Fiat-Chrysler still has a long way to go to compete with industry's top names

January 2, 2014

Fiat SpA's agreement to take 100-per-cent control of Chrysler Group LLC for $4.35-billion (U.S.) will create the world's seventh-biggest auto maker and solidifies the reputation of Sergio Marchionne, the Italian-Canadian chief executive officer of both companies, as the industry's top deal maker.

What it doesn't do is change the market conditions and lack of new products that have hobbled Fiat in Europe, where it loses money. Nor does it guarantee the new group's success against Toyota, Volkswagen, General Motors and the other industry giants, which can devote tens of billions of dollars to product development programs as the technology arms race intensifies.

But analysts consider the merger a good start, one that may be followed by another deal by Mr. Marchionne, who is considered one of the most aggressive and opportunistic auto bosses. On their own, Fiat and Chrysler lacked the heft to challenge the market leaders, even if they had been sharing technology since 2009, when Fiat formed a partnership with Chrysler as it emerged from Chapter 11 bankruptcy protection.

"In the life of every major organization and its people, there are defining moments that go down in the history books," Mr. Marchionne said in a statement after Fiat agreed to buy the 41.5 per cent of Chrysler held by the health care trust, known as VEBA, that is controlled by the United Auto Workers. "For Fiat and Chrysler, the agreement reached with VEBA is clearly one of those moments. The unified ownership structure will now allow us to fully execute our vision of creating a global auto maker."

The deal will see VEBA receive $3.65-billion in cash for its Chrysler stake, $1.9-billion of which will come from Chrysler and $1.75-billion from Fiat. After it closes on Jan. 20, the trust is to receive another $700-million over three years. The whole package values Fiat-Chrysler at about $10.5-billion.

The buyout is especially good news for ailing Fiat because Chrysler is on the hook for the bigger portion of the purchase price. Fiat shares soared 16.4 per cent in Milan trading Thursday, taking their one-year gain to 78 per cent.

In a note, Bernstein Research analyst Max Warburton said: "This deal is more favourable to Fiat than the market expected, and the deal successfully secures Fiat's operational and financial future."

The Fiat-Chrysler merger came close to failing because of a deadlock over the value of VEBA's holding. Mr. Marchionne reportedly valued it at $3-billion while VEBA was holding out for $5-billion.

When a price could not be agreed, VEBA decided an initial public offering of Chrysler shares should be pursued, allowing the market to determine the company's value. But an IPO would have destroyed Mr. Marchionne's vision of creating a single transatlantic company, one with a shared balance sheet, assembly plants, auto platforms and technologies.

To get his way, he had to raise the price considerably, although it was still less than health care trust had wanted.

While Fiat will own all of Chrysler, it is Chrysler that seems destined to emerge as the dominant player. That's because Chrysler, whose survival was in doubt only five years ago, is in far better shape. Its overhauled Jeep Cherokees and Dodge Rams have been hot sellers. The company's sales rose 9.3 per cent in the first 11 months of 2013 (Fiat's tiny American market share fell). In the United States, the Ram pickup truck is the fourth-best-selling vehicle.

While strong in Brazil, Fiat is going nowhere in the highly competitive European market, where car sales are still slow as the economic recovery proves weak and uneven. Fiat's core Italian market is fading away and its high-cost Italian factories are running well below capacity. In Europe, it's in seventh position, with a market share of just above 5 per cent – insignificant compared with Volkswagen's 26 per cent.

Chrysler's resources will be used to prop up Fiat and its Italian plants will try to find new lives as makers of expensive, low-volume cars, such as Jeeps for the European market and Maserati SUVs and Alfa Romeos for the export market. The experiment may not work as the mighty Germany auto companies go from strength to strength. In the end, Fiat may emerge as rather small subsidiary of a U.S.-based group that will carry only the Chrysler name.

In spite of Chrysler's resurgence, the Fiat-Chrysler group has a long way to go before it can compete with the industry's top names, leading to speculation that Mr. Marchionne's global empire building might resume once Fiat and Chrysler operate seamlessly.

In 2008, Mr. Marchionne said that only the very biggest auto makers will survive. Shortly thereafter, he tried to buy Opel, GM's European division, a move that was taken as an admission that Fiat, even with Chrysler at its side, was too small for long-term success.

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