After months of growing fears that Chrysler might not survive, the automaker's announcement Tuesday of an alliance with Italy's Fiat was seen as giving the Auburn Hills automaker a new lease on life -- if it can convince the U.S. government the arrangement makes Chrysler viable for the long term.
The deal, which is an agreement in principal with complicated details to be worked out, allows Fiat to increase an initial 35% stake in Chrysler to 55% in the future, according to a person familiar with the deal.
Chrysler Chief Executive Officer Bob Nardelli said the arrangement, which would give Chrysler the ability to make small cars and Fiat access to the U.S. market, could be completed by April.
Industry insiders greeted the news with guarded optimism, saying it was doubtful Chrysler could have survived without such an alliance. They were curious how the federal government, which has taken on a powerful new role in the auto industry, might react.
Word of the deal came on the day that President Barack Obama was sworn into office. The U.S. Treasury, which has been overseeing rescue loans to the auto industry, is in transition, with a so-called car czar yet to be named.
As word of the deal leaked Monday, Rep. Barney Frank, D-Mass., told CNBC that a Fiat partnership might force Chrysler to pay back its $4 billion in federal rescue loans early.
"It might well trigger a repayment," Frank said, emphasizing that it depended on how big a role Fiat might have.
Chrysler was working to make sure that didn't happen.
"The ownership structure by our various constituent groups will not be determined until the final restructuring plan is agreed to by all constituents and the U.S. Treasury," Chrysler spokesman Dave Elshoff said.
The deal could, in fact, be a way for Chrysler to argue to the government that it has a plan to be viable and that it should receive another $3 billion in government loans, analysts said.
Auto industry insiders said the arrangement between the two automakers was symbiotic and could help Chrysler's case more than hurt it.
In need of a partner
While both companies have a checkered past with similar tie-ups -- Chrysler with Daimler; Fiat with General Motors -- Chrysler and Fiat each need a partner to save money and increase global reach.
"This is really a good marriage and makes a lot of sense," said Aaron Bragman, an analyst with IHS Global Insight.
"There is very little product overlap, there is very little market overlap," he said. "Going forward, I think you're looking at a much more rounded company that can provide the type of things global markets want."
Since the breakup 18 months ago of DaimlerChrysler AG -- a merger initially billed as a marriage made in heaven -- Chrysler has languished, its sales plummeting in last year's industry slump.
"I don't think they could have been able to survive without a deal like this," Bragman said of Chrysler.
UAW President Ron Gettelfigner showed support Tuesday for the deal, saying it could save U.S. jobs.
Nardelli said the agreement "creates the potential for a powerful, new global competitor."
"The alliance would help sustain Chrysler's product development, manufacturing and sales operations here in the U.S., which further supports our viability plan, and preserves American jobs," Nardelli told employees in a memo obtained by the Free Press.
In addition to Chrysler's use of Fiat's small car technologies, the two automakers would have access to each other's plants and dealer networks.
Viability uncertain
That Chrysler has needed a partner to survive has been an overriding theory both in Detroit and Washington.
"My expectation is the feds are looking for what can make Chrysler as viable as possible as quickly as possible," said David Cole, chairman of the Center for Automotive Research.
Fiat did not commit any cash to the deal and made no vows to do so in the future, raising questions about how much the deal would help Chrysler survive what many expect to be a brutal year ahead.
"Chrysler's midterm earnings power makes the ultimate determination of its viability uncertain, and hence may still lead to it being denied government aid," said Barclays Capital auto analyst Brian Johnson in a note to investors.
The deal includes assistance from Fiat management in developing Chrysler's viability plan, which was a requirement for Chrysler's government loans.
Fiat, led by Sergio Marchionne since 2004, appears to be on the other side of its own restructuring. After a series of losses in the early part of the decade, Fiat reported a $4.5-billion profit in 2007.
But alliances between automakers don't always work, said Robert Schulz, a credit analyst at Standard and Poor's. "The industry track record of these sorts of alliances is mixed, with fewer successes than disappointments," he said.
Fiat's failed partnership with GM is just one example.
GM paid Fiat $2 billion to exit its partnership with the Italian auto company. The two teamed up in 2000 for a share swap and joint ventures on powertrain technologies and purchasing. The deal gave Fiat the right to sell the remainder of its automotive unit to GM.
Beyond finalizing the alliance, there are several other hurdles that stand in the way of bringing Fiat vehicles to the U.S. market, including U.S. safety requirements.
Michael Robinet, vice president of global vehicle forecasts at CSM Worldwide, doesn't see a Chrysler small car using Fiat technology hitting the U.S. market for at least two years.
"Don't expect to be able to buy a Fiat vehicle tomorrow at your Chrysler dealership," Robinet said.
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