Fiat is very near an agreement with Chrysler to take a piece of the No.3 US car company. The deal will need the blessing of the Treasury Department which is supplying Chrysler with financial aid.The question is why would the European auto firm bother?

Fiat is taking a beating in Europe, but is will probably elect to take a 35% stake in Chrysler in exchange for converting one of the US firm’s big plants to build smaller cars. Fiat will also negotiate for the right to buy a total of 55% of Chrysler at a later date.

According to The Wall Street Journal, "Italy’s Fiat SpA and Chrysler LLC are poised to announce a partnership as soon as today in which Fiat could take control of the U.S. company’s operations "

Buying part of Chrysler would be suicide. Based on estimates from Ford (F), the US car market will yield below 11 million vehicle sales this year. That is down from 17 million three years ago. It is safe to say that no company, US or foreign based, is making money in the domestic market.

If Fiat wants to look beyond the current recession, it is faced with Chrysler’s falling market share. Its unit sales dropped 53% in December against 35% for the entire US market. Fixing the fact that Chrysler has a line of cars that don’t sell well could take two of three years, if it can be done at all.

Fiat faces another hurdle, this one nearly insurmountable. The small car market in the US is dominated by Toyota (TM), Honda (HMC), Nissan, and certain models made by Ford and GM (GM). There is not enough room for another car company to have even modest sales in the segment unless it can take market share from the incumbents. That has to be a long shot.

Otherwise, the idea of Fiat buying into Chrysler makes sense.

Douglas A. McIntyre

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