In 'interesting alliance,' Chrysler fills hole with Fiat

At first it doesn't seem to make sense — Italian automaker Fiat Group, known in the U.S. for unreliable but sporty cars, acquires 35% of Chrysler in exchange for a promise to share its car designs, but no cash.

Private U.S. investment company Cerberus Capital Management owns 80.1%. Former owner Daimler still holds 19.9%, a stake it has values on its books as $0.

But the experts think there could be something to the deal announced Tuesday. "It's an interesting alliance. We like it," says Rebecca Lindland, auto analyst at IHS Global Insight, a consultant.

"It gets Chrysler access to (Fiat's) smaller cars, fuel-efficient powertrains. It helps the long-term viability," she says, though the deal "won't do anything in the short term, in 2009."

It could supply small cars Chrysler badly needs.

"It fills a hole in that product line. If nothing else, it's going to generate showroom traffic," says Paul Melville, a principal at consultant Grant Thornton who specializes in auto dealers. "If I'm a Chrysler dealer, I can see a glimmer of hope,"

The Chrysler-Fiat linkup "seems to have minimal downside risk for both sides," because it probably will make the U.S. government more eager to lend bailout dollars to Chrysler, says Himanshu Patel, auto industry analyst at JP Morgan, in an alert to clients.

Most automakers are struggling because of worldwide recession and the huge drops in auto sales that has brought. Chrysler is surviving on a $4 billion federal loan and will ask for more next quarter.

U.S. auto sales were down 18% last year and are expected to fall another 22% this year to 10.3 million, IHS Global Insight says in a dire prediction not disputed by automakers. Patel says that if sales continue fall and the feds balk at more loans, Fiat could play hardball: Let Chrysler file for bankruptcy protection, "then acquire select Chrysler assets (e.g., Jeep) without having to inherit Chrysler's burdensome dealer network."

If the Chrysler-Fiat alliance survives, Lindland thinks that a Chrysler-built version of the Fiat 500 mini-car could be the first model on sale in the U.S. She thinks that might be the only Fiat vehicle, but foresees several U.S.-market models from Fiat's Alfa Romeo brand: Alfa 159 and 169 sedans, rivals to BMW 1- and 3-series cars; hardtop and convertible versions of a sports car; GTX, a small crossover sport-utility vehicle.

Citing a reference to Fiat quality when it previously sold cars here, ending in 1987, she says: "The Fix-It-Again-Tony syndrome? There could be some reason for caution. But Fiat has done a lot of work on reliability."

And it's unlikely that U.S.-market Fiats would be the focus. "We're not looking at bringing the Fiat brand full force" back into the U.S. market it left in 1987, she says. In fact, there might be only Chrysler-badged and -built versions of small cars designed by Fiat.

Fiat's reputation for poor-quality cars in the U.S. market might be old enough to be irrelevant. Baby Boomers "have some kind of remembrance of Fiat in the United States, and not necessarily a positive one," says Jack Nerad, market analyst and executive editorial director of auto-shopping site kbb.com. "But I think the vast portion of the market doesn't know anything about Fiat. They're an open book. They are interestingly designed and innovative-looking in what they offer, and that has a chance to resonate."

Fiat's most notorious business deal with a U.S. automaker is its tie-up with General Motors — which Fiat seemed to win. In 2000 GM paid $2.4 billion for 20% of Fiat, in a deal that gave then-troubled Fiat the right to demand that GM later purchase all of Fiat. According to GM records, the automaker wrote down the value of its Fiat stake to just $220 million in the third quarter of 2002, then paid Fiat $2 billion to take back the stake in February 2005.

Fiat says its auto operations posted a profit in 2006, first time since 2000, after the company restructured.

Contributing: Chris Woodyard, Sharon Silke Carty.

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