Chrysler: No Roman Holiday Ahead

The carmaker has 30 days to hammer out an alliance with Italy's Fiat. But owner Cerberus will lose in any case, and skeptics predict bankruptcy

By David Kiley

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.