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And there you have it.

According to the Associated Press, Fiat (FIATY.PK) will sign a pact with Chrysler to officially extend its existence as a going concern (see Fiat to Sign Partnership Deal).

Italian automaker Fiat Group SpA will sign paperwork to become a partner with Chrysler LLC by Thursday, according to three people briefed on the deal…

“It’ll be signed by tomorrow, I know that,” one of the people [familiar with the deal] told The Associated Press.

As I’ve mentioned before, I am not convinced that this alliance is the best outcome for Chrysler, Fiat, the auto industry, or the U.S. taxpayer (see Fiasco for Fiat? or Chrysler Miracle for background). The following issues concern me:

  1. Are the auto union concessions enough to make Chrysler viable for the long run, …especially since the various agreements with the auto union did not involve wage cuts that would make Chrysler more competitive on an operating basis moving forward.
  2. Is the taxpayer getting a fair shake in exchanging $10 Billion ($4 Billion in outstanding loans plus an additional $6 Billion cash) for a 10% stake in Chrysler? I am assuming that the additional $6 Billion that the federal government intends to pump into Chrysler has already been factored into its 10% stake in Chrysler. If so, by that calculus, Chrysler would be worth an imputed $100 Billion (if not, at the very least they are valuing Chrysler at $40 Billion). That’s more-or-less the current valuation of GM. Is Chrysler really worth that much?? Under such generous exchange terms, it is possible that the taxpayer would have been better off calling the preexisting loans and simply liquidating Chrysler.
  3. Is Fiat up to the task? It has entered and exited the U.S. market once already. Are we looking at a possible repeat performance? Let’s not forget that Fiat is a firm that, as little as two years ago, was on the verge of bankruptcy itself.
  4. Fiat is not prepared for what it is about to get into by acquiring a stake in Chrysler. Global expansion and integration is difficult enough in the best of circumstances, but Fiat is now acquiring a feeble company with little in the way of design and product capabilities. It is not clear that Fiat will be able to manage the cross-cultural complexities associated with this deal. Moreover, it is possible that Chrysler’s products (even with technology infusions from Fiat) will not improve quickly enough for it to become a profitable enterprise.
  5. The global auto industry continues to be plagued by massive overcapacity. Keeping a weak competitor like Chrysler around will certainly not resolve systemic overcapacity in any meaningful way.

So while it looks like there is currently a future for Chrysler, it might prove to be a temporary future. It is entirely possible that despite the effort, Chrysler might end up right back in the same place in a few short years - on the verge of bankruptcy.

[Ed. Note: As of press time, AP reports that talks between Chrysler and its lenders have broken down.]

Source: Chrysler's Temporary Future