Fiat Won't Be Chrysler's Savior

Can two small and struggling carmakers join forces and make one strong company? Chrysler and Italy's Fiat Auto (FIA) are about to find out.

Chrysler and Fiat signed a partnership agreement today that gives the Italian carmaker a 35% stake in Chrysler. Fiat will give Chrysler some small and midsize cars while Fiat gets access to the North American market.

Strategic Benefits

On paper, the deal makes sense. Fiat needs to reach beyond Europe and South America, where the company is strong. While Chrysler gets about 95% of its sales in North America, the automaker is strong only in the minivan, SUV, and pickup markets, and it needs the technology to make smaller cars, which Fiat has.

"A Chrysler/Fiat partnership is a great fit as it creates the potential for a powerful new global competitor," Bob Nardelli, chairman and chief executive officer of Chrysler, said in a statement. The deal offers "Chrysler a number of strategic benefits, including access to products that compliment our current portfolio; a distribution network outside North America; and cost savings in design, engineering, manufacturing, purchasing, and sales and marketing," Nardelli said in the statement.

But big questions remain about how the two companies will fund development of jointly built vehicles. In the agreement, Fiat made no commitment to give Chrysler cash now or in the future.

Chrylser's Cash Crunch

Chrysler certainly has big cash problems. In January, Chrysler Chief Financial Officer Ronald Kolka told the media that the company had between $2 billion and $2.5 billion in cash, which is the bare minimum it needs to fund payroll, buy parts, and keep its plants going. That's down from more than $11 billion last summer.

"From a technology perspective, Fiat will help Chrysler fill some gaping holes in its product line. Fiat is one of the best small-car makers in the world," says Michael Robinet, vice-president of auto consulting and research firm CSM Worldwide. "But with no cash infusion, it puts (Chrysler owner) Cerberus Capital Management on the hook to fund this."

Meanwhile, Chrysler also has $7 billion in debt. And that's before the $4 billion it just borrowed from the government. Chrysler hopes to get another $3 billion in loans from the Treasury Dept. through the Troubled Asset Relief Program (TARP) once it submits a turnaround plan to the government on Feb. 17.

It will be tough to get cash assistance from Fiat. Fiat's industrials division, which includes the carmaker, had $2.9 billion in cash on Sept. 30, 2008, down from $7.4 billion a year ago. And it carries almost $4.4 billion in debt, which rose sharply last year from just $470 million at the start of 2008. In December, Standard & Poor's lowered the outlook on Fiat's debt rating from "stable" to "negative." Similarly, Moody's on Jan. 15 placed Fiat rating "under review" for possible downgrade.

That's why Fiat won't be a savior for the smallest of Detroit's Big Three. Chrysler will need cash to see the benefits of the alliance. Retooling its factories to make Chrysler versions of Fiat's cars could cost hundreds of millions per model.

Even if Fiat exports some of its Alfa Romeo or Fiat brand cars to the U.S. for sale at Chrysler dealerships, it would take 18 months to get the cars in compliance with American emission and safety standards, Robinet says. Retooling a factory to make Chrysler versions of Fiat passenger cars could take three or four years. Says Robinet: "We're looking at 2011 at the earliest. And that's aggressive."

Fiat Gains Market Access

But there are some good fits. Chrysler has a Dodge Hornet subcompact coming late next year. The car will be jointly developed with Nissan. Aside from that, Chrysler has only a few small cars, and its family sedans—the midsize Dodge Avenger and Chrysler Sebring—have been also-rans. "They could rebadge the Fiat Bravo compact and Punto minicar," says Neil king, an analyst with IHS Global Insight in London.

The announcement would not affect existing alliances that Chrysler has with Nissan (NSANY) and Volkswagen (VOWG). For Fiat, the deal means the Italian carmaker can expand into North America. Right now, Fiat plays mostly in Europe and South America. The company already had its eye on selling Alfa Romeo cars in the U.S. The brand has some resonance in the U.S. but has not sold cars here in more than a decade. Fiat could also build its stylish 500 subcompact in Mexico and sell it in the U.S. as a rival to BMW's (BMWG) Mini brand. Says Robinet: "The prize for Fiat is distribution here."

Fiat once was one of the sickest car companies in the business. But CEO Sergio Marchionne restructured the company and got it back in the black in 2005. He also improved quality and pushed for better styling. In the first nine months of 2008, Fiat sales rose 9%, to $30.5 billion, and the company made $1.2 billion. But like all carmakers, weak economies forced sales into a freefall in the fourth quarter. The company has warned that its sales could be off 20% this year. Fiat has idled some factories for January and February.

The deal will halt speculation that owner Cerberus will liquidate Chrysler by selling off core pieces of the business, such as the vaunted Jeep brand, or the minivan and Ram pickup lines. It also has the blessing of Ron Gettelfinger, president of the United Auto Workers, who says he plans to work with Fiat and Chrysler to shape the company.

But it also may not be the panacea for Chrysler. "I'm not sure this is an end to deals involving Chrysler," says David E. Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich. "Even after this, we could see Renault-Nissan, for example, come into it. We shouldn't jump to premature conclusions that this would be an end, it could just be a beginning of more to come." That will be especially true if Chrysler can't find a source for new cash.

With David Kiley

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