Manjunath Biradar
CASE STUDY: The 2009 Chrysler-Fiat Chrysler- Fiat Strategic Alliance
What are your views of the 2009 Chrysler-Fiat strategic alliance and its future prospects in the auto industry? 1.
The alignment between Fiat and Chrysler does not exactly save Chrysler. It gives Fiat an entry into the U.S. In short, Fiat is to get 35% of Chrysler, will not pay any cash for the stake, and it will give Chrysler access to its technology. Fiat had publicly said it wanted a production base in North America for its Alfa Romeo brand--and presumably the Fiat brand, too. Through its 35% interest that it is getting in Chrysler, it would presumably have access to a U.S. plant to build its cars. The company has been weak technically and does not have enough money to finance the kind of new vehicle programs that Chrysler needs to stay competitive in this market. Fiat is strong in small cars and in their engines and transmissions, as well as in luxury cars and diesel engines. Getting the technology could be a huge help for Chrysler, but the American company will still need the money and ability to create new cars even with Fiat technology. The alliance might help Chrysler if it needs to get more money from the American government in its battle to survive. Fiat needs a manufacturing base if it intends to reenter the American market. It makes no sense to import small or low-priced cars, or even mid-level cars from Europe, as the strong European currency makes that a money-losing proposition. If Fiat could manufacture in the U.S., it could build some variations of its cars for Chrysler. How this would fit with the cars scheduled to come from Nissan is another question. The problem is that it could take years for Fiat to pass on technology and build engines and transmissions for new Chrysler products, or even to build Fiats here and badge them as Chryslers. 2. Analyze and evaluate Chrysler and Fiat¶s strengths and weaknesses before and after their 2009 strategic alliance (see Tables II and III).
The Strength & weaknesses of the Chrysler-fiat strategic alliance with in today¶s business conditions Chryslers tie up with fiat was not only a matter of survival but became a part of bankruptcy proceedings. Fiat can take care of retooling activities by sharing its technologies with Chrysler to build small cars in North America. This will help them to receive loan from the government. In addition Chrysler will have fiats readily available distribution network in the European market. For fiat, the alliance is a quick access to the north American market that the company exited in the eighties, An initial 20 % stake in Chrysler is a good market entry strategy for fiat and could reach to 51% . In the coming years both the companies combined production capacity could reach to 5 million cars based on ³tangible economies of scale´ And ³geographical reach´. Some of the weaknesses of the alliance could show up in corporate integration, technology sharing and mismatch of brand portfolios. In most of the alliances, companies¶ goals and changing markets can pose problems. Also areas that may create predicaments in cross-border alliances are knowledge sharing in R&D, control, regulatory and antitrust issues, and distribution and ownership problems.
3. Compare and contrast Chrysler and Fiat with five other global auto manufacturers (GM, Ford, Toyota, Volkswagen, and Daimler) in the areas of global operations and manufacturing issues (see Tables II and III).
The problem is that Chrysler-Fiat can compete with other car manufacturers; however, it could take years for Fiat to pass on technology and build engines and transmissions for new Chrysler products, or even to build Fiats here and badge them as Chryslers.
Analyze Chrysler and Fiat¶s brand portfolios in the world auto industry. How do you see both companies revamping and overhauling their brands in the short and long terms? 4.
Chrysler's strength has been in sport utility vehicles, pickup trucks and minivans. We do not know Fiat's degree of interest in these businesses. Meanwhile, another foreign maker, Nissan (which is part of the Renault/Nissan alliance) has an agreement with Chrysler whereby Nissan is to get a version of the Dodge Ram, a big pickup, and Nissan is to build small cars destined for Chrysler. 5. What did you learn from the Chrysler-Fiat Strategic Alliance regarding managing multinationals in the changing global business? What role did the U.S. government play in the formation of this alliance? A Chrysler/Fiat partnership is a great fit as it creates the potential for a powerful, new global competitor, offering Chrysler a number of strategic benefits, including access to products that compliment their current portfolio; a distribution network outside North America; and cost savings in design, engineering, manufacturing, purchasing and sales and marketing. This transaction will enable Chrysler to offer a broader competitive line-up of vehicles their dealers and customers that meet emissions and fuel efficiency standards, while adhering to conditions of the Government Loan. The partnership would also provide a return on investment for the American taxpayer by securing the long-term viability of Chrysler brands in the marketplace, sustaining future product and technology development for our country and building renewed consumer confidence, while preserving American jobs. Consistent with the President¶s commitment to provide adequate working capital to help Chrysler through this restructuring period and loan up to $6 billion to the Chrysler-Fiat Alliance, the U.S. government has committed to provide assistance sufficient to help give Chrysler a chance to achieve financial viability. Working capital: The U.S. government is prepared to provide approximately $3.3 billion in debtor in possession financing to support Chrysler through an expedited chapter 11 proceeding. Loan to the New Chrysler: Upon closing, the U.S. government is prepared to loan approximately $4.7 billion to New Chrysler, in the form of a term loan with $2.1 billion due in 30 months and the balance 50% due on the 7th anniversary and 50% due on the 8th anniversary of the loan. The interest will be an appropriate combination of cash and payment-in-kind. There is also an additional note of $288 million which is a fee for making these loans. The loans will be secured by a first priority lien on all of Chrysler¶s assets.
6. What has happened to the company since this case was written as the alliance was being formed? Give an update as of the time of your reading this case.
Chrysler's sales are falling faster than the other Detroit manufacturers. Its December sales were off 53% from a year before, but the company still had 10% of the U.S. market that month. Chrysler is suffering because of its past emphasis on trucks, its weak front-drive car entries and perhaps because of a weak reputation for quality. All the negative news of the past several months may have scared away potential customers, too. Right now, Fiat sells Ferrari and Maserati cars in the U.S., but in tiny numbers. Last year's Maserati sale number was only 2,509, and there are plans to sell a few dozen very expensive Alfa models here in the near future. A few years ago, Fiat had a partnership with General Motors. GM had bought 20% of the Fiat auto business, but then paid Fiat $2 billion to get out of the deal. That $2 billion helped jumpstart Fiat's recovery. Fiat is not a global competitor like Volkswagen. It is strong in Italy, of course, and is the leading seller there, and it is also the leader in Brazil. Fiat's European sales were down only 5% after
11 months last year, while the industry was down 7%, but its November sales crashed 24%. Others dropped sharply too, but Fiat's CEO seemed particularly worried. Yet Chrysler, which is weak outside North America, does not seem to gain any global trading advantages in the alliance. T he Chrysler-Fiat deal might--just might--stir interest in Chrysler from Nissan, which still needs those pickup trucks from Chrysler, and maybe minivans, too. How will it all end²The deal making may not be over. The Fiat Company after several considerations and lobbying with several automakers in the world especially in the US, with the US being its strategic interest which has never dying thirst for autos and also the absence of the company in the region including the entire region of North America comprising mainly of the US, Canada and Mexico other than few minor islands such as Costa Rica, Cuba, the Caribbean Islands etc. The Company plans to run its North American operations with the US plant as its base in the region. The report will include several sections that cover the various issues that will probably come up in the way of the Fiat Company in its process of acquiring an auto plant in the US. Various factors like the following will come into picture one the operations of the Fiat Company start towards acquiring a stake in the Chrysler group LLC. Extensive literature covering the trials of the Fiat Company of Italy and the Franco Japanese Collaboration Nissan-Renault¶s attempts of acquiring a stake in the Chrysler Company which was declared bankrupt following the withdrawal of support of the US government in early 2009. DETAILS OF MERGER: Obama Administration Auto Restructuring Initiative Chrysler-Fiat Alliance On March 30, 2009, President Obama laid out a framework for Chrysler to achieve viability by partnering with the international car company Fiat. After a month of close engagement with the President¶s Auto Task Force, Chrysler, Fiat and their key stakeholders have made unprecedented sacrifices and executed an agreement that positions Chrysler for a viable future. Chrysler has not only been an icon of America¶s auto industry and a source of pride for generations of American workers; it has also been responsible for helping build our middle class, giving countless Americans the chance to provide for their families, send their kids to college, and save for a secure retirement. As a result of the sacrifices by key stakeholders and a substantial commitment of U.S. government resources, Chrysler has an opportunity to thrive as a long-term viable 21st century company. To execute this agreement, Chrysler will use S ection 363 of the bankruptcy code to clear away the remaining impediments to its successful r e-launch. The Chrysler Fiat Alliance ± Shared Sacrifice The alliance will retain Chrysler¶s existing factory footprint and continue producing Chrysler cars in U.S. factories. The alliance will create the sixth-largest global automaker, spreading R&D and design development costs over higher volumes, making it more competitive in an increasingly global and consolidating industry. Fiat is contributing billions of dollars in advanced technology and intellectual property, and offering Chrysler access to a global distribution network. Fiat¶s technology will allow Chrysler to build new fuel efficient cars and engines in U.S. factories. The UAW has made important concessions on wages, benefits, and retiree health care that, while difficult, will help save jobs for active employees, pensions and health care for retirees and make Chrysler more competitive. Chrysler¶s largest secured creditors have agreed to exchange their portion of the Company¶s $6.9 billion secured claim for their pro-rata share of $2 billion in cash at closing. The Bankruptcy Court
process will be used to confirm this treatment on those lenders that failed to accept the offer that was accepted by a majority of the lenders. Daimler, Chrysler¶s current minority shareholder, has agreed to waive its share of Chrysler¶s $2 billion of second lien debt, give up its 19% equity interest in Chrysler¶s ultimate parent, and settle its guaranty obligation to the PBGC by agreeing to pay $600 million to Chrysler¶s pension funds. Cerberus has agreed to waive its share of Chrysler¶s $2 billion of second lien debt and forfeit its entire equity stake in Chrysler. Cerberus has also agreed to transfer its ownership of the Chrysler headquarters in Auburn Hills, Michigan to the new Chrysler alliance. Lastly, Cerberus will contribute a claim it had against Daimler to assist in the Daimler settlement with the PBGC. Details on the Chrysler Fiat Alliance: Fiat will contribute a free license to use all of its intellectual property and "know how" to capitalize Chrysler in exchange for 20% of the equity of the reorganized Chrysler. Fiat will have the right to select three directors of Chrysler once reorganized. In addition, Fiat will have the right to earn up to 15% in additional equity in three tranches of 5% ± each in exchange for meeting performance metrics, including introducing a vehicle produced at a Chrysler factory in the U.S. that performs at 40 mpg; providing Chrysler with a distribution network in numerous foreign jurisdictions; and manufacturing state-of-the art, next generation engines at a U.S Chrysler facility. The newly reorganized Chrysler will purchase substantially all of the assets of the old Chrysler out of a chapter 11 bankruptcy case in exchange for a $2 billion payment to its secured lenders. This new Chrysler will establish an independent trust (VEBA) that will provide health care benefits for Chrysler¶s retirees. The VEBA will be funded by a note of $4.6 billion payable over approximately 13 years with a 9% rate of interest and will receive 55% of the equity of New Chrysler. The VEBA will have the right to select one independent director and will have no other governance rights. The Chrysler Pension Plans will be preserved, and their stability will be strengthened from the Daimler contribution of $600 million. The U.S. Treasury will receive 8% of the equity of the new Chrysler. U.S. Treasury also has the right to select the initial group of four independent directors, but thereafter will not play a role in the governance or management of the Company. The Governments of Canada and Ontario will together receive 2% of the equity of the new Chrysler. Based on its substantial financial contribution, Canada will also have the right to select one independent director, on the same basis as the four independent directors initially chosen by the U.S. Current Strategic Implementation The current operations are formulated predominantly around Italy and the head office in Turin. All the plants are located in Europe except for the plant which operates in Brazil. This could be a reason for the firm not performing very well outside of its domestic market or at most, Europe. A majority of its production still emanates from Italy. This means that production can be closely monitored but it also means that export costs will be higher and the ability to be locally responsive is low. This is in keeping with the Italian design being a key theme through the brand image and keeping production Italian helps towards that but it doesn't have to. As long as the research and development centre is based in Italy and has the same Italian designers, the style can be implemented into the vehicles around the world.
Since the appointment of the new CEO, Sergio Marchionne, the company seems to be a lot more structured in the way that it is run. It seems as though the decisions come from the top in a clear cut way. The profitability has increased dramatically from the appointment and Fiat has looked like expanding once again incorporating a stake in Chrysler in 2009 and a bid to buy Opel from general motors in order to secure a large market share in Europe. At present the car industry is in tough times with demand slowing and costs rising. Fiat have realized this and tried to increase their size in order to achieve better and more efficient economies of scale. Although this is good, Fiat has not been able to secure another global strategic alliance in recent times as other manufacturers have. It would benefit Fiat to attain an alliance with a Japanese car company such a Honda or Nissan in order to gain knowledge of local tastes and consumer preferences so as to expand operations there. Also, the Chrysler alliance needs to be used to its full potential. The American market has been notoriously hard for Fiat to crack, seeing their exit from the marketplace in 1984 (LA Times, 2009). Apparently, Fiat is to re-launch itself into the US market using the 500 as its weapon. The New York Times (2009) is quoted as claiming that Fiat plans to take the model into Chrysler dealerships as soon as 2010. This shows the reasoning behind Fiat forming the alliance with the struggling Chrysler. If these plans go ahead and the 500 is a success like it has been in Europe, it will be a breakthrough in Fiat history and the dawning of a new age. The vast U.S market will be opened up and with help from its alliance with Chrysler, can start producing cars for American consumption.
