Chrysler Might Have a Future Yet

First, the bad news: Chrysler lost $3.78 billion during the not-quite-seven-months of its post-bankruptcy existence last year and another $197 million during the first quarter of 2010.

That's a big loss, though hardly an unexpected one -- Chrysler's sales in recent months have best been described as "moribund," declining even as the company's rivals see double-digit percentage gains.

But there are some signs of hope emerging -- thanks in no small part to Fiat, Chrysler's new owner.

The positive influence of Fiat
Chrysler isn't really "owned" by Fiat, at least not yet -- the company's majority owner in the wake of bankruptcy continues to be a UAW health-care trust, with a 67.7 percent stake. The U.S. and Canadian governments combined hold a bit over 12%, and Fiat has the remaining 20%, acquired for "free" as part of the bankruptcy settlement after Fiat agreed to share technology and management.

Fiat can raise that stake to 35% if certain targets are met, and the Italian industrial giant has wasted no time identifying and exploiting synergies between Fiat's auto group and the Detroit automaker. In a briefing on Wednesday, Fiat CEO Sergio Marchionne and his staff unveiled a five-year plan for Fiat that includes extensive Chrysler involvement -- the companies will share platforms, manufacturing, and distribution, and have already begun rationalizing such functions as purchasing, identifying the best practices on each side and adopting them to cut costs in both Turin and Detroit.

This is a very different arrangement from the one Chrysler had with former owner Daimler (NYSE: DAI  ) , where the reluctance to share Mercedes parts with Chrysler -- or incorporate Chrysler parts or expertise into Mercedes' cars -- eliminated many potential synergies. Marchionne envisions Chrysler as an extension of Fiat, providing large-car and light truck expertise, some advanced technology -- Chrysler is developing the electric version of the Fiat 500 small car, for instance -- and a vast, ready-to-go North American manufacturing and distribution base for both Chrysler and Fiat products.

The 6-million-car man
The fact is, Marchionne sees the successful integration of Chrysler as essential to Fiat Auto's survival. The company expects that annual sales of about six million vehicles are the "minimum required to be a competitive global player". Not coincidentally, that number is the Fiat/Chrysler mashup's 2014's sales target, one that will require Chrysler brands to sell more than double the 1.3 million they sold in 2009.

To get there, a significant expansion is planned, with Fiat brands coming to the U.S. and Chrysler expanding globally. Marchionne said on Wednesday that Fiat Group will add 1,600 European dealers over the next five years, with some 950 of those being Chrysler dealerships. The Chrysler and Lancia brands will effectively be merged, with a single -- expanded -- line of cars being sold under different brands in different markets. And production of all brands will be spread around the world to make the most of manufacturing capacity -- your new Alfa Romeo could be made in Canada, and your neighbor's Dodge in Italy.

It all sounds impressive. But will it work?

Can they pull it off?
Marchionne has already worked wonders with Fiat itself -- turning around major losses, improving sales and quality, stealing European market share from key competitors like Ford (NYSE: F  ) and Toyota (NYSE: TM  ) , and pushing into new markets such as India, where the company has a joint venture with Tata Motors (NYSE: TTM  ) . That history will serve him well with Chrysler, which clearly needs an industrial-strength shot of the same medicine.

But while Wednesday's presentation promised great things in coming years, Chrysler is still in pretty rough shape today -- and will need to hang in there for a while yet, as new products won't start to arrive in earnest until late this year. The company's ability to tread water has been something of a question mark, but a look at Chrysler's financials gives some reason for hope: Losses have narrowed, thanks to those Fiat synergies, and the company has over $7 billion in cash to keep the lights on and the product development flowing until revenues pick up.

So can they really do it? On the surface, Fiat appears to have been a good match for Chrysler -- the Italian company is eager to find and make the most of synergies, its product strengths and market position fit together nicely with Chrysler's, and the pooled manufacturing and distribution resources provide what seem like great opportunities for expansion.

But there are a lot of "ifs" here, starting with a big one: Will Americans buy Fiats and Alfas? Fiat's quality is said to have improved greatly in recent years, but it was atrocious before, and that reputation lingers. Chrysler, for its part, hasn't done much better in recent years, and the American market is fickle about quality. Will these new Alfas stand up to American-style side-by-side comparisons with quality leader Honda (NYSE: HMC  ) , which is likely to be a key competitor here? Will they even be in the ballpark?

Certainly they have a chance, a more credible one than it seemed when Fiat entered the picture during Chrysler's freefall last year. But it's still something of a long shot. At this point, I wouldn't bet heavily on their success -- but I wouldn't count them out.

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Fool contributor John Rosevear owns shares of Ford. Ford Motor is a Motley Fool Stock Advisor selection. Try any of our Foolish newsletters today, free for 30 days. The Fool has a disclosure policy.


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  • Report this Comment On April 22, 2010, at 4:16 PM, jesterisdead wrote:

    Please. Chrysler already failed once, is owned nearly 70% by the US government and Fiat (Fix It Again Tony!) is a failure in the US automotive market. Possibly gaining some efficiency in operations is not going to help them do the #1 thing that they need to do: sell cars. Their current offerings still suck and Fiat isn't going to bring anything revolutionary to the table. The only future in store for Chrysler is possibly another taxpayer financed bailout.

    ...and I own a Jeep! Maybe that's why I hope Chrysler quietly disappears... Let capitalism rule, Fool.

  • Report this Comment On April 22, 2010, at 4:28 PM, karl042 wrote:

    jesterisdead, I know it is fun for some to wish ill on others, but at least read the article you are commenting on. The article states the US and Canadian governments and Fiat together only own 32% of Chrysler, not even half the percentage you complain about.

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