March 31, 2009

Do Or Die For Chrysler

Chrysler has filed a survival plan, as they face a life-threatening time in their life-cycle.
Yesterday, on March 30th 2009, the plan was rejected, being considered as insufficient by President Obama.
The White House has imposed an April 30th 2009 deadline on Chrysler, to come up with a working business plan. Chrysler announced it had the framework of an alliance with Italy’s Fiat SpA. President Obama is convinced that the company can no longer stand on its own and requires that Chrysler engages in an alliance with a partner, in order to receive another multibillion-dollar loan from the government to escape from bankruptcy.


  • Chrysler must restructure its balance sheet so that it has a sustainable debt burden in the next 30 days.
  • Chrysler, Fiat and the UAW need to reach an agreement that entails greater concessions than those outlined in the existing loan agreements.
  • Chrysler and Fiat need to detail an operating plan that is viable, that can generate cash flow and demonstrate taxpayer loans will be repaid on a timely basis.
  • A final plan agreed to by Chrysler, Fiat and their stakeholders must not require more than $6 billion in loans from the U.S. Treasury.
  • Chrysler must have an adequately capitalized mechanism to finance the purchase of Chrysler cars by its dealers and customers. (Source: The White House)

The basic idea behind the alliance is for Chrysler to take existing small cars, car platforms, and engines from Fiat to produce Chrysler vehicles and for Fiat to utilize Chrysler’s excess manufacturing capacity and dealer network to sell Fiats and Alpha Romeos.

There are several arguments to support the alliance.

Looking at Volkswagen and Toyota sharing platforms or the Audi TT and the VW Golf coming from the same Volkswagen A-platform, a few alliances have been successful in the past.
Eventually Fiat and Chrysler will build both companies’ models together on assembly lines in the United States and Europe, allowing economies of scale.

A piece-by-piece sale of Chrysler after they file for bankruptcy would also represent high opportunity costs, including all future profits of the no longer existing company. Economically, this reflects a decreased supply, taking a producer out of the market.

According to Fiat’s chief executive Marchionne, taking the risk of an alliance with this critical partner, Fiat would help Chrysler come back to life, strengthen its financial position, and be more competitive in the American small car market against Japanese producers. It would also help preserve American jobs and accelerate Chrysler’s efforts to produce fuel efficient cars.

It could also be helpful that President Obama is working on a new program with the Congress to provide consumers with incentives to trade in old and fuel-inefficient cars with newer and environmentally “cleaner vehicles”. Regardless if it is ethically correct or not, Germany has already proved, that a scrap premium can work, increasing its car sales by 21%. For Chrysler, this policy could also mean an increase in car sales, especially when the company can manage to produce more fuel-efficient cars with the help of Fiat.

By strengthening Chrysler and expanding in the American market, Fiat could itself generate value to its stakeholders.

While Fiat would receive access to the American market, Chrysler would gain a distribution network outside of North America.

Theoretically, it might be a good idea for both companies to engage in this alliance. In reality however, the partnership between Chrysler and Fiat faces many problems that might threaten the alliance's success.

First of all, a deadline of one month is only little time to fulfill the requirements and to come up with a new detailed business plan with the partner firm. It is important for both firms to carefully work out a common concept for their future business. Finding a proper solution in 30 days could be a difficult task for Chrysler.

It is also questionable, that a company like Fiat, in bad shape itself four years ago, would be able to save a big company like Chrysler. With a rating of only BB+, Fiat has only limited access to capital and therefore limited financial latitude.
Sharing platforms cannot be realized right away and it would take an estimated two years before Fiat cars could be remade into Chrysler models. Before that, a deal has to be struck.

One cannot forget that Chrysler’s last alliance with the German car manufacturer Mercedes-Benz failed, too. The merger between the two companies in 1998 was made “to set new standards in earning power, profitable growth and social responsibility.” But as the U.S. partner turned out to be critically ill, 30,000 jobs had to be slashed and six plants closed or sold off. Today, consultants use DaimlerChrysler as a model case study to illustrate everything that can go wrong when two companies from different continents and corporate cultures merge.

Even though Daimler CEO Schrempp proclaimed that Chrysler and Mercedes-Benz would mesh perfectly because their strengths lied in different vehicle classes, the two fundamentally different companies were hardly able to do much for each other.
Chrysler had little use for Mercedes- Benz' expensive technology because U.S. customers were not willing to pay for it. Conversely, Mercedes-Benz could not use Chrysler's cheap plastic parts; its clientele was more demanding.

As the DaimlerChrysler example shows, alliances face more or less unpredictable problems in reality. Even though the quality of the parts is more comparable between Chrysler and Fiat as it was between Chrysler and Mercedes-Benz, it will still be a crucial aspect for both companies to work out, integrate, and implement a consistent business plan despite great differences.

The English mentality differs completely from the Italian. Since the corporate cultures, visions, and the companies’ policies derive from the domestic mentality, the alliance could face even more difficulties.

Other contrary arguments of experts are that Chrysler could lose even more potential sales because consumers are worried about warranty cost coverage, whether dealers would be around to repair the cars, and if their car might be of less worth if the brand or model is discontinued. For example, the sales of Saturns, Saabs and Hummers are decreasing already.

Critics also state that small-car profits are difficult to achieve in the U.S. because labor costs are the same as they are on larger vehicles even though the prices are lower.

Another option for Chrysler would be to file for bankruptcy in order to split into “good” and “bad” segments.
As president Obama explained, Chapter 11 bankruptcy does not necessarily mean a company has to close their doors; rather it provides them with the option of cost cuts and restructuring of debt with help from the federal court.
The other side of the coin is that consumers could be afraid to purchase cars from a critically ill company.
Chrysler could also be sold piece-by-piece.

In my opinion, since they are under high pressure at the moment, Chrysler will engage in the alliance with Fiat, because it sees no other way out. Hasty decisions and business plans, and the companies merging from two different continents with completely different car classes and corporate cultures, might lead to another failure in the next few years.

As far as Fiat goes, it is highly important to analyze their potential partner, which is critically ill, their risks, and their potential opportunities. Daimler’s experiences with Chrysler, for example, illustrate that size is no guarantee for corporate survival.
As Porsche CEO Wendelin Wiedeking has persistently mocked: “If volume were everything, dinosaurs would still be roaming the earth today.”

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