Chrysler And Fiat Strike an Alliance
Wednesday, January 21, 2009
The ailing Chrysler yesterday agreed to give Fiat a 35 percent stake in the company in return for access to the Italian automaker's line of small cars and international sales network.
The alliance of the two companies provides no cash to Chrysler, but the company's chief executive, Robert L. Nardelli, told stakeholders in a letter that he hoped the deal would bolster the automaker's case for an additional $3 billion of federal loans by strengthening its offerings. The nonbinding agreement is subject to approval by the Treasury, and Chrysler said it hoped it would be complete by April.
"You're taking two big automakers who have gaps in both their products and geographic reach, and you're filling those gaps," said David Elshoff, a Chrysler spokesman. "They fit like pieces in a puzzle."
Chrysler, which received a $4 billion emergency federal loan last month as it ran short of cash, is best known for its Jeep and minivan brands and has been looking for merger opportunities, most recently with General Motors. Analysts said the private terms of the deal announced yesterday also give Fiat the right to increase its ownership to as much as 55 percent.
Fiat, which has bounced back from its own problems and now has 9.1 percent of the European car market, is particularly strong in compact and sub-compact cars such as the popular Fiat 500. Fiat Group chief executive Sergio Marchionne has said for months that he was searching for a partner to manufacture the Fiat 500 as well as its Alfa Romeo brand in the United States.
President Obama, former president George W. Bush and leading members of Congress have insisted that the ailing U.S. automakers demonstrate they can be viable firms in the long-run in order to tap more taxpayer dollars to avoid bankruptcy in the short-run. By mid-February, Chrysler must submit a restructuring plan to achieve long-term viability, international competitiveness and energy efficiency. If it doesn't show progress on that plan, by May 1 the government can call back the $4 billion loan, effectively pushing the company into bankruptcy.
"From day one, I've felt that Chrysler would not stay as a stand-alone" entity, said Sen. Bob Corker (R-Tenn.), who has been active in trying to set terms for an auto industry bailout. But, he added, "in essence the U.S. taxpayers have written a check . . . to get a foreign entity to take over a U.S. automaker in the name of saving the Detroit Three. Hopefully the jobs will be saved. Hopefully the brand will be empowered. But at the end of the day, it poses quite a dilemma for U.S. taxpayers."
Itay Michaeli, automotive analyst at Citigroup, said the Fiat alliance may "strengthen" Chrysler's "case for long-term viability to the U.S. Treasury." And he added that Chrysler could gain "a critical source of retooling investment necessary to compete in the U.S. small car segment, critical cost savings . . . and new international expansion opportunities."
"However," he warned, "the deal does not provide Chrysler with any new liquidity commitments from Fiat, which could reflect a desire by Fiat to protect its investment under future downside scenarios for Chrysler."
Moreover, the history of alliances between U.S. and foreign car manufacturers is troubled. American Motors formed an alliance with Renault in the mid-1970s and later sold "Le Car," the Renault Alliance and the Encore, but their sales lagged and when Chrysler bought AMC in 1987, it discontinued the vehicles.
A Fiat alliance with GM in 2000 later fizzled, and GM paid Fiat $2 billion to end the arrangement.
Daimler Benz bought Chrysler for $38 billion, but sold controlling interest for a fraction of that in August 2007, leaving Chrysler perhaps weaker than before. The private buyout firm Cerberus Capital Management bought an 80.1 percent stake in Chrysler that year for $7.2 billion. Investment banking sources say that Daimler values its remaining 19.9 percent stake in Chrysler at virtually nothing.