Looks like it's a little more official now.

Fiat uses GM money to help rescue Chrysler

Jeremy Cato, today at 12:47 PM EST


Today Fiat S.p.A. and Chrysler LLC (Chrysler) – with its parent Cerberus Capital Management L.P. – announced plans to strike a global alliance, and it never would have happened without the help of General Motor Corp.

Fiat, of course, used billions of dollars of GM money to rebuild its product line and refashion its business under the leadership of Canadian Sergio Marchionne, CEO of Fiat Group. Ah, the GM connection.

Back in 2000, GM struck an alliance with Fiat not unlike the one announced today with Chrysler. For Fiat back then, it was a defensive alliance.

The then-DaimlerChrysler was pursuing a full acquisition of Fiat at a time when all the world's auto makers were striking deals with one another following the so-called “merger of equals” between Daimler-Benz and Chrysler Corp. But Fiat did not want to be taken over completely.

Instead, GM paid $2.4 billion in stock to acquire 20 per cent of Fiat Auto (figures in U.S. dollars). The deal also made Fiat a 5.1 per cent shareholder in GM.

Fiat needed the help from what was then a profitable GM and GM needed Fiat's expertise in small engines and diesel engines. GM's goal then was not very much different than Chrysler's goal now – get small car and diesel help from Fiat.

At the same time, Fiat's goal was not very much different from Chrysler's now – get help from someone with deeper pockets and a healthier balance sheet.

The big picture goal in 2000 was for GM and Fiat to eventually share platforms. Many assumed that Fiat would even make a return to the United States after leaving in 1983 because of poor sales and endless quality problems.

Well, none of that ever worked out. GM has proven over the years that it's not great with alliances, the Daewoo purchase notwithstanding. By early 2005, Fiat was in dire straits and threatening to exercise a put option that would have forced GM to buy the remaining 20 per cent of Fiat.

GM wanted none of that. Fiat was in stronger position, however, and the struggle came to an end when GM threw in the towel and agreed to pay out nearly $2 billion to terminate once and for all the Fiat put.

So add it up: GM paid $2.4 billion for 20 per cent of Fiat and another $2 billion to give it back. GM did get some engine technology out of the deal, but not $4.5 billion worth.

As veteran commentator Jerry Flint of Forbes magazine noted at the time: “The $2 billion handed to Fiat could be enough to turn GM around. It is enough to buy a rear-drive platform for the Cadillac DeVille and a big Buick, plus a hybrid for Chevrolet. It's enough to tool a plant for five-speed automatic transmissions so Bob Lutz's new models don't have to carry outdated four-speeds, with enough money left over to add XM radios to a year's production.”

Fiat, of course, took the money and did just the sorts of things Flint said GM could and should do with $2 billion. The Fiat product line was rebuilt and now Fiat is relatively healthy by global car company standards.

This should be a cautionary tale for the Chrysler people: Do not underestimate Marchionne and the Fiat people. They are shrewd business people who know how to build cars and brands.

For instance, the Fiat 500 microcar is a sexy hit in Europe and so well done that Ford Motor will use its mechanical underpinnings, the 500 platform, for its next-generation Ka. Yes, yes, Fiat has other alliances in the works.

Of course, today Fiat is having its struggles just like other auto makers. Sales were sliding at the end of the year and profit on the automobile side was a meagre €190 million for the third quarter and for the first nine months of the fiscal year profit at Fiat Group from automobile was €626 million. But unlike Chrysler, Fiat is worth something.

They aren't printing money on car sales in Turin, but no one disputes that Fiat has emerged as a success story in the past few years and it never would have happened without a cash infusion from GM.

Chrysler's people say the alliance with Fiat will provide “access to competitive, fuel-efficient vehicle platforms, power train, and components to be produced at Chrysler manufacturing sites. Fiat would also provide distribution capabilities in key growth markets, as well as substantial cost savings opportunities.”

Fiat will also help Chrysler manage its business, something sorely needed. And the deal gives Cerberus the exit strategy most observers say it wants desperately.

In another twist of irony, Daimler AG is also getting its little piece of Fiat after all these years. Remember, Daimler still owns about 20 per cent of Chrysler.

Will the Fiat-Chrysler alliance work? Will it help Chrysler survive? Of course it will, at least in the short term, although it remains to be seen how this alliance fits into the restructuring plans Chrysler must soon submit to the U.S. and Canadian governments as a condition of getting bailout money.

But in the longer term, alliances and takeovers in the auto business have generally gone badly. Only the Nissan-Renault alliances stands out as a huge success, though again I should give credit to GM for doing a good job using Daewoo as a source of small cars.

But the Daimler and Chrysler, that merger of equals, was a share-destroying fiasco. Ford's efforts with Jaguar, Land Rover and so on also turned out very badly. It's not easy getting different companies and different cultures to work together.

If I were a betting man, I'd wager Fiat gets the better end of this deal.


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