COMMENTARY: Fiat-Chrysler Link Is Nice Idea, but Futile Without Money
By Michelle Krebs January 21, 2009By Bill Visnic
Fiat S.p.A.'s acquisition of 35 percent of Chrysler has all the good-sounding trappings of an auto-industry alliance that, under normal circumstances, would indicate another industry tie-up that might bear fruit.
But in the supercharged atmosphere currently surrounding the auto sector -- and particularly the at-risk U.S. domestic automakers -- the deal is being considered by some as the salvation of Chrysler.
The prolongation of Chrysler's likely dissolution is the more viable assessment of Tuesday's announced Fiat-Chrysler deal because it includes no cash infusion to Chrysler.
The terms of the alliance, as presented, bring from Fiat no capital that could be used to shore up Chrysler's foundering day-to-day operational outlook. While an arrangement that might -- comparatively quickly -- lead to new models for gaps in Chrysler's product range and increased utilization for some of its manufacturing plants is a solid strategic step, it's not a tactical solution to the overriding predicament: Chrysler needs cash and needs it now.
The Fiat deal is like offering a starving man a patch of ground, a shovel and some seeds, saying, "Here, this will take care of your hunger."
Another Step in the Deconstruction of Chrysler
The announcement of Fiat's no-capital "investment" in Chrysler could be construed as a step towards assuring Chrysler's viability -- and making a better case for the reorganization plan it must submit to Congress to win approval for additional federal "bailout" funds.
But in reality, the Fiat move likely is another in the process that eventually will be understood as the structured deconstruction of Chrysler.
"This helps [80.1 percent owner] Cerberus [Capital Management LLC] in their exit strategy," said Joseph S. Phillippi, principal of AutoTrends Consulting. Phillippi thinks that although the terms of Fiat's stake in Chrysler present intriguing possibilities for future business, any product-related terms of the deal would take a minimum of 18 to 30 months to enact. In its current cash-poor situation, Chrysler won't last a fraction of that time without access to more government money.
Phillippi says the Fiat announcement may be most helpful in doing just that, however, lending the appearance of a company reconfiguring itself with an improved business model. Chrysler's restructuring blueprint must pass government muster on March 31 if it is to receive additional federal loans.
But Fiat could be getting involved with the simple notion that the new 35 percent ownership arrangement either puts the company first in line for the choicest morsels during an eventual dissolution of Chrysler -- or at least allows input into the proceedings. Further, Fiat's ownership stake now could allow it to make legitimate claims to certain portions of Chrysler's hard assets -- parts of a crumbling company for which Cerberus, for the most part, has no use.
It's All About Access, New Models
Specifically, Chrysler's press release about the proposed global alliance outlines several facets -- all related to product. A rundown, along with a reality check for each:
> "Access to competitive, fuel-efficient vehicle platforms, powertrain, and components to be produced at Chrysler manufacturing sites."
All things Chrysler needs -- including increased use of its manufacturing capacity -- but the time frame to bring these developments to fruition would be acceptable only for a more financially stable automaker.
> "Fiat would also provide distribution capabilities in key growth markets, as well as substantial cost savings opportunities."
Access and distribution in growth markets is attractive, but first, one must have something worth distributing. For the markets in which there's currently growth, Chrysler's product range isn't a great match. Moreover, "access" and distribution to new markets does not by definition translate to "success" in those newly opened regions.
> "Fiat would provide management services supporting Chrysler's submission of a viability plan to the U.S. Treasury as required."
This sounds enigmatic. In the next 30 to 60 days, what can Italian managers offer in the way of advice that can make a difference in the highly politicized viability-plan situation with the U.S. Dept. of Treasury?
> "The alliance would also allow Fiat Group and Chrysler to take advantage of each other's distribution networks and to optimize fully their respective manufacturing footprint and global supplier base."
This is really what Fiat wants out of the deal.
For no actual cash investment, Fiat enjoys access to the Chrysler dealer network. This is an unprecedentedly cheap -- as in "no cost" -- and quick way to establish a sales network for the Alfa Romeo brand in the U.S. (Fiat's original goal) and provide the same access for any potential Fiat-badged models imported or eventually made in North America.
As for optimizing manufacturing and the supplier base, that was going to -- and must -- happen with or without Fiat and Chrysler collaborating. The ability to produce Fiat models or components (i.e. engines) in Chrysler's North American plants is an advantage, to be sure, but both companies have too much capacity, so combining that broad overcapacity is no panacea.
In the end, whatever becomes of Chrysler, this deal ushers Fiats and Alfa Romeos into Chrysler showrooms.
Small Profit From Small Cars Can't Save Chrysler
The centerpiece of the proposal obviously is the promise of small, fuel-efficient models for a
Chrysler whose product-development cupboard has long been bare. But Phillippi says this is a something of a smokescreen, too. He think Fiat's lauded 500 subcompact, Europe's Car of the Year, wouldn't be on the table.
"I'm not sure Fiat would want to dilute the 500 brand to have a badge-engineered version [for Chrysler]," he said.
And he said the prospect of selling and distributing a car like the 500 for Fiat through Chrysler dealerships would generate scant profit-making potential for Chrysler, which, more than anything at the moment, is deeply in need of revenue.
Finally, the U.S. market -- which last year contracted to a sales level not seen in two decades -- is about to be flooded with small and subcompact cars of every stripe. The competition will be fierce and profits, at least initially, will be marginal. If there are profits at all.
Despite the sparkle of promise in Chrysler's proposed alliance with Fiat, the details show nothing to help Chrysler alleviate the immediate crisis, Phillippi said.
The real job, many industry analysts continue to insist despite the Fiat distraction, is how to most effectively and efficiently disassemble Chrysler -- particularly its capital assets -- with the least trauma to an already fragile U.S. auto industry and the nation's broader economy.
Phillippi said the terms of the Fiat alliance deal may inspire "the government to keep the morphine drip going for a few more quarters," while Chrysler continues a piecemeal wind-down and owner Cerberus "backs out of the picture."
Photos by Bill Visnic
1 & 2 - The Fiat 500 was Europe's Car of the Year but Fiat likely would not want to dilute the brand and the car's popularity by branding it as a Chrysler.
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