Fiat Deal Could Save Chrysler

The news that Chrysler and Fiat have forged a strategic partnership offers more than just a glimmer of hope for the struggling automaker, it could very well open up a number of doors on both sides of the Atlantic.

Chrysler has been struggling for years, dating back to the 1970s when the automaker found itself running low on cash and losing market share to Japanese imports. After receiving a federal government loan and paying the money back early and with interest, Chrysler managed to go on through the 1980s, riding the success of its K car lines and minivans.

In 1987, Chrysler acquired America’s #4 automaker, the American Motors Corporation (AMC) and things looked good for awhile. Even into the early and mid 1990s when the company rolled out an all new Dodge Ram pickup truck, the Dodge Viper sportscar, and a new line of full sized cars, the company’s fortunes appeared to be positive. That was enough to convince Daimler to purchase Chrysler and pay the $37 billion valuation for the company.

A marriage that some had hoped was made in heaven was hatched in hell as the terms of the “merger” clearly demonstrated that Stuttgart, Germany was in charge and that Auburn Hills, MI would do as the Germans said. By 2007, a divorce was in the works, one where Daimler wrote off tens of billions of dollars in equity to sell controlling interest to Cerberus Capital Management, LP - a private equity firm.

Because Cerberus is a private equity firm with no automotive experience whatsoever, the thought among industry experts was that the company would hold onto Chrysler only long enough to make some changes and then sell it for a handsome profit a year or so later.

Unfortunately for Cerberus, the auto industry began a historic collapse at the beginning of 2008, one that eventually devalued Chrysler, even forcing Daimler AG to write down its 19.9% share in the company to zero by June. When the year ended, Chrysler was out of cash and had seen 30% of its sales disappear.

A federal loan in the amount of four billion dollars has kept Chrysler afloat, one that they received just a few weeks ago. Part of the deal with securing the loan is a requirement that Chrysler come up with a plan to remain solvent for the long term. Though specifics weren’t hammered out, striking a deal with another automaker was considered to be a priority, though Chrysler certainly didn’t see themselves hooking up with a company along the lines of Daimler.

Now comes Fiat, struggling to keep pressing forward itself, is a natural for Chrysler. Fiat at one time sold cars in the US market, pulling out in the early 1980s but has been wanting to re-enter. The cost of entry into the US market is quite high, but with a strong Chrysler, Jeep and Dodge dealership network in place, the obstacle to bringing its Alfa Romeo brand back to America has now been eased.

Chrysler will gain access to something it doesn’t have, but desperately needs to survive: small car platforms. The Fiat 500 is the 2008 European Car of the Year, just the kind of model that would fit in nicely for Dodge, for example. Chrysler LLC would probably take the 500’s platform and build its own car, something it can do quickly thanks to Fiat.

Fiat’s part in the deal will also include the company gaining a 35% equity stake in Chrysler with the option to take another 20%. That 20% could end up coming from Daimler, especially as they are eager to divest themselves of their 19.9% stake.

The Fiat-Chrysler deal would benefit both companies and has already received tacit UAW approval. With both companies needing a partnership in a bid to survive long term, the Fiat-Chrysler alliance could be the best deal that either company can expect to make in a highly competitive global car market. That means there is still hope for Chrysler.