Italian-American deal

The US government announced Thursday that it had reached an agreement to sell its remaining 6 percent equity stake in Chrysler to Fiat. It marks the final step in the US government's bailout plan for Chrysler, which was severely hit by the 2007 financial crisis.

Fiat has agreed to pay $500 million (347 million euros) for the US treasury's 98,461 shares of Chrysler. That means Fiat's stake rises from 46 percent to 52 percent, giving the Italian automaker majority control and fulfilling one of Fiat CEO Sergio Marchionne's overarching goals for 2011.

President Obama's government can now look forward to the end of a tempestuous episode. In 2007, German carmaker DaimlerChrysler sold off its US arm, after Chrysler reported losses of $1.5 billion and announced plans to lay off 13,000 employees, close a major assembly plant and reduce production at other plants.

Then in 2009, the Obama administration invested $12.5 billion in Chrysler under the Troubled Asset Relief Program as part of an auto industry bailout that eventually brought both Chrysler and another limping titan, General Motors, through bankruptcy court.

Since the crisis ended, the US government has been making every effort to sell off interests in the industry. The path to Fiat's majority takeover was cleared when Chrysler paid back $7.6 billion in state help at the end of May.

Fiat plan

Because of the thousands of US jobs that were saved, the US government is presenting the deal as a victory, despite the $1.3-billion loss inflicted on the American taxpayer.

But why was Fiat so keen to make the investment now?

German auto expert Ferdinand Dudenhöffer, economics professor at the University of Duisburg-Essen says Fiat has plenty to gain from the deal. "Fiat got Chrysler cheaply, and the US market is slowly improving," he told Deutsche Welle. "Plus Fiat needs the economy of scale, or else it won't survive."

Willi Diez, director of the Auto Research Institute (IFA), thinks Fiat has been waiting for this opportunity for a while. "Fiat has been missing from the US market for some time, and Chrysler offers it the chance to get back into one of the biggest markets in the world," he said.

Chrysler, along with its subsidiary Jeep, are well-established brands in the US, and Dudenhöffer believes Fiat plans to rebadge its models as Chryslers to sell in the US.

Better match

Fiat would seem to be a more suitable partner for Chrysler than Daimler was. To put it bluntly, Daimler always seemed to consider its top-of-the-range Mercedes as a bit too special for its US partners. Fiat and Chrysler are on a much more similar wavelength.

"Fiat and Chrysler are both in the volume segment, while there was always friction between Chrysler and Daimler," Dudenhöffer said. "The Mercedes engineers are very proud of their car, and they said, 'The cheap Chrysler parts are breaking our Mercedes.' Meanwhile the Chrysler people said, 'The expensive Mercedes parts are making our cars too expensive and turning away our customers.' Both Fiat and Chrysler are going for the same market."

There were other rifts in the DaimlerChrysler marriage as well. "Chrysler was bought far too expensively from the beginning," Dudenhöffer said.

Diez also points out that the omens are better for the Fiat alliance. "The problem was that Chrysler did not manage to build its brand in Europe – on top of that, there was the difficult US market," he said. "The competition in the US is not as intense as it was a few years ago."

Still, Diez does not think the benefit will necessarily be mutual. "I don't think they'll be able to sell more Chryslers in Europe than they did before," he said. "But for Fiat the situation is better, of course. Chrysler has a huge network of auto-traders, and Fiat will be able to use that. I'm sure it will be easier for Fiat over there than for Chrysler over here."

But the real test of the new partnership is only visible on the bigger picture – in other words, on the global market. "The success of this alliance won't be decided in the US or Europe," Diez said. "What is decisive is how well it performs in China and India."

Dudenhöffer agrees. "The problem for both Chrysler and Fiat remains that they're badly represented in the emerging markets – Russia, South America, China and India," he said. "It will still be a huge task to be successful there."

Author: Ben Knight
Editor: John Blau