Page last updated at 15:07 GMT, Monday, 30 March 2009 16:07 UK

Chrysler's decline comes full circle

By Kabir Chibber
Business reporter, BBC News

Reagan and Lee Iacocca
Lee Iacocca, on the right, was instrumental in reviving Chrysler

The task force set up by US President Barack Obama to oversee the struggling automobile sector, has come with its verdict.

And with regards to Chrysler, the verdict is damning.

"The administration has determined that Chrysler has not demonstrated that it can achieve long-term viability as a stand-alone company," said the task force's report.

"In particular, Chrysler's plan contains a number of assumptions that are unrealistic or overly optimistic."

The message is clear: the US giant will not be supported in its current form.

If it wants to keep going, it needs to find a partner. That partner is most likely to be Italy's Fiat, which reached an agreement to take a 35% stake in Chrysler and create a "global strategic alliance" in January.

What is striking is that this has all been done before.

Carter's bail-out

In the 1970s, Chrysler was losing money and struggling to pay its employees because of poor sales and large scale recalls of some of its cars.

It began the road to recovery by hiring now-legendary American businessman Lee Iacocca, who sold Chrysler's loss-making European division to Peugeot.

While the administration sees promise in this deal, substantially more needs to be accomplished to make this plan viable
President Obama's auto task force

But Chrysler's survival was only due to $1.5bn in federal loans guaranteed from Jimmy Carter's administration in the late 1970s. At the time the plea was unprecedented.

Mr Iacocca concentrated on minivans and cars such as the Dodge Caravan and Plymouth Voyager, which sold very well in the 1980s. He also brought the Jeep brand to the company though an acquisition in 1987.

Chrysler under Mr Iacocca tried to strike a deal with Fiat in 1990, but the Italians decided against this after reviewing Chrysler's books.

But in the event targeting larger vehicles proved a success; American consumers shifted their taste in the 1990s towards sports utility vehicles (SUVs) and Chrysler became the most profitable company in the world.

This culminated in a historic $38bn takeover by Germany's Daimler-Benz in 1998.

Sell off

But tastes in the US shifted again. As petrol prices rose in recent years, consumers opted to buy smaller, more economical cars, which Japanese car firms specialised in.

Chrysler Dodge Ram
Chrysler has been burning through money as it tries to restructure itself.

Daimler finally sold off the majority of the $1.5bn-loss-making Chrysler to private equity firm Cerebus for 7.4bn euros in 2007.

The changing fortunes culminated in Chrysler joining GM and going cap in hand to the US government last year for aid, leading to a $4bn emergency loan in January and the request for a further $5bn.

Meanwhile Fiat, Chrysler's potential partner, has not had an easy time either.

While Fiat has seen its sales - and reputation - improve in recent years, sales in Italy of its branded cars dropped almost 30% in February, and its debt has been downgraded to "junk" status by both Moody's and Fitch over the last two months.

Fiat chief executive Sergio Marchionne has said only about five or six major carmakers worldwide will survive this recession. He is betting that a tie-up with Chrysler will make his company one of them.

The idea behind the tie-up is that it gives Fiat access to the US market and Chrysler gets first dibs on Fiat's fuel-efficient vehicle technologies. The two companies aim to produce their first new model together by 2011.

Mr Obama's task force thinks it is the only hope - but with strong caveats. "While the administration sees promise in this deal, substantially more needs to be accomplished to make this plan viable."

With Mr Obama's task force giving only 30 days for Chrysler to seal an agreement that it approves of, Chrysler once again finds itself at the mercy of both Fiat and the US government.

Perhaps for the last time.



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