Fiat Controls Chrysler -- Now What?

One year ago, if you had asked auto industry analysts how to solve Chrysler’s chronic problems, we doubt that one of them would have said “Fiat.” Even though the venerable Italian auto company has reinvented itself in this decade, improving its status from laughingstock to midlevel player, it is still not looked upon as an industry leader. In fact, there are those close to the European market who would tell you that the success wrought by Fiat CEO Sergio Marchionne has largely been done with mirrors and puffs of smoke. Now, Fiat will be tested in the high-stakes U.S. market with the white-hot light of the media glaring down, interest piqued by the fact that none other than popular President Barack Obama anointed Fiat as the company that could pull a bankrupt Chrysler out of the woods.

While some might harbor lingering doubts of Fiat accomplishing with Chrysler what Daimler was unable to, one has to be impressed with the management moves Fiat made immediately after assuming control of Chrysler courtesy of the bankruptcy court and the U.S. Treasury Department. Among the best of those moves, in many analysts’ estimation, was retaining auto industry veteran Jim Press and giving him further latitude in directing American operations. Former head of Lexus and Toyota in the United States, Press has won praise for both his decisiveness and his personable nature -- two excellent qualities in a leader.

Analysts were also impressed that Marchionne moved immediately to place profit-and-loss responsibilities on individuals who will lead the Chrysler, Dodge, Jeep and Mopar brands. This should give clarity to the business that was harder to determine under the previous structure. As Marchionne is well-aware, the acquisition was the easy part; now, making Chrysler a functioning and profitable arm of Fiat is the challenge.

Questions about the Chrysler-Fiat marriage linger, however. Now that Chrysler has been married off to Fiat, the result of the rapid maneuverings of the Administration’s auto industry task force, it might seem to many that the Fiat-Chrysler hookup was the only option. That is how the administration positioned it to the press. And to be fair, as Chrysler’s situation deteriorated last summer and fall, there were few suitors eager or even willing to take on Chrysler’s big losses and dwindling market share in a period of economic turmoil. But there was one potential suitor, which was having troubles of its own, that was involved in an on-again-off-again romance with Chrysler: General Motors. And a GM-Chrysler merger was among the hot topics in the automotive rumor mill last spring.

Many analysts were cool to the idea because they had a difficult time figuring how cash-strapped Chrysler and cash-strapped GM could be worth more together than they were worth individually, but that was looking through the lens of a traditional, privately financed merger. Had $50-60 billion in government financing been thrown into the equation -- as has now been done with the Chrysler and GM bailouts -- the analysts’ thinking might well have been different.

An acquisition of Chrysler by GM had the potential to push GM’s market share back up to well above the 30 percent mark. GM would have acquired the Jeep business and Chrysler’s popular minivans, filling holes in its model lineup. Further, many analysts believe that combining the GM and Chrysler cultures would have been a much easier task than the shotgun marriage between Chrysler and Fiat. After all, Chrysler already suffered through a marriage with another European company that turned out badly. It is hard to imagine that a combined Chrysler-Fiat won’t have growing pains and a period of adjustment.

So did the automotive task force make the right call in picking Fiat as Chrysler’s partner while leaving GM to fend for itself? We’ll never know for sure. But what we do know is that all three companies still have the fight of their lives ahead of them.