It’s the IPO that no-one really wants. Fiat and Chrysler’s UAW retiree healthcare trust are locked in a dispute over how much Fiat should pay for the healthcare trust’s (VEBA) remaining stake in Chrysler. Fiat’s Sergio Marchionne wants Fiat to acquire the 41.5% stake and have 100% control of Chrysler; that would make pooling cash between the two companies easier, potentially streamlining costs still further.
The VEBA needs funds and the suggested IPO could raise much-needed finance for growing medical bills, but it also risks upsetting the alliance that has become fundamental to the survival of both Fiat and Chrysler. The stakes are high.
Go deeper with GlobalData
Fiat Auto Chairman John Elkann has suggested that an IPO would alter the two companies’ relationship. The clear implication is that an alliance that has already produced significant benefits for both would be called into question.
On the face of it, the two carmakers have little in common on which to base a global automotive alliance. Fiat specialises in small cars and is big in Europe and Brazil. Chrysler is the smallest of the Detroit ‘Big 3’, almost went out of business a few years ago and is best known for large pickups (Dodge Ram) and SUVs (Jeep). Market geographies are different. The business case for the coming together in alliance is different to that of Renault and Nissan. Fiat and Chrysler cannot immediately start sharing cost on similar-sized platforms and engineering or see easy parts procurement savings the way Renault and Nissan, both with similar-sized product line-ups and big scale economies to exploit, could.
However, in this case, it’s the differences between the two – product and geography – that offer hope to both. Chrysler is feeling the benefit of recovery in the US and profits there are bolstering Fiat at a time when Fiat is feeling bottom line headwinds in Europe and, increasingly, Brazil. Chrysler offers Fiat distribution for its cars in the US. And Chrysler can get its hands on a smaller car platform for the US market, something it will need for both broader customer appeal and tighter fuel-economy standards. Both companies can look to be smart about the way they approach operations around the world, saving cost wherever possible, adjusting brand mixes for profit maximisation. The alliance offers a shot at long-term survival for two structurally weak players.
Sergio Marchionne, everyone knows, is a big believer in the primacy of scale in the automotive business; he believes the big groups will ultimately be left standing as automotive companies come under growing pressures on already thin margins; the pressures are both market-based and regulatory and they are relentless.
The Fiat-Chrysler alliance is essential to his view of how both small makers with their structural weaknesses can survive. He’d like another member, for more scale, too. He certainly doesn’t want to weaken the Fiat-Chrysler axis: together they have a chance, individually they are too small. The UAW/VEBA knows that he doesn’t want to lose the alliance and appears to be banking on him moving closer to the VEBA view on the remaining stake valuation to avoid an IPO that could complicate things further. But would the VEBA want to be responsible for upsetting a relationship that has been instrumental in getting Chrysler out of intensive care and into recovery? Will Marchionne have to suck up an IPO and continue business as usual, more or less, anyway? Who’ll blink? Or will there be a compromise that enables everyone to save face?
ITALY: Chrysler IPO would ‘alter’ relationship with Fiat – Elkann
