Auto Bailout

Chrysler: No Roman Holiday Ahead


General Motors (GM) lost its CEO on Mar. 29 as the price for a continued government lifeline. A day later, it became clear what Chrysler's owner, Cerberus Capital Management, will give up: its 80% equity stake in the carmaker.

Chrysler has 30 days to cut a deal with Italian automaker Fiat (FIA.MI). The Obama White House said on Mar. 30 it has determined that Chrysler's only avenue of survival is though an alliance with another automaker. Under any rescue plan, an Administration official said, Cerberus will have to forfeit its Chrysler stock, though it will retain control of Chrysler Financial, the carmaker's finance arm.

The White House auto industry task force said Chrysler's restructuring plan submitted in February failed to convince the panel that it can be a standalone company. If Chrysler cannot strike deals with banks, which hold $6.8 billion in secured debt, and the United Auto Workers union, which is owed $8.8 billion for future health-care obligations, and reach an alliance with Fiat, the U.S. Treasury will cut off Chrysler's financial support.

Jeep, Dodge Ram Are Valuable Assets

The automaker would then most likely enter Chapter 11 bankruptcy, with its more valuable parts being sold off. Most analysts agree that Chrysler's Jeep brand, its Dodge Ram pickup, and its minivan business are the most valuable assets aside from the book of auto loans at Chrysler Financial.

If Chrysler management and Cerberus can satisfy the White House auto task force in 30 days that creditors, the union, and dealers have agreed to adequate concessions, the government will grant $6 billion more in loans. That would help the automaker realize its alliance with Fiat and thus, the theory goes, save tens of thousands of jobs at Chrysler and its suppliers.

Chrysler CEO Robert Nardelli said Mar. 30 that the company had advanced with Fiat to a formal agreement, and that the company is progressing to something that will meet White House approval. In a prepared statement, Nardelli said: "By providing Chrysler with product and platforms, technology cooperation, and global distribution, Fiat strengthens Chrysler's ability to create and preserve U.S. jobs; gives U.S. consumers more choices for environmentally advanced vehicles; gives its dealers more of the products they need to be successful; helps stabilize the supplier base; and allows Chrysler to pay back government loans sooner."

No Consumer Reports Cars

That may be too rosy a scenario, though. In its refusal of Chrysler's existing restructuring application, the Obama task force noted the company's woeful record for product quality, as measured by J.D. Power & Associates and Consumer Reports. The Obama team also pointed to Chrysler's heavy spending on incentives to move unpopular vehicles and its lack of flexible manufacturing plants.

"While the company has made meaningful changes to its cost structure in the last few years, the combination of a fundamentally disadvantaged operating structure and a limited set of desirable products make standalone viability for the business highly challenging," the White House report said.

Chrysler received a $4 billion federal loan in December and was seeking $5 billion more. The Treasury Dept. will float an additional unspecified sum to Chrysler in the next 30 days to keep it operating until the final decision over more funding is made on Apr. 30.

Bankruptcy Is a Bargaining Chip

The threat of bankruptcy and the White House's clear willingness to allow Chrysler to fail may bring banks and the union to the negotiating table to take a haircut on Chrysler's debts. "There is a lot of unknown risk in what they will get in the kind of bankruptcy being contemplated," says bankruptcy attorney Douglas Bernstein of law firm Plunkett Cooney.

In Chapter 11, the government, bank creditors, and the union would all wind up with much less than what the automaker owes today.

Fiat so far has not pledged any funding to Chrysler, nor is it positioning itself to be responsible for any of the company's debts. Instead, it is looking to barter the transfer of small-car technology to Chrysler in exchange for an equity stake.

Fiat Brings Small Cars

The White House said Monday it has hopes for a Fiat agreement to preserve jobs, but it is demanding changes to the original deal the two companies cut. According to executives familiar with the negotiations, Fiat's stake could be as low as 20%, down from a initial share of 35%, possibly rising to 55% down the road. But before Fiat would be allowed to increase its stake, Chrysler would first have to pay back U.S. bailout money.

Fiat would bring small cars like the Fiat 500, small-car engineering platforms, and a family of small engines to Chrysler that will help the automaker meet stricter fuel-economy regulations. Chrysler's Nardelli says the technology it will receive is worth $8 billion to $10 billion. Chrysler is top-heavy with trucks and sport-utility vehicles, and hasn't the money to develop enough small cars on its own to meet the new standards.

But while Chrysler's Nardelli and Fiat CEO Sergio Marchione have been talking about enormous synergies from Fiat leveraging Chrysler's distribution network, and Chrysler getting Fiat's small-car and engine technology, success does not live on paper. There were to be enormous synergies between Mercedes-Benz and Chrysler after Daimler-Benz purchased Chrysler in 1998. The clashing cultures of two very different companies made that impossible.

"Fiat in a Dodge Blanket"

Indeed, there are plenty of skeptics who doubt that a Fiat alliance will be enough to make Chrysler a viable standalone company. "Fiat has small cars that Americans were interested in when gas prices were high, but right now there is limited demand for these cars," says Jeremy Anwyl, CEO of Edmunds.com, the automotive research Web site.

Fiat has little name recognition in the U.S., notes auto industry consultant Daniel Gorrell of AutoStrategem of Tustin, Calif.

"We have seen these sharing ventures before, and consumers have been very cool to vehicles that are built and or designed by one company and sold by another," says independent marketing consultant Dennis Keene. "How many car buyers are apt to pass up Toyotas, Hondas, Fords, and Chevys to buy a Fiat wrapped up in a Dodge blanket?"

Kiley is a senior correspondent in BusinessWeek's Detroit bureau.

David Kiley is a freelance writer based in Ann Arbor, Mich.

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