Image: Fiat 500
Mary Altaffer  /  AP
A Fiat 500 at a promotional event in New York. Fiat is expected to introduce the retro-styled hatchback in the U.S. late next year.
By Roland Jones
msnbc.com
updated 6/10/2009 11:49:43 AM ET 2009-06-10T15:49:43

Chrysler may have sealed its alliance with Italy’s Fiat, but the automaker still faces the serious challenges, according to analysts. The automaker must integrate operations with its new owner and bridge a product gap until a new line of small cars is available late next year.

“Chrysler’s going to come out of bankruptcy leaner and meaner, but they haven’t answered the product question,” said Tom Appel, associate publisher of Consumer Guide Automotive, a guide for car buyers.

For a glimpse at the future of Chrysler, take a look at the updated Fiat 500, a remake of the company’s iconic “city car” that the Italian automaker recently showed off on the streets of New York. The tiny car, likely to hit U.S. roads in late 2010, will mark Fiat’s first return to these shores since 1983 when it pulled out of the market, its brand having suffered from a reputation for shoddy workmanship and poor reliability.

The 500 is emblematic of a plan to change Chrysler’s fortunes by shifting its product line toward small, fuel-efficient vehicles based on Fiat platforms and technology. The smaller models will round out Chrysler’s existing product range, overly focused on big pickup trucks, minivans, Jeeps and large cars like the Chrysler 300 and the Dodge Charger.

The question, Appel said, is how long will the automaker take to redesign its product line.

“It’s going to be a long road,” Appel said. “Basically, we have about 18 months until we see the first 500s and then about another year after that until we see any new vehicles emerge. We just have to hold on until all these new cars are available over here.”

Appel said he is a bit worried that Chrysler has little else in its product line aside from a new Jeep Grand Cherokee, due next year, and it’s unlikely to bring any Fiat vehicles in the United States for another year.

The new Chrysler will likely emerge from bankruptcy having shed 789 dealers, or about a quarter of the total. It will be majority owned by a trust fund created to ensure health care obligations are met for retired unionized Chrysler workers. The trust fund will own 55 percent of the new company, followed by Fiat at 20 percent, the U.S. government at 8 percent and the Canadian government, 2 percent.

Fiat will have an option to raise its stake by an additional 15 percent in three increments as it meets certain vehicle platform and distribution goals but cannot become a majority owner until all U.S. government loans — approximately $10 billion so far — have been repaid.

The small car segment, including compact and subcompact vehicles, represents about 15 percent of all U.S. vehicle sales, and is extremely important to Chrysler’s future, said Michelle Krebs, editor of Edmunds.com’s AutoObserver.com Web site.

“You’re going to see smaller, more fuel-efficient efficient cars coming from Chrysler because they have not made anything successful in that area, and that is where the growth was last year,” she said.

Small car sales last year were boosted as gas prices rose above $4 a gallon, shifting buyer interest away from larger, gas-guzzling vehicles.

Gas prices are rising again, which is certain to boost interest in small and midsize cars, she said.

But Anwyl, of Edmunds.com, said gas prices need to stay high, perhaps as high as $5 a gallon, to keep Americans interested in small cars like the Fiat 500.

“These small Fiats could work well in a high gas price world, but if gas prices don’t go up, [Chrysler] will be selling the same cars as before, and so they’ll need to get some energy behind those vehicles,” he said.

Still, Chrysler does have a history of launching innovative new models just when they’re needed, including the K-cars of the 1980s and early 1990s, the retro-styled PT Cruiser in 2000 and the 300 full-size sport sedan in 2004, Anwyl said.

“They need to keep them relevant and new,” said Anwyl. “If I were a senior Fiat executive I would think about remaking the company, taking a clean sheet of paper approach. Chrysler needs to step back and ask how they want to connect with consumers.”

Aside from the increased emphasis on small cars, it’s not clear exactly what the “New Chrysler” will look like, said George Magliano, director of automotive industry research for the Americas at consulting firm IHS Global Insight.

“We have a vague idea of what the new company’s products will be, but we don’t know if they will succeed or the full extent of the product sharing between Fiat and Chrysler,” he said. “So the jury’s still out on this new company, and so there is still a lot of risk that it doesn’t succeed.”

To some degree Chrysler faces a greater risk of failure than General Motors, which followed its smaller rival into a government-forced bankruptcy reorganization last week.

GM has invested heavily in new products, but Chrysler’s product development suffered during its partnership with Germany’s Daimler-Benz and its subsequent sales to private-equity group Cerberus Capital Management, said Magliano, although he pointed out that the company still has marquee brands like the Jeep and minivans.

Judging from Fiat’s current offerings, a handful of small or midsized cars based on Fiat platforms are likely to be introduced in the United States, said Appel.

These include a U.S. version of Fiat’s Panda, a highly successful minicar in Europe, and versions of the subcompact Alfa Romeo MiTo and the Alfa Romeo 147 to replace the Dodge Caliber compact vehicle. Alfa Romeo is a division of Fiat.

But none of those are expected before late 2010. Until then, Chrysler will depend on sales of vehicles like the Dodge Ram pickup and minivans.

“But I really do believe this Fiat deal is good for Chrysler because it’s plugging a hole exactly where there is a gap in Chrysler’s vehicle line-up,” Appel said.

The Associated Press contributed to this report.

Video: Closing sales for Chrysler dealers

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