January 21, 2009 at 1:00 am

Fiat clawed back to take Chrysler stake

The Italian automaker, written off just five years ago, reaches out to the weakest of the Big Three.

A Fiat employee works in a factory in Turin, Italy. The Italian automaker will make use of Chrysler's U.S. production capacity in a tentative deal with the smallest of Detroit's Big 3. (Luigi Bertello / Getty Images)

A few years ago, Fiat Auto struggled with the same kind of challenges that Chrysler LLC faces now. Its rivals expected the Italian automaker to collapse. Auto analysts said Fiat's quality lapses, its lopsided model range, its reliance on its home market and mounting losses had caught up finally with the company.

When Fiat SpA hired Sergio Marchionne, an Italian-Canadian businessman with scarcely any automotive experience, to run the group, Fiat Auto's prospects seemed gloomy indeed.

"Fiat was on the verge of collapse when he took over in 2004," said Pierluigi Bellini, an auto analyst with IHS Global Insight's offices in Milan. But "he did a very good job in a desperate situation."

In the cutthroat Western European auto market, Fiat has boosted its share to 8.2 percent from 6.6 percent in 2004, and it is a consistently profitable company now.

This week, Marchionne, 56, felt confident enough to reach out to Chrysler, the smallest and most vulnerable of Detroit's automakers, which is now subsisting on government loans.

In a preliminary deal announced Tuesday, Fiat will acquire 35 percent of Chrysler without paying any money. Instead, it will offer the ailing U.S. automaker access to its small-car platforms and engines, ratcheting up production levels and generating savings for both companies.

The deal fits with Marchionne's objective to create a global group producing between 5.5 million and 6 million vehicles to ensure its survival.

The Fiat Group, a Turin-based conglomerate controlled by the glamorous Agnelli family, has a wide array of manufacturing businesses producing farm and construction equipment, heavy trucks, auto components and passenger cars ranging from sumptuous Ferraris to tiny Fiats.

The automaker has a big presence in key emerging markets, such as China and Brazil, but it has been absent for many years from the United States, except for the super-luxury segments. It stopped selling Fiat-brand cars in the United States in the early 1980s, and withdrew its premium Alfa Romeo line in the 1990s.

Fiat retains a presence in the American manufacturing sector through its Case New Holland agricultural operations.

Together, Fiat and Chrysler would produce around 4.5 million cars and light trucks a year -- nearly double Fiat's output of around 2.5 million units a year. But that still falls short of Marchionne's target, suggesting that his deal-making isn't finished.

Chrysler should be seen as "an important leg of a table with other legs," said Fiat spokesman Gualberto Ranieri, raising the prospect of further partnerships.

Fiat's alliance with Chrysler recalls a similar pairing in 1999 between two automakers that were then derided as weaklings -- France's Renault SA and Nissan Motor Co. of Japan.

But the Renault-Nissan alliance turned out to be one of the most successful and amicable deals in the industry.

Some analysts see a similar potential for Fiat and Chrysler. Fiat will be able to tap Chrysler's manufacturing operations and distribution network to relaunch the Alfa Romeo brand in the United States, said Bellini of IHS Global Insight. The forecasting firm estimates Chrysler will use only 60 percent of the production capacity of its U.S. plants this year.

Bellini said Fiat also can draw on Chrysler's expertise in making sport utilities and rear-wheel-drive cars to develop Alfa Romeo SUVs and an Alfa flagship car.

Analysts said the financial structure of the deal -- which limits Fiat's exposure -- recalls its shrewd bargaining in another deal that ended less amicably.

In 2000, Fiat and General Motors Corp. concluded a far-reaching agreement that entailed joint ventures, an equity stake for GM in Fiat Auto along with an option that entitled Fiat to oblige GM to make a takeover offer. In 2005, GM ended up paying Fiat $2 billion to retire that option.

But auto analyst Jrgen Pieper at Bankhaus Metzler in Frankfurt said the Chrysler tie-up could drain Fiat's management, as the merger with Chrysler drained the former Daimler-Benz, now Daimler AG. "I don't think it's a very smart idea," he said.

But then Pieper added that he had not expected Marchionne to succeed with Fiat either.

"I wouldn't have bet any (money) on Fiat five years ago, but I was wrong, and Marchionne achieved more than anyone could have imagined."

You can reach Christine Tierney at ctierney@detnews.com">ctierney@detnews.com.

Analysts say Fiat was on the verge of collapse when Italian-Canadian ... (Antonio Calanni / Associated Press)