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Indego / IndeGo Forum / Fiat and Chrysler - Third Time Lucky?

Fiat and Chrysler - Third Time Lucky?

 

Tuesday, 20 January 2009 16:43

The announcement that Fiat is in talks with Cerberus to form an alliance with Chrysler is a significant step towards the sort of consolidation that Sergio Marchionne said would be required back in December last year. But what are the chances of success?  Both have been in transatlantic alliances before - Fiat with GM (and almost with Ford before that), Chrysler through their acquisitions of Simca and Rootes, then as part of Daimler Chrysler.  Will this be third time lucky?

There is no question that without an automotive partner soon, Chrysler is doomed to fail. Turning round an ailing car manufacturer is not something that can be addressed by financial engineering, and the downturn has demonstrated how quickly cash can be sucked out of a car business when things go wrong. When the Chrysler sale to Cerberus was announced in May 2007, most observers – including myself – thought that the likely exit would be through a sale to a Chinese manufacturer such as Chery with whom Chrysler had planned to jointly develop and market small cars. However, that plan has now been abandoned, and Chery and the other Chinese manufacturers have domestic problems to address which reduces their interest and ability to tackle expansion into tough international markets. Now Chrysler is at least heading for the rocks, if it has not already run aground.

 
Fiat Auto has been characterised as a hugely successful turnaround story over the last 3 years since Marchionne took over. From my own experience, I know that you can get an auto business heading in the right direction quite quickly, but that does not mean it will keep heading that way without constant attention and reinforcement. Fiat does not yet have the strength in depth that characterises a company like Toyota or Volkswagen. Products are just coming through that were approved under current leadership, and the organisation is still evolving as controls and processes are put into place to institutionalise what is needed to achieve sustained success. Fiat Auto is still fundamentally a domestic Italian business with some successful operations in South America. It does not have the resources or experience required to address the underlying issues in Chrysler, which are not just limited to credit availability and a lack of small cars.
 
The discussions look likely to lead to an acquisition and change of management control, if not immediately, then over a relatively short time. Doing less than this will not yield a sustainable solution for either party, as simple production, sourcing or distribution deals will only provide tactical fixes. The Daimler-Chrysler period showed that even 9 years of heavy management input from a well-resourced partner could not address the structural issues that made Chrysler the smallest and weakest of the Big 3 for decades.  The Renault Nissan alliance is a partnership between two relatively strong companies, and initially seemed to be a great solution to deliver mutual benefit whilst recognising cultural differences and a degree of management independence.  However that was when global markets were booming, and it seems much less clear whether Renault-Nissan can make it through the current downturn without some changes to the alliance model.

The fit between Fiat and Chrysler in terms of product and geography is excellent.  They share similar problems and need similar fixes.  This - unlike the Daimler Chrysler "merger of equals" - might actually merit that tag despite the financially dire position of Chrysler today.  An integrated non-partisan management team could really start to make something great out of the component parts of the business.  Some Italian design flair for Chrysler and Dodge product?  Comprehensive European distribution for Jeep?  Excellence in cross-brand platforms and accelerated product development processes?  This and more is potentially available.  However, an arms-length alliance or a Turin-dominated takeover of a US company will fail, and ultimately take both parties down.  The location, structure, make-up and mandate of the top management team will be key to success.  A neutral HQ location and a "best of the best" top team following an integration mandate to push forward with creating a new business, whilst leaving others to firefight the old, will be key to maximising this opportunity.
Comments (1)
Fiat/Chrysler alliance
1 Tuesday, 20 January 2009 19:24
???

Your analysis put more evidence and clarification about what I tried to put in short at the "just auto" blog. I fully agree with your comments. Depending on the terms and conditions of such a deal, both companies may benefit. The right vision under current and future conditions on the auto-industry will be the key for both companies to set proper flexibility on their strategies and actions to follow if both parties are to succeed.

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