Chrysler, Fiat Drive Off the Lot

Italian automaker Fiat (FIA.MI) officially began running the newly constituted Chrysler Group on Wednesday, June 10, a day after a deal was cleared by the courts enabling the Detroit automaker to emerge from Chapter 11 bankruptcy.

As arduous as Chrysler's path has seemed during the past six months—with an avalanche of negative publicity, collapsing car sales, and bankruptcy—the road ahead promises to be even more difficult. The new company will be working in a recession-weary environment, and with no significant new product arriving for months. "I would call this deal a move to salvage Chrysler, not save it, and we will have to see what comes of the salvage," says John Casesa, managing partner of New York-based Casesa Shapiro Group, an advisory firm specializing in the auto industry.

Fiat CEO Sergio Marchionne, who will also serve as Chrysler CEO, made his first management moves on Wednesday. He named Chrysler Vice-Chairman James Press, the former U.S. head of Toyota who arrived at Chrysler in 2007, as deputy CEO. Frank Klegon, the company's product development chief, and top marketing executive Steve Landry both left the company.

Speed Interviewing

Chrysler executives say that Marchionne has taken what for them seemed an unorthodox approach to sorting out the talent pool he inherited. He did fast, 15- or 20-minute interviews with more than 100 executives, often asking what they thought of their superiors, what their strengths and weaknesses were, as well as what they thought of certain peers. "The questions were very blunt," said one staff executive. "It was a drill the likes of which I had never been through before."

Marchionne has not yet detailed how he will structure the company. But industry analysts believe he will not run Fiat and Chrysler as two separate companies. Instead, design and product development will be run centrally with one staff, from Italy, though there will be designers and engineers working in Michigan. That will effectively put product development for Chrysler, Dodge, and Jeep into Fiat's hands. It is a similar structure as Ford's (F), which now runs global product development from Dearborn, Mich., for all its world markets. For years, Ford had separate staffs on different continents.

"They can't afford to run this as two separate companies and take a lot of time to get to know one another," says Gary Dilts, executive vice-president at J.D. Power & Associates (which, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP)). Dilts led Chrysler's sales operation after the company was acquired by Daimler-Benz a decade ago. "They don't have the luxury of time, and I'd look for Marchionne to act swiftly and decisively," he said.

New Vehicles 18 Months Away

Chrysler's share of the U.S. auto market was 12.1% through the first five months of the year. But in May, its first month in Chapter 11, that slid to 10.6%. Some industry analysts believe the company will bounce back to near 12% as news of its fast exit from Chapter 11 sinks in.

The first new vehicles to come from the Fiat-Chrysler marriage are probably 18 to 24 months away from hitting dealerships. All that time, says Dilts, costs will continue to be cut and new management will be trying to "rewrite how you run a car company for profit in North America."

Top of that to-do list for management, say Chrysler insiders, is to run factories very lean, not building up massive inventories of vehicles that have to be heavily discounted. And although Chrysler, Dodge, and Jeep brands are integrated at the manufacturing and marketing levels, each one will be run with its own profit-and-loss responsibility.

Cultural Problems Possible

Both Fiat and Chrysler sell mostly mass-market cars and sport-utility vehicles. But many wonder if they won't encounter some of the same cultural problems as those that Daimler-Benz found hard to bridge, between a German luxury car company and an American maker of family cars and minivans. "I see a tremendous amount of risk in Fiat's effort to revive Chrysler," says analyst Michael Robinet of CSM Worldwide.

But Chrysler had no choice: Fiat was the only automaker to step forward with a plan and desire to link up and keep Chrysler from the scrap heap.

The White House task force advising the Obama Administration thought it was a good match, though also the only way to salvage the company's jobs and auto plants in the U.S. Task force members recognized that only two executives have turned around a car company in recent times: Fiat's Marchionne and Carlos Ghosn of Renault-Nissan. Renault-Nissan, a European rival of Fiat's with a stated desire to have a North American partner, didn't even look at Chrysler.

New Board Members

The task force figured the Fiat boss would be the right man to bring change, starting from the top. Also key was Fiat's ability to make competitive passenger cars and small engines, where Chrysler has been weak for most of its history.

Chrysler's board is being remade as well. The government already has named former Duracell Battery and Borden Chemical executive Robert Kidder as nonexecutive chairman. And the UAW said on Wednesday that former Michigan Governor James Blanchard will take a seat on the board to represent the union's health-care trust fund.

Indeed, the task force believes that Chrysler is closer to achieving competitive costs than GM, though its challenges in the market and problems with its product lineup are certainly greater. Despite what many consider a weak product line that earns no recommendations from Consumer Reports, outgoing Chairman and CEO Robert Nardelli instilled a lean-thinking culture at Chrysler. Before its Chapter 11 filing, Chrysler needed to borrow just $4 billion, compared with $19.4 billion for GM. "And GM is not four times larger than Chrysler," says one senior Obama Administration official. "It's closer to breaking even."

All Eyes on the Fiat 500

But it takes a long time for merged auto companies to bring unique new products to the market. Probably the best, most competitive vehicle to come out of the 1998 merger between Daimler-Benz and Chrysler is the 2010 Jeep Grand Cherokee, arriving a decade after the deal was sealed and three years after it was dissolved. Along the way, a Mercedes transmission helped make the Chrysler 300 a success. But the Chrysler Crossfire, built on a Mercedes vehicle platform, was a bust. When BMW purchased the Rover Group in 1994, it was six years before the marriage produced the MINI Cooper.

The car most often cited as a boon to Chrysler is the Fiat 500, a model that has taken on iconic status in Europe. A Fiat spokesman has said that the small car is the only one the company plans to sell at Chrysler dealerships under the Fiat name. Some believe it could take on similar status as the MINI in the U.S.; others aren't so sure.

A well-equipped Fiat 500 costs the equivalent of more than $24,000. That is price territory profitably occupied by MINI, but it's the only similar small car that has been able to get away with pricing on a par with today's Honda Accords and Toyota Camrys. "I'm dubious that the Fiat 500 can pull off the kind of marketing phenomenon MINI has done," says independent marketing consultant Dennis Keene. "It's a long shot at best."

Reassuring Chrysler Workers

The fate of Chrysler's existing brands is unclear. According to industry sources, there have been discussions about eliminating the Chrysler brand in the future and replacing it with Fiat to sell alongside Dodges and Jeeps. Fiat also plans to sell its Alfa Romeo vehicles through stand-alone showrooms in markets hand-picked as favorable to the Italian sports cars—i.e., New York, Miami, Washington, and Los Angeles. Fiat says other vehicles adapted from Fiat vehicles or created between the two companies might be sold in the U.S. under the American brands, not Fiat.

On his first day as CEO, Marchionne delivered a written message intended to buck up Chrysler employees who have seen thousands of co-workers lose their jobs:

"Over the next several months, we will begin the process of transferring Fiat's technology, platforms, and power trains for small- and medium-sized cars into Chrysler's manufacturing facilities. This award-winning technology will be critical to helping Chrysler round out its product line and give the company a strategic advantage in many markets around the world. Work is already under way to develop new environmentally friendly, fuel-efficient, high-quality vehicles, including Chrysler's electric-vehicle program. In the meantime, we will begin working together to find the most effective ways to combine our R&D and distribution networks so that we can begin to reap the many benefits this alliance will provide."

Highlighting Fiat's Turnaround

In his letter, Marchionne tried to draw some parallels to the situation he inherited at Fiat: "Five years ago, I stepped into a very similar situation at Fiat. It was perceived by many as a failing, lethargic automaker that produced low-quality cars and was stymied by endless bureaucracies. But most of the people capable of remaking Fiat had been there all the time. Through hard work and tough choices, we have remade Fiat into a profitable company that produces some of the most popular, reliable, and environmentally friendly cars in the world. We created a far more efficient company while investing heavily in our technologies and platforms. And, importantly, we created a culture where everyone is expected to lead."

Every merger looks good on paper when it begins, notes consultant Dennis Keene. "But these things are all about execution. Marchionne is going to have to prove it, because a Fiat turnaround in Europe means nothing on Broadway."

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