Fiat's Sergio Marchionne declared last month that the immediate prospects for the car industry were so dire that only big producers, with sales of more than 5.5 million a year, would remain in the long term -- and that Fiat, despite its recent renaissance, was not even halfway there.
Then he took a big, bold step intended to ensure the Italian firm's survival by forging a strategic alliance with Chrysler, which is on the edge of extinction.
Chrysler had just been saved from immediate bankruptcy by a $4 billion emergency loan from the U.S. government. But it must produce evidence of a plausible recovery plan by Feb. 17 to avoid having to pay the money back in late March. Only then can it get hold of the further $3 billion it says it needs, without which the Fiat deal will not go ahead.
With sales in December falling by more than 50 percent year-on-year, a nearly empty product pipeline and a damning verdict from Consumer Reports about the quality of its vehicles, Chrysler had run out of options.
Under the terms of the deal, which is still only a memorandum of understanding, Fiat would take a 35 percent stake in Chrysler in exchange for supplying it with its highly fuel-efficient powertrain technology. Fiat also would make available to Chrysler its small and medium-sized vehicle platforms to be rebadged or reskinned in North America as Chryslers.
And it would help Chrysler in overseas markets, such as Europe and South America, where its presence is minimal. Fiat dealers, for example, would sell Jeeps in Brazil and Italy. In the longer term, the two firms would cooperate on a new rear-wheel-drive, large-car platform, for use by Alfa Romeo as well as Chrysler. Critically, Fiat would send in a hit squad of executives who know a thing or two about turning round ailing carmakers.
With Fiat's help, Chrysler might just be able to convince a skeptical administration that it has a plan to rectify three of its most glaring weaknesses: an over-reliance on gas-guzzling trucks and sport-utility vehicles, almost total dependence on the North American market and a perilously thin senior management team.
What's in it for Fiat
What Fiat would get in return, apart from its "gifted" equity stake (which currently has a book value of precisely zero), is a cheap bridgehead into America, a market it abandoned more than 20 years ago.
One or two Chrysler factories would be converted to build the hot new Fiat 500 and two new Alfas, to be sold by Chrysler dealers. With a combined production capacity of more than 4 million vehicles a year, Fiat also would get economies of scale for its platforms, powertrains and electrical components.
With an option to increase its stake in Chrysler to 55 percent, the deal is potentially transformative for Fiat. And if things do not work out and Chrysler slides into bankruptcy, Fiat will have no liability exposure but will be in a good position to pick up the assets it needs for its North American strategy at fire-sale prices.