Can Fiat Cars Save Chrysler?

Fiat (FIA.MI) CEO Sergio Marchionne has said little about his plans to reinvigorate Chrysler since agreeing to acquire the U.S. automaker in June. But what he has said is telling. In a chat with reporters on the sidelines of the Frankfurt Motor Show in September, he acknowledged being chagrined by Chrysler's woeful condition and the discovery that its previous owner, the private equity shop Cerberus Capital Management, had done so little to prepare the automaker for the future. Marchionne said he'd found "a whole pile of surprises."

And the surprises keep coming. No one, certainly not Marchionne, expected Chrysler to be a shiny new car company when it reemerged from bankrupcty in June. But even for an industry as troubled as this one, the numbers have been shockingly bad. Chrysler's sales in the U.S. are down 40% in the past year, and market share has slipped from 11% to 9%. You know an automaker is in deep trouble when it is selling more than half of its ­vehicles to corporate and rental fleets, as Chrysler did in September, according to CNW Marketing Research.

Chrysler badly needs appealing new models if it is to have a hope of surviving. On Nov. 4, Marchionne will lay out his plan, which, according to industry insiders, involves plugging Chrysler's product holes with Fiat-engineered cars. (Chrysler declined to comment on the plan.)

That will be a vital first step. The trouble is that the new vehicles won't appear for at least 18 months. Between now and then, Chrysler's market share will almost certainly continue to erode, making it all the harder for the company to stay in the black and develop and market new models. The question for Marchionne, says IHS Global Insight analyst John Wolkonowicz, is: "How do you get Chrysler from here to 2012?"

Concerned Suppliers When the Italian CEO lays out his strategy, no constituency will be listening more intently than Chrysler's suppliers. As sales keep dropping, some parts makers are getting leery about accepting Chrysler business. They fear winding up with a bunch of production capacity and eating production costs if Chrysler can't sell enough cars or doesn't survive. Thomas T. Stallkamp is a partner at Ripplewood Holdings, the private equity firm that owns German engine parts maker Honsel International. In anticipation of lower sales, he has already renegotiated a contract to sell engine blocks to Chrysler. "Our guys in Germany are worried that the sales volumes won't make it," Stallkamp says. "Every month that sales go down, suppliers get more nervous."

Some suppliers have simply decided not to sell parts to the company. Charles A. Gassen­heimer, chairman and CEO of lithium ion battery maker Ener1 (HEV), passed on a chance to sell batteries for Chrysler's planned electric cars. He thought it was too risky. "Does Chrysler have the cash to commit to that program? No," Gassenheimer says. "We don't have the resources to bet on a program like that."

If Chrysler is to have a hope of boosting sales, it will need a strong network of experienced dealers. Over the past year, Chrysler has pared its dealership ranks by a quarter, bringing the number to 2,400 nationwide. At the same time, the company has been pushing dealers to bring all three of its brands—Dodge, Jeep, and Chrysler—under one roof. Building new retail space is expensive, and many dealers need to borrow the money.

Death of a Car Salesman Now a number of them can't get loans and may bow out. Leo Griggs has been selling Dodges in the tony Park ­Cities neighborhood of central Dallas on and off for the past 15 years. In January, Griggs acquired a Chrysler-Jeep franchise to go along with his existing Dodge showroom and borrowed $22 million from Chrysler Financial. But when Chrysler went into bankruptcy, the Treasury Dept. decided to wind down Chrysler Financial and designate GMAC Financial Services, the former General Motors unit, as lender of choice for Chrysler dealers and customers.

GMAC, which in late October asked the government to shore up its finances, gave Griggs a temporary credit line to buy cars from Chrysler. But GMAC would renew the credit line only after Chrysler Financial released the liens on his dealership's assets. Chrysler Financial refused unless Griggs paid all the money back at once. Griggs was forced to shut his business. And Chrysler lost an experienced dealer. "I never understood that anything like this could happen," Griggs says. Chrysler says its dealer network is stronger, but with sales down, many are struggling.

A credible turnaround plan from Marchionne could go a long way toward calming the nerves of suppliers and dealers, Stallkamp says. And Marchionne plans an extravagant rollout—an eight-hour sales pitch in Detroit to the media and financial community.

People familiar with his plans say he wants to develop Chrysler and Fiat cars together, sharing parts, vehicle platforms, and engineering in a way former parent Daimler (DAI) never did. He also wants to export Jeeps, a plan that would be helped by a cheaper dollar. Says James N. Hall, who runs the auto consulting firm 2953 Analytics in Detroit: "Jeep has a lot of upside potential."

An Emerging Brand Strategy For the U.S., Marchionne may replace the weak Chrysler Sebring and Dodge Avenger with midsize cars using hardware engineered for Fiat cars in Europe. Alfa Romeo may also build a premium SUV using the underpinnings of the Jeep Grand Cherokee. And Fiat's premium Lancia brand may replace its flagship car, the defunct Thesis, with a sedan built alongside Chrysler's 300. That car would sell only outside the U.S., but its sales volume could help make Chrysler's factories more profitable.

As Marchionne's product plan rolls out, the brand strategy will take shape. The Ram truck brand will be split from Dodge, which will sell entry-level cars and sporty rides. Chrysler will maintain its higher-priced status. Jeep will be strictly SUVs. And Alfa Romeo will be offered as a lower-priced (but still upscale) sporty rival to BMW.

Marchionne's grand plan is to create a global car giant by combining the best pieces of Fiat and Chrysler. The strategy makes sense on paper. But the best-laid global plans can be undermined by heavy losses in the U.S. market. That's what happened to GM. Shoring up Chrysler at home won't be easy, not in this competitive environment. "Chrysler can make it," says Hall. "The question is, how committed is Fiat to saving Chrysler?"

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