Just over a decade ago, German auto giant Daimler bought Chrysler for $38 billion, an alliance that promised to reinvent the auto industry but instead ended in tears.
On Wednesday, Chrysler, bankrupt and downtrodden, got a new European boss and, along with it, what could be a last chance. After months of planning and negotiating, Italian automaker Fiat finally gained control of Chrysler, and its leader, Sergio Marchionne, took the chief executive position at the U.S. company as well.
The arrangement marks Chrysler's exit from bankruptcy, stripped of debt and with a cleaner balance sheet. The deal gives Fiat an initial 20% stake in the Auburn Hills, Mich., carmaker and the chance to eventually own it outright.
And it didn't cost Fiat a penny.
As an exercise in deal making, Marchionne's performance has been nothing short of masterful. But whether it made good business sense isn't certain.
In creating the world's sixth-largest carmaker, Marchionne is betting that he can pull Chrysler out of its sales nose dive on the force of the small, fuel-efficient vehicles Fiat excels at building. At the same time, he's hoping to expand Fiat's reach, bringing brands such as Alfa Romeo back to a market it abandoned years ago, and in doing so make the brand a global power.
"This alliance must be a constructive and important step toward solving the problems impacting our industry," Marchionne said Wednesday in announcing the merger. "We now look forward to establishing a new paradigm for how automotive companies can operate profitably going forward."
If it works, the Chrysler-Fiat alliance could serve to vindicate Marchionne's belief that such consolidation is the key to the future of the auto industry and show that his ability to turn a money-losing Fiat around was no fluke.
But if it fails, the results could be dire for both companies in the face of an economic downturn and fierce competition from still larger, richer automakers including Toyota Motor Corp., as well as agile, low-cost competitors from Asia.
"This is going to be a very tough road for them both," said Bruce Belzowski, associate director of the University of Michigan's Transportation Research Institute. "Do they have enough money and the right products, and can they do it fast enough? It could get very messy."
Chrysler, which has already received $8.6 billion in federal funding, will get as much as $6 billion more in financing as it exits bankruptcy, including $2 billion paid to creditors in exchange for forgiving their debts.
But if that money proves insufficient -- and with Chrysler losing $100 million a day, according to Treasury officials, and its U.S. sales down 46% this year, that's not hard to imagine -- the new alliance could have a problem.
In testimony before a Senate committee Wednesday, Ron Bloom, a key member of President Obama's auto task force, said the government did not plan to give any further aid to Chrysler or General Motors Corp. beyond the billions of dollars that have already been lent or committed.
"It is our belief that this will be the last trip to the well," he said.
In any case, the automakers insist they won't need it.
Under terms of the merger, Fiat must help Chrysler produce the smaller, more fuel-efficient cars that it sorely lacks and that some believe it needs to increase its sales.
For Fiat to increase its 20% stake to 35% -- the remainder is split between the U.S. government, the government of Canada and the United Auto Workers union -- it must help Chrysler produce a new gas-sipping four-cylinder engine in the U.S. based on an existing Italian-engineered motor used in models such as the popular Fiat 500.
It also must produce a Chrysler vehicle based on a Fiat platform within the U.S. that is capable of 40-mile-per-gallon fuel efficiency.
But Rebecca Lindland, auto analyst at IHS Global Insight, questions whether turning to fuel-saving small cars is the solution.
"This isn't what Chrysler customers have been buying, and there's no guarantee that's what they want to buy," she said, noting that Chrysler's strength has been in trucks and minivans.
The demand issue
There's also a branding problem. After nearly a year of negative headlines, Chrysler's name has been thoroughly dragged through the mud, and consumers are turning away from its vehicles faster than those of any other automaker.
A study released Wednesday by industry research firm AutoPacific showed that 58% of respondents believe that Chrysler should have been allowed to fail.
Americans "do not have confidence that government involvement will bring the cars and trucks they want to buy to showrooms, nor that these vehicles will be more fuel-efficient," said George Peterson, president of AutoPacific.
