Five years ago the idea that Fiat might be a potential saviour of one of the big three US carmakers would have been highly implausible, to say the least.
In 2004, a year after the death of Gianni Agnelli, its legendary chairman, the Italian automotive group was saddled with debt, bleeding about €1bn ($1.6bn) a year in cash, entangled in an unhappy relationship with General Motors, and badly in need of a turnround.
But in June that year Sergio Marchionne became chief executive and the turnround began.
Mr Marchionne extracted Fiat from the GM alliance, cut costs, streamlined production and reorganised the compnay around its core brands, returning it to profitability.
The company has reported profits for the past 15 consecutive quarters, earning Mr Marchionne a reputation as a force within the industry.
Evidence of its success will be clear on Thursday when Fiat is expected to announce group profits for 2008 of around €3.3bn.
In comparison, Chrysler, the smallest of the big three US carmakers, is worthless and was given a $4bn emergency loan by the US government this month.
Mr Marchionne predicted last month, in an interview with the Automotive News Europe trade magazine, that only six mass carmakers would survive the economic downturn.
Yet this week’s deal with Chrysler, which will see the Italian group offer technology and distribution to the US company in return for a 35 per cent stake, raises the question of whether it is the right move for Fiat.
The stock market’s initial response was cautious – Fiat’s shares rose slightly before closing down 1.3 per cent.
The stock has been under pressure in recent days after the abrupt departure of a key executive and news that the company might lose its investment-grade rating. This is because of the deteriorating operating environment in which the global car makers now find themselves.
Analysts said the deal raised many questions.
Arndt Ellinghorst, automotive analyst at Credit Suisse, said: “Our initial stance regarding a tie-up is that Fiat has made a material error in its path towards consolidation.”
Harald Hendrikse, an analyst at Bank of America, said that Fiat would have a tough job making a success of Chrysler when Cerberus Capital Management, its private equity owner, and Daimler, the German carmaker that once owned the US automaker, had failed.
Other analysts noted that, rather than consolidating the global auto industry, the Fiat/Chrysler alliance would expand it – at least initially – by creating a new entity.
In addition, the proposal to retool Chrysler’s production plants to make Fiat cars will cost hundreds of millions of dollars.
Fiat says Chrysler will pay for that retooling, and is likely to acquire the new production technology from Comau, a unit of Fiat that makes automated production platforms.
The benefits to Chrysler are obvious: it gets the technology to make smaller, greener cars, which fit with the viability plan it must produce under the terms of its government bail-out.
Paul Haelterman, head of global advisory services at the CSM Worldwide consultancy, said: “This is a nice quick shot in the arm for Chrysler to make their plan viable.”
Fiat has a reputation as an efficient producer not only of cars but also of small diesel and petrol engines. Besides giving Fiat a foothold in North America, the deal could help to expand its presence in South America.
Chrysler has two under-used assembly plants and an engine factory in Mexico that could export to other parts of Latin America without the hefty import duties levied on cars from Europe.
Mr Haelterman said: “It allows Fiat to put its toe in the water at a very low price point”.