The political storm is just beginning for a Fiat-Chrysler deal where Fiat takes a 55% stake.
Fiat takes over Chrysler if it survives. That stark fact was buried back on page 177 of the Chrysler survival plan submitted to the Treasury Department last week.
Chrysler’s bargaining position is now so weak that under the deal Fiat would provide no cash, nor would it commit to funding Chrysler in the future.
Worse, Fiat’s offer is contingent on more U.S. taxpayer support – Chrysler’s request for an additional $5 billion dollars to cover operating expenses on top of the $4 billion already given, and $6 billion from the Department of Energy to develop fuel efficient technologies. More money might be needed if a permanent source of funding for Chrysler Financial is not secured.
So the multi-billion dollar question facing the U.S. government is whether this is a good investment. Will it ultimately save taxpayers’ money, as Chrysler-owner Cerberus maintains, or is it time to fold the company and cut our losses?
Saving an American auto company by giving it to an off-shore maker is not exactly the sound-bite I would choose to carry the day in a skeptical Washington. However, in the wake of General Motors refusing a merger with Chrysler, and Nissan’s inability to pursue one given its collapsed financial position, this is the only gamble left.
A large wager it is, since the consequences of liquidation are huge. Chrysler says a bankruptcy will cost tax-payers $65 billion. No matter the debatable but still significant amount, the only winners in this scenario would be the lawyers, sucking more cash out of an economy that desperately needs spending and investment.
Closed almost immediately would be 29 manufacturing facilities and 22 parts warehouses; Chrysler’s 40,000 U.S. employees lose their jobs and the government their taxes; 3,300 dealers with 140,000 employees go out of the new car business and/or fold; and $7 billion in outstanding auto supplier invoices go unpaid.
Oh, and here are customers — some of them voters. The 31 million Chrysler vehicle owners lose resale value, warranties, access to parts, and service. And at least some of Chrysler’s $100 billion in annual sales goes elsewhere.
The large ownership stake involved, initially Fiat gets 35% of Chrysler, with an option increasing Fiat’s share to 55%, were not disclosed when Cerberus, Fiat and Chrysler announced the strategic alliance on January 20th.
What Fiat offers in return for control of Chrysler is access to seven new small vehicles or platforms and six new powertrain combinations, all of them in mini, sub-compact and compact segments where Chrysler has little if any presence. The bet here is that a large car and truck company can reposition itself by selling tiny vehicles that U.S. consumers have mostly avoided. (At least one of the products contemplated would use a 2-cylinder engine.) Virtually all of Chrysler’s 20% share of cars and trucks smaller than compact would become Fiat-derived during the next couple of years.
Of course there are promises of synergy between the two companies, to the amount of $6.9 billion. But followers of the industry have heard similar claims before from failed alliances such as Daimler-Chrysler and GM-Fiat, among others. One synergy not explored could be the elimination of the Chrysler CEO position by combining it with the CEO of the Fiat Group, Sergio Marchionne.
Without Fiat, Chrysler claims it could survive if can maintain its annual sales of 2.5 million units but its chances increase with an alliance of the Turin, Italy, based small call maker with annual sales of 2 million. At least executives are not trying to call this a merger of equals, as they did when Daimler took over Chrysler.
Click here for an earlier Chrysler bailout story.
The nays have it: poll shows most Americans against a bailout
The question was as simple, as the answer discouraging for those who depend on the domestic auto industry for their livelihood:
“The federal government has given some of the major U.S. auto companies more than $13 billion dollars in loans to prevent them from going into bankruptcy. Some of those auto companies now say they need more money. Should the federal government give them additional financial assistance, or not?”
In the latest New York Times/CBS News poll, a mere 22% said more assistance should come; 68% said no more assistance; and 4% waffled with “Depends.”
And this was before details of the latest recovery plans from General Motors and Chrysler were well known.