Fiat chief executive Sergio Marchionne is not one to shirk a challenge. He made his name as a corporate whiz in June 2004 when he stepped in to take the wheel of Italy’s then-dying automaker, driving through a swift and vigorous turnaround that returned it to profitability by 2006.
Now Marchionne is about to attempt to do the same for Chrysler, the smallest of Detroit’s “Big Three” and North America’s most sickly automaker.
On Thursday, President Barack Obama said Chrysler will file for Chapter 11 protection in New York after last-ditch rescue talks between its creditors and the U.S. government collapsed. The move smoothes the way for an alliance with Italy’s Fiat, as it allows the automaker to restructure its remaining debt and reduce its bloated auto dealer network.
Fiat has been negotiating with Chrysler for weeks and a deal is expected by a U.S.-imposed midnight deadline. But while some say uniting Chrysler and Fiat is the perfect pairing of two complementary automakers, others argue that it’s nothing short of a reckless gamble on the part of Marchionne.
“No matter how capable a businessman you are, taking on another car company that’s been losing money for years and at the same time taking a bigger stake in an industry that’s in freefall and has an uncertain future is a huge gamble,” said Karl Brauer, editor in chief of automotive Web site Edmunds.com.
“I think it’s impressive that Fiat is in this position now just a few years after they were in the same position as Chrysler just a few years ago. And it’s a testament to Sergio Marchionne that he could take a company like Fiat and turn it into a company that’s vying to do deals with other large companies,” he added. “But fixing Fiat is one thing; doing a deal like Chrysler-Fiat is another. Putting all the pieces together is much more difficult.”
According to the White House, in a Fiat-Chrysler alliance Fiat will offer Chrysler its technological “know how” in exchange for a 20 percent equity stake in the reorganized Chrysler. Fiat will have the right to select three directors of Chrysler once reorganized. Current Chrysler Chief Executive Robert Nardelli will step down after the company emerges from bankruptcy.
Fiat’s share of Chrysler could rise to 35 percent if certain targets are met, the automaker said Thursday. It could get another 16 percent by 2016 if Chrysler’s U.S. government loans are fully repaid. Fiat would also have access to the North American car market though Chrysler’s dealer network and factories.
Brauer said he’s pessimistic about the feasibility of a Chrysler-Fiat partnership. There are risks, he said — the auto market may not recover quickly, and there are obvious cultural and logistical challenges in meshing a North American and an Italian company, he added. The costs of a union will be considerable, Brauer said.
“To go from building Dodge Durangos to Fiat 500s takes time, and time is something Chrysler doesn’t have,” he said. “If this takes a few years to go through and the market keeps declining, you’re in a bad place.”
Fiat’s Marchionne has shown he knows how to overhaul the corporate culture of dying companies. He cut his teeth reviving Fiat earlier this decade, turning it into one of the fastest growing companies in the automotive industry. And he revamped the company culture and sped up the introduction of stylish new cars, like the reworked Fiat 500 and the redesigned Punto.
It’s the sort of leadership Chrysler could use. Overly focused on large SUVs and trucks, the automaker wants Fiat’s small-car engine technology to comply with rising federal requirements for fuel-efficiency and consumers’ desire to buy smaller vehicles whenever the price of gasoline spikes.
While a Fiat-Chrysler partnership will bring obvious benefits to Chrysler, it brings Fiat another debut on the North American stage. The automaker withdrew from the U.S. market in 1984, finding itself crowded out by then-upstart Japanese automakers. Now Fiat will benefit from selling its vehicles through Chrysler’s extensive dealership network, which is likely to be trimmed in a Chapter 11 bankruptcy reorganization.
As of the end of the first quarter this year, Chrysler had about 3,200 dealers and 11 percent U.S. market share, according to Edmunds.com. By comparison, Toyota had just under 1,500 dealers and 16 percent market share. Fewer dealers allow an automaker to better control its costs and inventories.
“Fiat has wanted to get back into the U.S. market for years, so this is a very good opportunity for them because it produces a quick entry,” said Pierluigi Bellini, a Milan-based automotive analyst with IHS Global Insight.
Overseas automakers like Hyundai have spent over a decade building their presence and reputation in the U.S. market. A partnership with Chrysler would help Fiat avoid that, he said. Fiat would also have a production base to make vehicles for the Latin American market, he added.
A deal with Chrysler would also bring Marchionne control of an iconic American automaker that built the popular minivan and owns the famous Jeep brand.
Chrysler has failed to return to full strength since it broke off its partnership with Germany’s Daimler-Benz AG two years ago, even while under the control of the Cerberus Capital Partners private-equity group. An earlier partnership with General Motors was dissolved in a $2 billion payment to Fiat, and some observers wonder if a tie-up with yet another European automaker will work.
“The Chrysler-Daimler deal didn’t work and it laid out a lot of problems in meshing European and U.S. business customs,” said Edmunds.com’s Brauer. “On the other hand, if Marchionne is looking for the best possible time to get Chrysler, Fiat may have found it. But then again he has to manage it and not let it drag down the progress he made with Fiat.”
Observers argue that Marchionne is just the man to manage a trans-Atlantic business partnership. Italian-born, he was raised in Canada where he studied law and business. His background closely resembles that of Carlos Ghosn, the CEO of Renault-Nissan who is a Brazilian, Lebanese and French citizen and is credited with turning around Nissan’s fortunes.
“People like this, I think they get different perspective, they see possible connections others don’t see. They have a different sense and they know how to bring multicultural groups together,” Brauer said.
Marchionne also focused Fiat in a way that Chrysler must now be focused, said Josh Whitford, a professor of sociology at Columbia University who has studied the Italian automotive industry.
“Fiat started to work with suppliers to figure out how to make new, more appealing models, which is what I think they will do with Chrysler,” he said. “Fiat’s research and development investment fell in the 1990s and they just didn’t invest in new cars. You could say the same thing about the American automakers. In the last few years they’ve focused on the financial side, and that covered up a lot of sins on the auto side.”
“This is why I am cautiously optimistic about the Fiat-Chrysler alliance,” he said. “Fiat’s near-death experience pushed them to think more seriously about the industrial side; it pushed them to make new cars that people want.”
However, it remains to be seen whether Americans will buy small Italian cars. With stricter federal fuel economy standards on the horizon, the market for cars is likely to grow bigger than trucks and SUVs, said Whitford. And Fiat’s cars gained a reputation for poor reliability the last time they were sold in the United States.
“I hope Chrysler learned a lesson from betting on one type of car — they were caught with their pants down when gas prices went up, and gas prices are going to be volatile for a while,” he said.
Still, the deal remains a lottery for Fiat, said IHS Global Insight’s Bellini.
“As Marchionne puts it, this is an industry that is going to consolidate, so you can either be the buyer or the acquirer,” he said. “What Marchionne is trying to do is be on the buy side. I think this a very risky thing, and it all depends on the economic conditions ahead.”