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January 21, 2009 2:56 pm

Fiat and happy

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The “marriage made in heaven” touted by Jürgen Schrempp, chief of the newly formed DaimlerChrysler in 1998, turned out to be anything but heavenly. Judging from the 24-year low Fiat shares touched on Wednesday, some seem to fear a repeat of Daimler’s costly sinkhole that destroyed tens of billions of dollars in shareholder value.

While far from a panacea for the two ailing carmakers, Fiat’s joint venture with Chrysler comes with far less risk than Daimler’s gamble and more industrial logic.

Those surprised that Fiat committed neither cash nor equity for its 35 per cent stake should not be – Chrysler’s common equity is worthless anyway without a plausible plan that will keep government loans flowing. Its under-utilised plants and distribution network, however, present Fiat with a chance for a meaningful US foothold that took Asian and European competitors more time and money to build. Brand equity is another matter given Fiat’s poor US reputation before it exited in 1983. But the threefold growth in European car sales in the US since the 1993 low suggests a market that appreciates design flair.

If the key to surviving is scale, Fiat can hardly do so without a presence in the largest single car market (and may still fall short). It can also free-ride on US taxpayer-funded life support. If the slump in US car sales is worse than expected or if American customers fail to embrace its small cars, Fiat will not be in a much worse position than it is today.

Meanwhile, Chrysler’s stakeholders have little to lose. Cerberus enhances the viability of its wholly owned Chrysler Financial, the carmaker’s financing arm, in exchange for 35 per cent of nothing. Unions, dealers and the White House, all with their own reasons to oppose bankruptcy, must be hoping Fiat succeeds. Even Daimler, burnt so badly by Chrysler and still owner of a residual minority, may one day receive some token value out of its holding.

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