Chrysler-Fiat Alliance Is a Gamble Worth Taking

By Warren Brown
Sunday, March 22, 2009

Congress should approve the additional loans for General Motors and Chrysler.

That assumes GM's continued turnaround in an economic recovery, a restructuring success that was demonstrably evident before the global financial crash crushed consumer credit and stalled vehicle sales worldwide.

It also assumes that a memo sent to employees last week by Chrysler chief executive Robert L. Nardelli is right. Chrysler for the last 22 years has been in and out of joint ventures, "alliances," and a "merger of equals" in a bid for stability and growth.

Chrysler now is seeking an "alliance" with Italy's Fiat SpA to fill a gaping, expensive and risky-to-fill product hole for small, fuel-efficient cars.

Fiat has the expertise and technology to fill that hole. And it has been working with Chrysler on a technology-swap proposal that would give it a 35 percent stake in the American car company.

Fiat's proposal is based on the belief that the recession won't last forever, but that America's dominance of global automotive sales and its love of big trucks might be a forever thing. Chrysler is a leader in truck manufacturing in the American market.

Fiat also has floated the idea of acquiring another 20 percent of Chrysler, for the less-than-princely sum of $25 million, at a later date.

That seems to be a steal for Fiat, but a lousy deal for U.S. taxpayers who already have loaned Chrysler $4 billion -- and a deal made worse now that Chrysler is seeking $5 billion more in U.S. taxpayer loans.

Fiat gets a controlling interest in Chrysler for $25 million in cash after American taxpayers invest $9 billion in the company? The math didn't seem right.

But in his employee memo last week, actually written to placate a skeptical media and an increasingly skeptical Congress, Nardelli makes, at least for me, a convincing argument.

He said the proposed partnership with Fiat could be worth as much as $10 billion, "equal to or greater than the total amount of loans we have requested from the U.S. Government." Nardelli added that partnering with Fiat, which has authored small-car hits such as the Fiat 500, could save Chrysler up to five years in the design and development of small, fuel-efficient automobiles.

That could be a money-saving, market-gaining advantage.

Small cars have always been a risky proposition in the United States. They were seldom popular, that is, seldom bought because they were loved. Their sales usually increased in tandem with oil and gasoline prices, as they did during last summer's reign of prices for regular unleaded gasoline above $4 a gallon.

Likewise, sales of small cars in the U.S. market usually drop in line with decreases in pump prices -- as they did earlier this year, dropping faster than overall vehicle sales. That history makes small automobiles an iffy proposition for all car companies doing business in this country.

That is why manufacturers, including Toyota, Nissan, and GM -- yes, GM, which, like Ford, builds and sells very attractive small cars overseas -- have been reluctant to embrace the expense of introducing those models in the states.

That might surprise people familiar with Toyota's gas-electric hybrid Prius sedan and the mini Toyota Yaris, among the most fuel-efficient models Toyota sells here. But neither of those models is the smallest, nor the most fuel-efficient car Toyota makes. That honor goes to the teeny Japanese-market Toyota iQ, a three-passenger, 110-horsepower urban runabout that gets nearly 60 miles per gallon.

In its talks with Chrysler, Fiat is betting that last year's crazily fluctuating fuel prices and the U.S. sales success of some cleverly designed small models, such as the BMW-sponsored Mini Cooper and the Mercedes-Benz-sponsored Smart, have paved the way for a larger small-car market in America.

If Fiat is right, Fiat wins its bet. And Chrysler, Nardelli says, preserves or creates more than 5,000 stateside jobs. If Fiat is wrong, Fiat wins anyway, because it would have gained access to truck manufacturing technology in a market that traditionally has loved and demanded big trucks.

So, I accept Nardelli's argument that a Chrysler-Fiat "alliance" is a gamble worth taking. I'd be more in favor of it if the lawmakers who have invested so much energy into probing GM's and Chrysler's "viability" invested the same or greater passion in producing a commercially and environmentally beneficial national energy policy. Doing that would insure a bailout payback.

Nardelli's argument that Chrysler possibly could survive alone is another story, one in which I and others have substantially less confidence.

Nardelli is making promises in an era when promises are hard to believe -- especially considering the $163 million in bonuses, taken in the wake of $173 billion in taxpayer bailouts, by less-than-scrupulous executives of New York-based American International Group, the insurance and finance conglomerate largely responsible for our current economic mess.

Now, Nardelli and his counterparts at GM are trying to borrow more federal money -- collectively nearly $22 billion more on top of the $17.4 billion approved for them last year -- to keep their companies going.

Let them have it.

Supporting the native car companies is a much better bet than plowing more taxpayer dollars into AIG, which wrecked itself and much of the international financial framework by helping to create and insure the moral equivalent of a Ponzi scheme -- the nefarious credit-default swap business in which participants were guaranteed a return on investments in faulty loans.

That business did little good for anybody, except the people who ran AIG and those who reaped profits before the credit-default bubble burst. Why more of them aren't sharing quarters with convicted and jailed Ponzi maven Bernard L. Madoff, I don't know.

But I know that GM, Ford and Chrysler -- Ford is not yet seeking federal loans -- led several generations of Americans, including tens of thousands of minorities who otherwise would not have gotten there, into the middle class. I know that GM, Ford and Chrysler were there when we needed them in World War II and the Korean War. I know that GM, Ford and Chrysler have changed their ways from the bad, schlock-manufacturing days of the 1970s and 1980s, and that their current and future products are world competitive.

Let them have the money.

The chance that they will succeed and pay it back, plus interest, is greater than any likelihood Congress will succeed in retrieving the bonuses paid to AIG's executives.

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