Behind the Chrysler-Nissan Deal

The carmakers will produce vehicles for each other, though it's unclear if the agreement paves the way for an all-out alliance

As a name, Renault-Nissan-Chrysler goes together like chardonnay, sushi, and barbecue. Could such a business tieup be in the works?

Nissan Motor (NSANY) and Chrysler announced a deal Apr. 14 to build key vehicles for each other. Starting in 2010, Chrysler will assemble pickup trucks for Nissan using a unique body style designed by the Japanese automaker. At the same time, a Nissan plant in Japan will assemble a Chrysler compact car for the struggling U.S. company.

The deal immediately shores up two big weaknesses for each carmaker. Nissan's Titan pickup has been a loser since it was launched in 2003. Meanwhile, Chrysler's compact cars have long been distant also-rans behind Japanese cars like the Honda Civic and Toyota Corolla.

Beyond that, this latest joint venture may be the precursor to something much larger. Cerberus Capital Management finalized its deal to buy 80% of Chrysler last fall. The New York-based private equity firm won't want to keep the company forever. Meanwhile, Renault-Nissan CEO Carlos Ghosn has repeatedly said he wants a North American partner for his French-Japanese carmaking alliance.

Nissan Makes a Statement

Executives on both sides say that the new joint venture—along with a January deal that has Nissan making a Chrysler version of its Versa subcompact for South America—are not necessarily a prelude to any kind of merger of equity partnership. "These are both just product deals," says Chrysler Vice-Chairman and Co-President Tom LaSorda.

Similarly, Dominique Thormann, senior vice-president of administration and finance for Nissan North America, said the deal doesn't mean a merger or greater alliance is in the works. He said only that, "we'll keep an open mind and dialogue for further product-sharing opportunities."

Still, it's clear that Nissan and Chrysler are forging closer ties that would make a deeper, more broad partnership easier to do at some point down the road. It also tells any other company that would have an eventual interest in Chrysler that Nissan has a foot in the door. "This is the dating that could lead to a marriage," says David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich. "This also tells other potential suitors that the opportunity could disappear."

Nissan isn't the only company in bed with Chrysler. The Auburn Hills (Mich.) automaker has a deal with Volkswagen (VOWG.DE) to build a minivan for the German automaker. And it has an agreement to make cars with China's Chery Automobile. That also makes sense in the long run, Cole says. Volkswagen would be another likely suitor for Chrysler. So would an emerging player from India or China. Says Cole: "This could flush potential suitors out of the bushes."

Collaboration Needed

Assuming Cerberus isn't looking to cut a deal to sell a stake in Chrysler to Renault-Nissan in the long run, the deals are a key part to Chrysler's survival. The company doesn't have the global sales to compete on costs for parts and raw materials with the likes of General Motors (GM) and Toyota Motor (TM). The company also lacks expertise in key technologies like hybrid-electric cars, clean diesel engines and even small-car development. Chrysler relies on deals with other players to get that kind of hardware cost-effectively. The company gets diesel technology from former parent Daimler (DAI), and it's part of a hybrid venture led by GM.

In the meantime, Chrysler and Nissan will get plenty of practice working together. Engineers will have to collaborate to put a Nissan-styled body on a Chrysler truck frame. Similarly, Chrysler will be designing a passenger car around the underpinnings of a Nissan Versa subcompact.

That could come in handy if the two companies eventually cut a deal. It took Renault-Nissan most of its nine years to share vehicles, engines, and technology. Chrysler and Nissan could be getting a head start.

Before it's here, it's on the Bloomberg Terminal.