The announcement of a “memorandum of understanding” between troubled U.S. automaker Chrysler and European car manufacturer Fiat throws a new twist into the continuing saga of the plight of the Big Three. The offer from Fiat, injection of management experience and new, fuel-efficient technologies and car models in exchange for a 35 percent equity stake, is a possible lifeline for Chrysler, but might be a classic example of too little too late.
Under the terms of the agreement, Fiat won’t actually contribute any cash to Chrysler, something the company needs above all else right now. Instead, Fiat will provide its fuel-efficient powertrains and award-winning models, such as the Fiat 500 and Panda, rectifying one of Chrysler’s major weaknesses: an over-reliance on SUV’s and large, fuel-thirsty sedans. Crucially, Fiat will also fly in a team of crack managers who turned around Fiat itself a few years ago, transforming it from an expensive and out-of-fashion automaker on the verge of bankruptcy (sound familiar?) into a stylish and high quality brand in a little more than two years.
This improves Chrysler’s long-term prospects immensely and might be enough to persuade Congress to release the $3 billion in bridge loans. Congress has held these in escrow until Chrysler can persuade them that they have a viable turnaround plan. An unsurprising caveat from Fiat is that the deal is dependent on Chrysler receiving this loan.
However, even with the $3 billion, it’s not certain whether Chrysler will be able to remain solvent through 2009, while it retools to produce Fiat’s models and a few updated ones of their own. Production has come to a halt for one month at all plants, while management compiles the plan for Congress. Since new orders from dealerships have dropped off a cliff, Chrysler finds itself in a dire revenue crunch.
Chrysler finds itself in a race against time. Chairman Robert Nardelli says they have identified a potential $4 billion in cost-saving measures but didn’t elaborate further. Other serious questions remain. How fast are they burning through the first $4 billion loan from Congress? How long can they remain dormant without the United Auto Workers becoming restless? I would hazard a guess that Chrysler will have a fire sale on its current inventory to generate the desperately needed revenue, but will customers buy?
The deal represents a nice opportunity for Fiat. If Chrysler can turn itself around, Fiat gains an easy bridgehead into the North American Market, something it has wanted for several years. On the other hand, if Chrysler falls apart, Fiat can pick up the pieces at bargain basement prices.
As a petrolhead, I welcome the deal. I could care less about Chrysler as a brand or its vehicles, but with Fiat’s re-entrance into North America, it brings its Alfa Romeo brand as well. This means we could be seeing not only the stylish and well-built Fiat 500’s on the streets by early 2011, but we also might catch a glimpse of the lethally beautiful Alfa Romeo 8C, hailed by some as the most beautiful car ever built. Here’s to hoping.
