Chrysler's survival boils down to a deal with Fiat

For Chrysler LLC, survival has come down to a single option: successfully working out an alliance with Fiat S.p.A.

The Obama administration has given Chrysler 30 days to forge a broad product-sharing agreement with the Italian automaker.

Should the two companies fail to prove their plan will work, the U.S. government will cut off its financial lifeline to Chrysler, according to a summary of the automaker's viability by the administration's auto task force. If Chrysler demonstrates the alliance will succeed, the government may give the U.S. company as much as $6 billion more on top of the $4 billion it already has received.

Under the Fiat-Chrysler tie-up proposed in January, the Italian carmaker would get a 35 percent stake in Chrysler in exchange for small-car platforms and technology for fuel-efficient engines. The companies must agree to build new fuel-saving, Fiat-based cars in U.S. factories, the task force report said. The two automakers have agreed to produce as many as six Fiat-based vehicles on four platforms.

Can't stand alone

President Barack Obama's task force concluded that Chrysler's Feb. 17 viability plan failed to demonstrate it could survive as a stand-alone company. Among the reasons for that conclusion:

-- Chrysler lacks global scale.

-- The quality of Chrysler's products lags far behind that of its competitors' vehicles.

-- Chrysler's product mix is tilted too heavily toward trucks.

"Chrysler's plan to address these issues is based on overly optimistic assumptions that are inconsistent with its current products and its resources," the task force's report said.

Obstacles remain

Chrysler must clear a number of hurdles in the next 30 days. They include getting the UAW to agree to pay cuts and work rule modifications, persuading the UAW to agree to convert half of Chrysler's obligation for the union's retiree health care trust from debt to equity, and getting Chrysler's debt holders to exchange their debt for equity.

The task force credited Chrysler with making progress in reducing production capacity by 1.3 million units. But the report said that as a stand-alone company, Chrysler faces an insurmountable list of structural problems. Among them:

-- Chrysler devotes only 50 percent as many engineers to each platform as General Motors.

-- Chrysler's $20 billion annual global purchasing budget is too small to exert leverage over suppliers.

-- Chrysler's fixed costs "are spread over a smaller base."

-- Chrysler's quality lags far behind that of its competitors, even though it has made some progress in the area.

-- Chrysler lacks the manufacturing flexibility of its rivals.

The administration's report also disputes Chrysler's assumption in its viability plan that it can stabilize its U.S. market share at 10.7 percent.

"Chrysler has lost 5 percentage points of market share since the height of its share, at 16.2 percent, in 1998," the viability summary says. "Continued share erosion in line with recent history would translate into several billion dollars of increased losses over time."

The report also takes issue with Chrysler's assertions it can reduce incentives and stabilize prices.

"This is inconsistent with the company's recent history with regard to incentives, in which increasingly larger incentives still translated into continued share erosion," the document said.

The report also cited the ongoing weakness of Chrysler Financial, which was forced to exit consumer leasing in August 2008. Chrysler Financial provided leasing for 48 percent of Chrysler customers in 2008.

Said the summary: "The captive finance unit has substantial financing challenges of its own in the current financing environment, so future demand may depend on Chrysler finding alternate leasing sources."

By Bradford Wernle- Automotive News