Chrysler's Italian job

http://money.cnn.com/2009/01/20/autos/chrysler_fiat/

Chrysler's Italian job
Italian automaker Fiat, which has recently come through a makeover of its own, could be a good fit for the struggling Chrysler.
Peter Valdes-Dapena
January 20, 2009

NEW YORK (CNNMoney.com) -- For Chrysler, the big benefit from its new alliance with Fiat might be public perception: The automaker, under pressure by the U.S. government to restructure, is taking action to help itself.

An alliance with Fiat holds the promise of more attractive small, fuel-efficient cars for Chrysler down the road as well as better access to important global markets. Up to now, Chrysler hasn't been competitive in either area.

In the short term, with a Feb. 17 deadline looming for Chrysler to submit a workable turnaround plan, this plan may be key to helping the carmaker hold on to $4 billion in federal loan money.

"It makes their chances for viability much better," said George Magliano, an auto industry analyst with consultants IHS Global Insight. "And it might get the government to fund more cash into Chrysler."

That short-term benefit is probably the first thing on Chrysler executives' minds, said Jim Hossack of industry consultancy AutoPacific.

"Your first goal when you come in each day is to survive the day," he said.

Neither Chrysler nor Fiat responded to requests for comment beyond written corporate statements.

On Tuesday, the companies announced the basic terms of a tentative "global strategic alliance": Fiat, Italy's largest automaker, will provide no cash of its own to the struggling American automaker. Instead, in exchange for a 35% equity stake, Fiat will provide Chrysler with "technology," including the engineering underlying some of Fiat's small cars, which have proven popular in Europe.

"They've got some beautiful stuff over there," said Magliano, "and a lot of these things can be sold in the U.S."

Unlike Chrysler, Fiat is known to specialize in small, fuel-efficient cars that are popular in Europe. But the sort of "platform sharing" envisioned for Chrysler and Fiat takes years to bear fruit, so don't expect to see a Dodge version of the Fiat Punto at your Chrysler dealer anytime soon, said Magliano.

"It's difficult to have cross-cultural alliances like this," Magliano said, adding that language and cultural differences, as much as anything else, can hamper progress.

Besides products, Chrysler will also get the attention of Fiat executives, individuals who have themselves just pushed through an impressive turnaround over the past few years.

In 2004, Fiat lost more than $1 billion, according to a 2007 Fortune magazine report. The year after that, General Motors (GM, Fortune 500) spent $2 billion just to get out of an alliance it had formed with Fiat in 2000.

Despite a global downturn, Fiat earned $4 million more this year than last, according to Reuters, including results from the company's tractor and truck units. Fiat is now considered a relatively strong automaker partly on the basis of improved product designs and quality, analysts said.

A taste of Italy

For its part, Chrysler has promised to assist Fiat with bringing its brands to the U.S. market. Only Ferrari and Maserati are currently sold here and Fiat has long wanted to bring the luxury Alfa Romeo name back to the U.S.

In addition to those brands and the mass-market Fiat brand, the Italian carmaker also makes and sells the Lancia brand.

In order to move Fiat small cars more quickly into its dealerships, Chrysler could forgo restyling them as Chrysler or Dodge products, said David Soya, editorial director for auto industry news site WardsAuto.com.

In the short term, Magliano suggested that Chrysler and Fiat could make minor changes to Fiat products - just enough to meet U.S. crash safety and emissions standards - and simply sell them through the Chrysler, Dodge and Jeep dealer network under the original Fiat name.

Fiat's 500 subcompact "city car" has been a hit in Europe. Taking a cue from BMW's success with the retro-styled Mini Cooper, the current Fiat 500 is clearly an updated remake of the 1960s classic. (The classic 500 is probably best known to Americans in the role of Luigi the tire salesman in the 2006 Pixar movie "Cars.")

But Hossack thinks the 500 is probably too small for American tastes. "A relatively large car for Fiat may be appropriate for Chrysler here," he said, suggesting that something like the mid-sized Bravo or the mid-sized Grand Punto might stand a better chance here.

Fiat could also use some of Chrysler's under-utilized manufacturing facilities to build its products here. That would help Fiat by avoiding monetary exchange-rate problems that have hampered other European automakers that sell cars in the United States but don't manufacture them here.

Quid pro quo

For its part, Fiat could help Chrysler move more strongly into overseas markets. Chrysler relies much more heavily on the U.S. market than do its domestic rivals Ford and GM. That has meant that Chrysler has suffered even more as the domestic auto market has shrunk and shifted away from high-profit trucks and SUVs recently.

Fiat's greatest benefit to Chrysler, in terms of overseas growth, will be in emerging markets like South America and Asia, said Soya. That's really where a car like the tiny 500 could help.

"Chrysler has expressed interest in having a car that size for emerging markets," he said.

Deals like this will become more common in the years ahead, said Paul McCarthy, head of PriceWaterhouseCoopers automotive practice. Merger and alliance activity in the auto industry is cyclical he said, and surges whenever there's a contraction.

"After that, we have a period of dis-integration," he said. That's the sort of thing that led to Chrysler's split-off from Daimler and GM giving up its share of Fiat.

Both Fiat and Chrysler will likely proceed with caution this time, said Magliano.

"Both of these guys have been burned in the past with relationships," said Hossack.