May 1, 2009 at 11:12 am

Fiat takes an active role

CEO of Italian automaker says it, Chrysler can better confront changing market as allies

For some time now, Fiat SpA Chief Executive Sergio Marchionne has been convinced that the global auto industry would not be able to go on without a radical transformation -- and that the Italian automaker wouldn't be able to either.

To survive in an increasingly cutthroat industry, he has argued that Fiat needed to find partners to create a group with 5 million to 6 million in annual vehicle sales, or more than twice Fiat's size.

On Thursday, Marchionne signed agreements to establish a global alliance with Chrysler LLC that he said would strengthen both automakers and help them become more competitive.

"This transaction represents a constructive and important solution to the problems that have plagued not just Chrysler in recent years, but the global automotive industry as a whole," Marchionne said in a statement.

The industry is crippled by a big gap between production capacity and demand. That gap has widened dramatically in recent months because of plunging demand worldwide. These conditions are increasing the pressure on the industry to consolidate.

A week ago, as Marchionne discussed the automaker's quarterly results, he made it clear that Fiat would not be a passive player. "We have opened dialogues with a number of automotive companies around the world that would suggest that we are going to be part of a consolidation exercise," he said. "The market conditions to get that done are here. And Fiat is a willing player."

In addition to Chrysler, Fiat has approached General Motors Corp. about a deal involving GM's German subsidiary Adam Opel and talks are ongoing.

But Fiat's first priority was to sign a deal with Chrysler. "Our goal since we first entered discussions with Chrysler nearly a year ago was to leverage the strengths of both companies to yield the scale, efficiencies and cost savings necessary to create two stronger automakers able to compete more effectively on a global scale," Marchionne said in the statement.

His strategy resembles that of France's Renault SA, which paired up 10 years ago with Nissan SA of Japan, a similarly sized company that was losing money.

But that is one of the rare examples of a successful alliance. Most of them, including Chrysler's relationship with Germany's Daimler AG, turn out badly. Daimler sold Chrysler to Cerberus Capital Management LP two years ago. A fledgling alliance between Fiat and GM was scrapped in 2005 after a few years.

"Our work is just beginning," Marchionne said in the statement. "But together with our new partners at Chrysler, we look forward to delivering on the vast potential this alliance holds and reintroducing to North American customers some of our most popular brands, including Alfa Romeo and the award-winning Cinquecento."

Fiat, based in Turin, Italy, and Chrysler had announced plans in January to establish an alliance whereby Fiat would offer small car and engine technology in exchange for equity in the Auburn Hills automaker. Last month, the U.S. government, which has provided Chrysler with $4 billion in loans, set a deal with Fiat as a condition for further aid.

But, after the U.S. Treasury failed to obtain debt-reduction agreements with all of Chrysler's lenders, the U.S. automaker filed for bankruptcy.

Under the terms of the accords signed Thursday, Fiat will receive 20 percent of a new company comprising most of Chrysler's assets without putting in cash. It may increase its ownership stake by 15 percent by fulfilling certain steps, such as producing fuel-efficient engines and cars in U.S. plants and offering Chrysler vehicles through its retail outlets.

Fiat will have the right to appoint three of the nine directors on a new Chrysler board, and a fourth if it increases its stake by a further 15 percent. But its stake will be capped at 49 percent until Chrysler's loans from the U.S. Treasury are fully repaid.

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