Just over a decade ago, German auto giant Daimler bought Chrysler for $38 billion, an alliance that promised to reinvent the auto industry.
On Wednesday, Chrysler, bankrupt and downtrodden, got a new European boss and, along with that, what could be a last chance. After months of planning and negotiating, Italian automaker Fiat gained control of Chrysler, and its leader, Sergio Marchionne, became chief executive of the U.S. company.
The arrangement – which brings most of Chrysler’s assets out of bankruptcy, stripped of debt and with a cleaner balance sheet – gives Fiat an initial 20 percent stake in the Auburn Hills, Mich., carmaker and the chance to own it outright eventually.
And it didn’t cost Fiat a penny.
As an exercise in dealmaking, Marchionne’s performance has been nothing short of masterful. But whether it makes good business sense is not yet certain.
In creating the world’s sixth-largest carmaker, Marchionne is betting he can pull Chrysler out of a sales nose dive on the force of the small, fuel-efficient vehicles Fiat has excelled at building. At the same time, he’s hoping to expand Fiat’s reach, bringing brands such as Alfa Romeo back to a market it abandoned years ago, and in doing so make the brand a global power.
“This alliance must be a constructive and important step towards solving the problems impacting our industry,” Marchionne said Wednesday in announcing the completion of the merger. “We now look forward to establishing a new paradigm for how automotive companies can operate profitably going forward.”
If it works, the Chrysler-Fiat alliance could serve to vindicate Marchionne’s belief that consolidation is key to the future of the auto industry and show that his ability to turn a money-losing Fiat around was no fluke.
If it fails, the results could be dire for both companies.
“This is going to be a very tough road for them both,” said Bruce Belzowski, associate director of the University of Michigan’s Transportation Research Institute. “Do they have enough money and the right products, and can they do it fast enough? It could get very messy.”
Chrysler, which already has received $8.6 billion in federal funding, will get up to $6 billion more in exit financing as it departs bankruptcy, including $2 billion being paid to creditors in exchange for forgiving their debts.
But if that money proves insufficient – and with Chrysler losing $100 million a day, according to Treasury officials, and its U.S. sales down 46 percent so far this year, that’s not hard to imagine – then the new alliance could have a problem.
In testimony Wednesday before a Senate committee, Ron Bloom, a key member of President Barack Obama’s auto task force, said the government did not plan to give any further aid to Chrysler or General Motors Corp. beyond the billions of dollars already committed.
The automakers insist they won’t need it.
Under terms of the merger, Fiat must help Chrysler produce the smaller, more fuel-efficient cars it lacks and that some say it needs to increase sales.
For Fiat to increase its 20 percent stake to 35 percent – the remainder is split among the U.S. government, the government of Canada and the United Auto Workers union – it must help Chrysler produce a new gas-sipping four-cylinder engine in the United States based on an existing Italian-engineered motor used in models such as the popular Fiat 500.
It also must produce a Chrysler vehicle based on a Fiat platform within the United States that is capable of fuel efficiency of 40 miles per gallon.
But Rebecca Lindland, auto analyst at IHS Global Insight, questioned whether fuel-saving small cars would be the right solution.
“This isn’t what Chrysler customers have been buying, and there’s no guarantee that’s what they want to buy,” she said.
There’s also a branding problem. After nearly a year of negative headlines, Chrysler’s name has been dragged through the mud, and consumers are turning away from its vehicles faster than those of any other automaker.
A study released Wednesday by industry research firm AutoPacific showed that 58 percent of respondents felt Chrysler should have been allowed to fail.
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