The Chrysler-Fiat Marriage.Will It Work?

After a very brief courtship ,Fiat and Chrysler announced earlier this year that they had reached a deal under which Fiat will acquire 35% Stake in Chrysler, the ailing U.S. automaker.It would seem at first sight that this may mark the end of Chrysler's troubles, but it is not so.Under the deal Fiat is not bringing in any money into Chrysler. In return for its stake in Chrysler it will just supply its latest fuel efficient technology to it.Fiat plans to convert a couple of Chrysler's U.S. factories to producing Fiat's small and medium sized vehicles. It's dealers worldwide will also sell Chrysler cars besides its own vehicles. In theory at least this should be a big plus for Chrysler which has a limited presence in overseas markets. Fiat argues that this will not only strengthen Chrysler's product range which is presently loaded in favor of trucks and SUV's, but also increase its global sales.

This marriage seems to have the blessings of the Obama administration,most probably because there are no other suitors for Chrysler. As a gift the government will give billions in fresh loans to Chrysler.It has also persuaded its major creditors to write down the value of their loans and accept about 29 cents to the dollar instead of trying to recover more by auctionong off the whole company.This has cleared the way for a sale in which Chrysler will be divided into two, with the good parts going to Fiat and the unviable parts being sold off.

The only question that now needs to be answered is, will it work? Fiat's exposure to the U.S. market and U.S. automakers is not new. It licensed its first plant in the U.S. in 1910 and its cars fetched a premium. This plant was shut down when theU.S. joined World War II in 1917. Later it again entered the U.S. market but withdrew in 1989, facing complaints over quality and competition from Japanese vehicles.GM acquired a stake in Fiat in 2000 with an option to purchase the entire company. In case GM chose not to buy out Fiat it had to pay a penalty of $2 billion! GM chose to pay the penalty and dissolved the agreement with Fiat in May 2005. Now Fiat is saddled with a car company that is constantly losing market share. Fiat seems to think that it is in a win-win situation as it is not paying cash for Chrysler and is only bringing in technology,besides spending time managing it. But car companies all over the world are losing money and closing plants.Fiat's introduction of a low volume niche product in the U.S., even if successful against Japanese and other American cars, is unlikely to make much of a difference to Chrysler's fortunes. Unless a miracle happens the marriage will last only as long as the U.S. government is willing to fund Chrysler.