from the U.S. carmaker. If Marchionne fails at Chrysler, Fiat risks missing a chance to establish a beachhead in North America and may become a takeover target itself, said Societe Generale’s Bergeron.

“Fiat would lose the Chrysler distribution network and the opportunity to increase volumes in the U.S.,” Bergeron said. “It would have to go back to being a carmaker with 2.5 million units selling mainly in Europe.”

‘Hard to Believe’

Bergeron said he expects Fiat to spend its own cash on Chrysler. Fiat had 6.4 billion euros in cash and marketable securities as of June 30 and raised 2.5 billion euros through two bond issues since July. Bergeron said the automaker may use that cash to fund investments in Chrysler.

“It’s very hard to believe that Chrysler will be able to generate any cash in the next few years,” Bergeron said. “Sooner or later Fiat will have to inject cash as it’s highly unlikely the other shareholders will.”

Marchionne has repeatedly said that Fiat won’t invest cash directly into the U.S. company.

Chrysler hasn’t indicated how much cash it has or how fast the company uses it. Marchionne said in June the automaker is still losing money, though at a much slower rate than before it entered Chapter 11. The company used $14.5 billion in cash from August 2007 to April 2009, according to Bloomberg calculations.

If Marchionne doesn’t successfully rebuild Chrysler, the automaker may not get another chance.

“It has to work this time,” said a Chrysler board member. “A patient can only be operated on so many times before he dies.”

To contact the reporters on this story: Mike Ramsey in Southfield, Michigan, at mramsey6@bloomberg.net; Sara Gay Forden in Milan at sforden@bloomberg.net.

Last Updated: September 13, 2009 18:01 EDT