Can Fiat Cars Save Chrysler?

The new models won't materialize for two years—and the U.S. automaker could stall out in the meantime

By David Welch

Fiat (FIA.MI) CEO Sergio Marchionne has said little about his plans to reinvigorate Chrysler since agreeing to acquire the U.S. automaker in June. But what he has said is telling. In a chat with reporters on the sidelines of the Frankfurt Motor Show in September, he acknowledged being chagrined by Chrysler's woeful condition and the discovery that its previous owner, the private equity shop Cerberus Capital Management, had done so little to prepare the automaker for the future. Marchionne said he'd found "a whole pile of surprises."

And the surprises keep coming. No one, certainly not Marchionne, expected Chrysler to be a shiny new car company when it reemerged from bankrupcty in June. But even for an industry as troubled as this one, the numbers have been shockingly bad. Chrysler's sales in the U.S. are down 40% in the past year, and market share has slipped from 11% to 9%. You know an automaker is in deep trouble when it is selling more than half of its ­vehicles to corporate and rental fleets, as Chrysler did in September, according to CNW Marketing Research.

Chrysler badly needs appealing new models if it is to have a hope of surviving. On Nov. 4, Marchionne will lay out his plan, which, according to industry insiders, involves plugging Chrysler's product holes with Fiat-engineered cars. (Chrysler declined to comment on the plan.)

That will be a vital first step. The trouble is that the new vehicles won't appear for at least 18 months. Between now and then, Chrysler's market share will almost certainly continue to erode, making it all the harder for the company to stay in the black and develop and market new models. The question for Marchionne, says IHS Global Insight analyst John Wolkonowicz, is: "How do you get Chrysler from here to 2012?"

Concerned Suppliers

When the Italian CEO lays out his strategy, no constituency will be listening more intently than Chrysler's suppliers. As sales keep dropping, some parts makers are getting leery about accepting Chrysler business. They fear winding up with a bunch of production capacity and eating production costs if Chrysler can't sell enough cars or doesn't survive. Thomas T. Stallkamp is a partner at Ripplewood Holdings, the private equity firm that owns German engine parts maker Honsel International. In anticipation of lower sales, he has already renegotiated a contract to sell engine blocks to Chrysler. "Our guys in Germany are worried that the sales volumes won't make it," Stallkamp says. "Every month that sales go down, suppliers get more nervous."

Some suppliers have simply decided not to sell parts to the company. Charles A. Gassen­heimer, chairman and CEO of lithium ion battery maker Ener1 (HEV), passed on a chance to sell batteries for Chrysler's planned electric cars. He thought it was too risky. "Does Chrysler have the cash to commit to that program? No," Gassenheimer says. "We don't have the resources to bet on a program like that."