Fiat's Long Shot On Chrysler

Fiat is about to buy another 16% of Chrysler which would take its total stake to 46%. The deal would involve a payment of $1.5 billion, which does not value the No.3 US car company at very much. Fiat is likely to want a majority of Chrysler. The UAW and US government are likely to accommodate the Italian company. The union got 55% of Chrysler as part of the restructuring. The union has witnessed the firm’s fortunes falter since Lee Iacocca left and then Daimler AG took and then dumped control of the company.

Chrysler’s domestic market share is just above 9%. Its models have only been updated recently, which means it trails Ford (NYSE: F) and GM (NYSE: GM) by at least a year in introduction of new vehicles. One of Chrysler’s flagship products is Jeep. Gas prices have hurt its sales and are likely to do so as is the case with all SUVs.

Chrysler also faces a surge in sales of Hyundai vehicles in the US.  The South Korean firm now has nearly 5% of the market and should pass Nissan and Chrysler in units sold later this year or next. Hyundai’s sales rate in America has been extraordinary and there is no reason to think it will end soon.

Chrysler’s earnings are also under long-term pressure because it has virtually no sales in China, the world’s largest car market. The American car market is growing slowly. The future of the industry is in China, South America, Russia and India.

Chrysler is also gambling that its stablemate in car sales–Fiat–can find a market in the US. Fiat gets to join VW, Hyundai, Mazda, and Nissan–all of which hope to rely on American sales for much of their global growth. Fiat has had no presence in the US for decades. A gamble that this will change is a long one. Fiat would need, among other things, a line-up of hybrid vehicles to drive American sales.

Fiat and Chrysler assume that they are better off together than they are apart. For that to be successful, synergy, a favorite term of business school professors and management consultants, will have to work. The two companies would need to realize cost savings,  the advantages of the Chrysler dealership system, product development, and manufacturing capacity to make it a viable partnership. Chrysler tried and failed to do that following the Daimler merger and it didn’t work.

Fiat will find it easy to buy more of Chrysler and perhaps the whole company. The UAW know that it is a mistake to give a sucker a break.

Douglas A. McIntyre