Who Wins in Chrysler-Fiat Deal?

When you buy a used car, you are often buying someone else's problems. The same could be said about buying a car company. So far, Italian automaker Fiat has been the only one willing to kick the tires around at soon-to-be-bankrupt Chrysler. And until today, it was on track to purchase the fire-sale assets of the beleaguered Detroit giant. Now, the U.S. Supreme Court has put a stay on the deal after a few Indiana pension funds complained that the purchase favors other stakeholders over them and also makes unfair use of TARP funds for Chrysler's restructuring.

First the hedge funds were complaining, now the pension funds. I won't even try to deconstruct whether the Hoosiers have a fair case, but it seems to me that for Chrysler, any deal is a good deal at the moment. After all, as a former executive from the company told a judge back in May, the company has for the last few years engaged in a "round the world" search for a corporate savior to help them crawl their way out of debt and back to solvency. Nobody bit – except for Fiat.

Perhaps there was some simpatico. For years, Fiat was the sick man of the European auto industry. From to 2000 to 2004, it was deep in the red, having accumulated around $14 billion in net losses, as nimbler European and Asian competitors grabbed market share. It struggled with overcapacity at its plants, a series of unpopular new models, and weak internal management (sound familiar?). Then the death of family patriarch Umberto Agnelli brought Sergio Marchionne onto the scene. Now Fiat's CEO, he executed an impressive turnaround, cutting tens of thousands of workers and trimming hundreds of billions of euros off the company's bloated budget.

The result was a very successful niche car company – and that's the key here. Marchionne believes that in these tough economic times, only behemoths can survive, which is why he wants to expand Fiat's footprint into the U.S. market via Chrysler's large dealer base. The idea is that Fiat, which specializes in making smaller, more fuel efficient cars (the only kinds that sell at the moment), can reinvigorate Chrysler with new technology, In turn, Fiat will use the old Detroit gas guzzler as a way into what is still the world's most profitable auto market while cutting millions in costs by sharing parts and equipment.

It sounds good. But then, mergers usually do. In fact, only about half of them work out. I don't have the statistics, but I'm betting the failure rate in the auto industry is even higher, given the systemic dysfunctions in the business. Remember what happened to Chrysler the last time it hooked up with a European? And Fiat itself got out of a bad marriage with GM just a few years back, taking a hefty $2 billion alimony payment with them, which is one reason Marchionne was able to turn the company around relatively quickly.

Aside from the basic economies of scale that are gained in mergers, I'm not sold on the marriage of Fiat and Chrysler. The latter makes giant SUVs, which tend to lose their luster in a down market, especially when oil prices are going back up as they are now. Chrysler also has little reach into the fast-growing emerging markets which are the future of the automotive business (China recently surpassed the U.S. as the top destination for cars by unit sales). Fiat is already doing better in many of those markets on its own. In any case, the small green car market that is the future of the industry will most likely be owned by the Japanese, who have a long head start in this area, or perhaps by some plucky Indian or Chinese manufacturers. While Fiat may be nimble by European standards, it will have to compete much harder to gain ground against the Asian market-leaders.

In any case, as long as the deal remains unclosed, the biggest loser will likely be the Obama White House. This Supreme Court ruling, no matter how temporary, is one of the first significant legal setbacks to its auto bailout plans, which have made many queasy. For a while it looked like the Administration was going to get exactly what it wanted – a quick, "surgical" bankruptcy and a new company, unburdened by debt. Now, it seems, it's back to messy business-as-usual in Detroit.