Automotive News Europe - February 2, 2009 - 8

PAGE 8 · www.autonewseurope.com February 2 , 2009 Fiat-Chrysler alliance Tie-up offers many benefits Alliance would be a step towards long-term viability for Europe’s 4th largest carmaker Luca Ciferri Automotive News Europe TURIN, Italy By joining forces, Fiat and Chrysler would both become stronger, but the proposed ItalianAmerican alliance is just one step in two troubled recovery plans, not the final solution. The proposed alliance (see details in panel, far right ) has clear, though not necessarily immediate, benefits for both sides. Chrysler would get access to Fiat’s competitive, fuel-efficient vehicle platforms, powertrains and components. That access will be a key element in the viability plan Chrysler has to set before the US Treasury later this month. It would help Chrysler to quickly start building the fuel-efficient vehicles it needs to restore its competitiveness in a North American market. The pact would allow Fiat reintroduce some of its own products to the US, including the Fiat 500 minicar and at least two Alfa Romeo models. Slicing and dicing How the proposed Fiat-Chrysler alliance could work: Under the tentative agreement, Chrysler’s North American plants would build four vehicles based on Fiat’s platforms and powertrains. Chrysler could also build in North America two vehicles for Alfa and one for Fiat, also distributing them using its current Dodge-ChryslerJeep network. Chrysler could build and/or distribute in North America the Daily, a midsize van build by Fiat’s truck subsidiary IVECO. Fiat would make available its distribution network in key growth markets. Fiat and Chrysler would look for potential savings in combining their purchasing and logistic operations. In exchange of intellectual property rights evaluated at $3 billion, Fiat would receive a 35% equity stake into Chrysler LLC. An alliance between Fiat and Chrysler would bring together two companies that, each for their own reasons, are currently, actively seeking a partner to help them forge a viable future. absorbers to telematic systems. However, the expected savings, both on the purchasing and manufacturing side, are not on the immediate horizon: Production of the first Fiat-based vehicles in the US will start not sooner than 2011. Morgan Stanley auto analyst Adam Jonas in London calls the alliance “a deal born of weakness on both sides,” matching the fourth biggest European carmaker by volume in Europe with the fourth biggest in US. “Both companies need a partner to survive this crisis,” Jonas said. “But it is unclear that partnering with each other is the solution.” Paolo Mosole, auto analyst at Intermonte in Milan, has a more positive view on the potential Fiat-Chrysler deal, but is expecting more developments to take place. “We do not consider Chrysler the final answer for Fiat, as we expect a more important deal to be reached,” Mosole said. “The best candidate could be France’s PSA/Peugeot-Citroen, although some political issues could prevent an agreement in the short term.” only about 1.5 million units of FiatAlfa-Lancia passenger cars were based on common architectures. By 2015, if Fiat could confirm the viability of its long-term plan, the Italian automaker would be building about 2.5 million units based on common vehicle architectures, to which the US side could add another 500,000 units. Getting to 3 million units would be encouraging progress, but the proposed Fiat-Chrysler joint production would still lag at least 2.5 million units a year behind the 5.5 million units Marchionne believes is a safe level. If the proposed alliance is finalized, both companies would be stronger, but still require further and broader steps as part of the ongoing world automaker consolidation ANE process. The initial deal involves no cash investment by Fiat. Fiat could increase its stake to as much as 55%, but paying between $25 million to$200 million. Fiat’s initial 35%stake would come entirely from Chrysler’s majority owner, Cerberus, and not from Daimler, which has been trying to sell its remaining 19.9% stake. The deal is subject to federal approval as Chrysler seeks the final $3 billion of a $7 billion loan guarantee. Fiat expects to complete the deal by April 30. Fiat produced 2,813,870 vehicles in 2007, the most recent year for which global data are available. Chrysler produced 2,572,203. The combined 5,386,073 vehicles would have ranked them 5th globally. Other beneficiaries As part of the plan, Chrysler would begin making about 500,000 Fiatbased vehicles and engines in North America. Other parts of the Fiat group also stand to benefit: Fiat’s Comau product equipment subsidiary is struggling to fill its order book. Retooling Chrysler plants to build models on Fiat platforms would help. Fiat’s Teksid metallurgical subsidiary, which already has a strong footprint in North America, has the capacity for an additional 500,000 castings a year for engines and gearboxes Fiat group’s components division, Magneti Marelli, which is strong in Europe, but not yet a mayor player in North America, could benefit in several of its operating sectors, from engine management systems to lighting and from Brazilian-built shock- Fixing Fiat But even with their combined volumes, the proposed alliance does not fully correspond to Marchionne’s blueprint to fix Fiat. The Fiat CEO believes annual volume of 5.5 million to 6 million units based on common vehicle architectures is crucial for survival in today’s market. The 2007 combined volume of Fiat and Chrysler, about 4.5 million units, is a misleading number: The potential deal-breaker: lack of cash One thing Fiat will not bring to any alliance is the very thing Chrysler needs most: cash Jesse Snyder & Luca Ciferri Automotive News Europe The biggest obstacle to making the proposed Fiat-Chrysler alliance work may be finding the cash to finance a potential surge of product sharing on the North American side. Analysts say a strategic partnership of Fiat and Chrysler makes longterm sense and would be complementary, with little geographic or product duplication. But they question both automakers’ current financial reserves. Chrysler took a $4 billion US government loan last month to stave off bankruptcy and is seeking a $3 billion loan this quarter. Its plants are closed most of the first quarter. Fiat group’s 2008 net profit fell 16 percent to ¤1.7 billion. Last month Fiat lowered guidance on 2009 earnings because it expects weak auto sales. Last year Fiat’s debt level rose unexpectedly to ¤5.9 billion euros. Fiat and Chrysler can reduce development costs on an anticipated seven new vehicles for North America, but they still have US homologation and tooling expenses, said Rebecca Lindland, a Global Insight analyst. “Chrysler and Fiat definitely need an outside infusion of capital to make this work,” she said. Fiat said it is not going to inject any cash in funding the Fiat-based vehicles Chrysler would build in North America. “We’re not going to fund any of Chrysler’s costs,” said Fiat CEO Sergio Marchionne in a conference call with analysts on January 22. A 15-month engagement Timeline to an alliance October 2007: Fiat and Chrysler begin generic talks on a wide range of possible areas of cooperation March 2008: Fiat Powertrain Technologies (Fiat Group powertrain subsidiary) buys from Chrysler the Brazilian engine plant Tritec Spring-summer 2008: Fiat considers buying a Chrysler plant in North America to build Alfa Romeo models and/or a Chrysler plant in Mexico to build the Fiat 500 minicar September 2008: Chrysler approaches Fiat with a “what we need” list to turn the company around about $9 billion. While the proposed alliance gives Chrysler no immediate cash infusion, it helps the automaker convince a skeptical Congress that the company has a long-term future. By February 17, Chrysler must submit a plan to the US Congress proving its viability as a condition to get the $3 billion loan. Even though some legislators may Late November 2008: Fiat and Chrysler envisage a possible deal to exchange Fiat technology for a stake in Chrysler and to share distribution and purchasing Late December 2008: Fiat and Chrysler begin finalizing their non-binding agreement January 13, 2009: non-binding agreement signed January 20, 2009: non-binding agreement announced March 31, 2009: expected deadline to sign definitive agreements April 30, 2009: non-binding agreement expires object to lending money to a foreigncontrolled Chrysler, this will help overall, Lindland said. “A Fiat-Chrysler alliance is certainly a better plan than it can provide by itself,” she said. “And Chrysler absolutely needs the second round of loans because 2009 sales are not going to generate anywhere near enough revenue for it to ANE survive.” Debt conversion “If they (Chrysler) ever manufacture anything on our behalf, it will be done on our account,” he said. “Anything which they produce on their account will be paid by them, regardless of the source of the architecture of the powertrain.” Marchionne said turning Chrysler around is possible only if Chrysler creditors agree to convert debt into equity. He said that must occur before Fiat takes its 35 percent stake to avoid dilution. The US Treasury must be convinced of Chrysler’s long term viability before providing the loan that would pave the way to a Fiat-Chrysler alliance. Cerberus Capital Management currently owns 80.1 percent of Chrysler. Daimler AG owns the remaining 19.9 percent. “Cerberus would do anything to get out of Chrysler,” Global Insight’s Lindland said. “Daimler would be happy to be diluted.” Chrysler is privately held and does not disclose its finances, but analysts estimate its current debt at

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Automotive News Europe - February 2, 2009

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