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Chrysler And Fiat Strike an Alliance
No-Cash Deal Gives Ailing Automaker Expanded Market

By Steven Mufson and Peter Whoriskey
Washington Post Staff Writers
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.

By contrast, the alliance of Nissan and Renault has been successful, in part, analysts say, because Carlos Ghosn has simultaneously held the chief executive position at both companies and closely coordinated vehicle plans.

UAW President Ronald A. Gettelfinger said the Fiat-Chrysler deal "offers Chrysler new opportunities to compete in the U.S. market and the global marketplace." He added that "as the U.S. auto industry undergoes a restructuring process, this alliance has the potential to preserve a wide range of choices for U.S. consumers, as well as good-paying manufacturing jobs for our communities."

"We're going to work with Chrysler and Fiat in the days and weeks ahead, and UAW members will have a voice as this new alliance takes shape," said UAW Vice President General Holiefield, who directs the union's Chrysler Department. "Our focus is going to be on preserving good jobs and building great vehicles."

Since 2007, Chrysler has discontinued four vehicle models and reduced employment 36 percent, to its lowest level since 1934, Nardelli wrote to stakeholders.

A critical element to the deal is the acceptance by dealers, who would likely be asked to sell Fiats.

"This is phenomenal," said Hayden Elder, co-chair of Chrysler's national dealer council and the owner of Elder Chrysler Dodge Jeep in Athens, Tex. "We've got a partner now."

The rumors about other potential partners for Chrysler -- including GM and Nissan -- had given dealers pause because Chrysler had so much in common with their product lines.

"When they were talking about GM . . . that was a scary thought. There was total overlap, so the question was who was going to go?" he said. "There's a GM dealer in town. Do they need both of us if we're one and the same?"

By contrast, Elder said, the Chrysler-Fiat alliance had "the opportunity of being a marriage made in heaven." He said: "They've got European distribution, we've got North American distribution. We've got the trucks and the SUVs. They have the high gas mileage cars. It looks perfect to me. The two blend perfectly."

Chrysler has made some modest moves toward fuel efficiency, with the Caliber and Patriot, but offers no hybrids.

Elder said those smaller Chryslers could be replaced with Fiats. Some of the existing smaller Chryslers are "in their second year or third year of their life cycle. When it comes to refresh them, will they do that? Do they spend a lot of money on them or do they bring something from Fiat in? That remains to be seen."

Chuck Eddy, of Bob & Chuck Eddy Chrysler Dodge Jeep in Youngstown, Ohio, said the blending of product lines would help both sides. "I have no problems with having the Fiats on our showroom floor," Eddy said. "Our minivans, our Jeeps are our bread and butter. We're looking for small cars. That's a huge part of our future -- cars that get 50 mpg or more. We have to plan for the future."

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