FIAT MAY TAKE BIG STAKE IN CHRYSLER

By Ken Bensinger

Jan. 20, 2009 12 AM PT

A quarter of a century after saying arrivederci to America, Fiat may be poised for a U.S. comeback.

The huge Italian conglomerate, which sells vehicles under the Fiat, Alfa Romeo, Lancia, Maserati and Ferrari nameplates, has been looking for a tie-up with another carmaker for some time. After reported discussions with the French company that makes Citroen and Peugeot appeared to go nowhere last year, Chrysler may be its next dance partner.

Such a deal could have obvious upsides for troubled Chrysler, which has a lineup sorely lacking in small cars and a limited international presence. With 2008 sales down 30%, it recently had to accept $5.5 billion in federal loans to stay afloat, including $1.5 billion to its financing arm last week.

But a tie-up also could be a huge winner for Fiat, which has been angling to get its phenomenally popular 500 model, as well as the stylish Alfa Romeo luxury brand, to American consumers for years. Chrysler’s infrastructure could allow the Italian company to do that on the cheap.

“This makes a lot of sense,” said auto analyst Jim Hall of 2953 Analytics. “Fiat has had its eyes on this market for some time.”

Reports Monday in trade publication Automotive News and the Wall Street Journal suggested that Fiat could take as much as a 35% stake in Chrysler. The Auburn Hills, Mich., carmaker is 80% owned by Cerberus Capital Management and 20% owned by Daimler, the German maker of Mercedes Benz.

Another possibility, some in the industry say, is a nonequity joint venture. In both cases, however, the relationship would probably trade Chrysler’s facilities and dealership network for Fiat’s expertise in small cars as well as some cash, most likely as a direct investment in production facilities. The goal would be to produce small cars for sale in the U.S., and potentially bring Chrysler vehicles to Europe.

Individuals familiar with Chrysler’s operations who requested anonymity because of business relationships said the carmakers had been negotiating an alliance for some time. Chrysler has an agreement with Nissan to trade its trucks for the Japanese company’s small cars and had explored a linkup with Chinese automaker Chery.

A Chrysler spokeswoman would neither confirm nor deny a deal with Fiat on Monday.

“In today’s economic environment, talks are going on between companies in all industries,” said spokeswoman Lori McTavish. “Beyond those partnerships and alliances already announced, Chrysler has no further announcements to make at this time.”

Analysts said a deal with Fiat could be a boon for both carmakers, as well as consumers.

“Fiat really wants to grow around the world, and there’s a lot of potential for growth here,” said Rebecca Lindland, auto industry analyst at IHS Global Insight. “I think their cars, and particularly Alfa Romeo, could be a big hit here.”

After decades selling in the U.S., Fiat abandoned the market in 1984. At the time of its departure, the brand had a reputation as unreliable. According to one popular saying, Fiat actually stood for “Fix It Again, Tony.”

In the last 25 years, however, Fiat has built upon its strengths in other markets, becoming, for example, the largest carmaker by volume in Brazil. With a wide range of small and medium-size passenger vehicles, Fiat carved out a niche for itself in the cutthroat European market.

In 4 1/2 years under its current chairman, Sergio Marchionne, the company has focused on profitability and dealmaking, including the shrewd execution of a complicated buyout option with General Motors Corp. in 2005 that earned Fiat $2 billion.

Last year the company introduced the Fiat 500, a tiny two-door hatchback designed to compete with BMW’s Mini. An instant hit, the 500 won the 2008 European car of the year award, and U.S. fans have been salivating at the thought of being able to drive one. “It’s adorable,” Lindland said.

Marchionne has said he hoped to sell the 500 in the U.S. and had been looking for partnerships that would give Fiat a distribution infrastructure without having to build one from the ground up.

Stateside, Alfa Romeo could be an even bigger play than the Fiat nameplate. The high-end brand is known in the U.S. for the kind of cherry-red convertibles driven by Dustin Hoffman’s character in the 1967 film “The Graduate.”

But in Europe, Alfa Romeo today competes with entry-level and mid-range luxury cars. Americans’ huge appetite for vehicles such as BMW’s 3 Series and the Mercedes C-Class is alluring to Fiat, analysts say; models like the luxurious yet sporty 159 could compete with those cars and with Audi and Lexus as well.

Previous plans to bring such vehicles to the U.S. have been spoiled by a weakening dollar that made them too expensive to import. But a deal with Chrysler could allow Fiat to build both the 500 and Alfa Romeo vehicles in underused factories in the U.S.; just last month, for example, Chrysler shut down a mid-size SUV plant in Delaware.

“Each company has something to offer to the other,” analyst Hall said.

Under one scenario, Chrysler could provide the factories and manpower, with Fiat covering retooling costs. Fiat could then sell the cars through Chrysler’s dealer network.

On the flip side, Chrysler might be able to sell its vehicles in Europe through Fiat’s dealer infrastructure. Less than 10% of Chrysler’s sales volume comes from outside North America, and analysts say it needs more geographic diversity. Finally, Chrysler could use Fiat’s small-vehicle platform to produce its own cars in that segment, saving itself the development costs.

Some analysts, however, said Monday that Chrysler’s problems were too grave for an alliance with Fiat to make a difference. “The question is whether this is too little, too late,” said Todd Turner, president of Car Concepts. “It seems like the horse has left the barn, and the barn is burning down.”

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(BEGIN TEXT OF INFOBOX)

A tale of two automakers

CHRYSLER

Founded: 1925

Headquarters: Auburn Hills, Mich.

Chief executive: Robert Nardelli

Employees: 53,995

Brands: Chrysler, Jeep, Dodge, Mopar (auto parts and accessories)

2008 sales: 2.01 million vehicles

FIAT

Founded: 1899