January 21, 2009, 10:48 am
Mean Street: Chrysler’s Italian Job on the American People
Posted by Deal Journal
Is there any doubt that when government starts to tinker with industry all sorts of nutty things come to pass?
How about the proposed “global strategic alliance” between Chrysler and Fiat?
Apparently, there is only one way to make Chrysler competitive with foreign car makers in the US. And that’s to have US taxpayers put up $7 billion to essentially fund another foreign car maker’s takeover of Chrysler.
This swindle is not just pazzo – it’s plain wrong. Hopefully, it will be killed before it ever makes it to Congress.
It is of course a remarkable coincidence that the Chrysler-Fiat scheme has popped up only a few weeks before Chrysler is to present its case for stand-alone viability to the US Treasury.
But then again, no one really believes Chrysler is viable on its own. Not even the Italians. The “global strategic alliance” is in fact a flimsy “non-binding term sheet”. And money?
The alliance is contingent on $3 billion in additional government loans. “The alliance does not contemplate that Fiat would make a cash investment in Chrysler or commit to funding Chrysler in the future.”
There are Fiat’s promises of product and platform sharing and of overseas distribution. And for that, Fiat gets 35% of Cerberus’s already worthless equity in Chrysler. Fiat also gets an option of buying outright control of Chrysler within 12 months for the whopping sum of $25 million.
Chrysler of course is running out of cash. And that’s where you come in.
You’ve already lent Chrysler $4 billion on trust just to fund its operations through March. Last week, Chrysler Financial, Chrysler’s auto financing arm, received another $1.5 billion in loans. But just to keep going into summer, Chrysler will need the $3 billion on top. That’s a minimum $8.5 billion in loans. All - so that if things go well, Fiat can purchase 55% of Chrysler for a cash outlay equivalent to the price of a Chrysler corporate jet.
That just doesn’t feel right. Now, Chrysler will argue that if Fiat does take over, it will be picking up all those billions in government loans and nasty Chrysler pension and healthcare liabilities.
But who’s kidding who? For Fiat, this “alliance” is a cheap option to simply negotiate with Cerberus and the US government for splitting the tab. There is zero cost to Fiat for a non-binding term sheet.
Which is the real beauty of the Chrysler-Fiat proposal. There are few losers in it except you, the US taxpayer.
It gives Cerberus a face-saving retreat from Chrysler. It offers Fiat cheap distribution in the huge US market and a handy way to amortize its fixed costs back in Italy. And it keeps high-paying Chrysler jobs in Michigan so the politicians and UAW are happy.
GM and Ford should be unhappy as Chrysler’s survival theoretically means more competition in the shrinking US market. But they won’t be.
First, if Chrysler gets money, Congress won’t dare say no to GM or Ford for any of their funding requests.
And second, GM and Ford are probably pretty confident that the happy Italo-American alliance will end in tears. Why?
Look at the Germans. Daimler had buckets of money, nine years and good economic times and couldn’t make Chrysler work. Why should Fiat be different?
Which brings us back to the original problem: government standing in the way of the market doing its work. The aim of the “alliance” is to keep Chrysler afloat – to get money from the government. That’s what happens when the government becomes the arbiter for who wins and who loses in the market.
Sadly, there is no place for Chrysler in a domestic market that will average annual sales of 10 to 12 million cars for the foreseeable future. There’s too much capacity and too little demand. A cash-starved, sub-scale producer like Chrysler can’t keep up with Toyota or Ford.
Fiat and billions in taxpayer money won’t change that. It may be a terrible reality, but the government needs to stand aside and let Chrysler go bankrupt.
