Fiat: Coming Back to America

CEO Marchionne believes the carmaker is too small to make it on its own. But is Chrysler the best partner?

As Fiat (FIA.MI) and Chrysler negotiate an agreement with unions and banks that would seal their proposed alliance, the American team knows that a deal with the Italians may be the only way to avoid bankruptcy. For Fiat, the stakes aren't as high, but the talks represent the best chance yet for Chief Executive Sergio Marchionne to get U.S. drivers into his cars. "Marchionne is coming to America, and the only question is with whom, when, and for how much," says a senior Chrysler official involved in the talks.

Even before starting discussions with Chrysler, Marchionne had laid the groundwork to move Fiat back across the Atlantic after a 25-year hiatus. Last summer he approached Volkswagen (VLKAY), BMW (BMWG), Nissan (NSANY), Ford (F), and others to find a partner willing to help Fiat build and sell its cars in the U.S.

So why Chrysler? For starters, it's cheap. As in free. The proposed deal calls for Fiat to take a 20% stake in Chrysler in exchange for small-car technology. And if the two sides get a deal, the company will have $6 billion in federal money to spend on restructuring. Marchionne, meanwhile, could tap Chrysler's dealer network to sell Fiats within a year or two. Chrysler "could be the least expensive way into the U.S. for Fiat," says former Chrysler President Thomas Stallkamp.

Many in the industry, though, believe Fiat could get most of the benefits of a deal with fewer management headaches by purchasing selected assets out of bankruptcy. The Italians could cherry-pick key dealerships and buy a low-wage factory. Marchionne could also skip Chrysler altogether and get Saturn on the cheap from General Motors (GM) or hire Ford to make vehicles in underutilized plants. (The two build cars together in Poland.) "The management time and distraction [running Chrysler] will be so large that it's tough to see the benefit for Fiat," says Max Warburton, a Bernstein Research (AB) analyst. Marchionne declined to be interviewed while talks are ongoing.

Quick and Lean

Teaming up with Chrysler offers one big advantage: speed. Overnight, Fiat would get U.S. distribution and access to Chrysler knowhow to adapt its cars to U.S. tastes and standards. And Marchionne is in a hurry. He has repeatedly predicted that a wave of consolidation will leave only a half-dozen major automakers worldwide within two years. As the industry's No. 9 player, Fiat sold just 2.1 million vehicles last year, less than half the

5.5 million Marchionne says is needed for sustained profitability. The question is whether Chrysler can survive long enough to get the Chrysler-Fiat models into U.S. showrooms.

The Fiat CEO knows how to move fast. Fiat was on the verge of bankruptcy when he took over in 2004. He quickly laid off hundreds of executives and built a leaner team, including younger managers from Fiat's South American operations and its U.S.-based farm equipment subsidiary, Case New Holland (CNH). By last year, Fiat was back in the black and had one of the healthiest profit margins in the industry. "There used to be a joke at Fiat: The main thing they produced was organization charts," says Karl Ludvigsen, an independent auto consultant who was a Fiat executive in the pre-Marchionne era. Now, he says, "People's energy has been released to make the changes that are necessary."

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