Case Study 3
The 2009 Chrysler-Fiat Strategic Alliance

1. What are your views of the 2009 Chrysler-Fiat strategic alliance and its future prospects in the auto industry?

When it comes to dealing with worldwide economic recession, grave steps have to be taken in order to ensure the survival of businesses, as too many livelihoods depend on it. Also, due to the investments that shareholders make, and the wide array of other businesses that the company would affect, it puts a lot of pressure on the board or the people running the company to make sure that they survive the bad times and emerge victorious.

For Chrysler, it was a major setback when Daimler decided to withdraw its partnership and give its 80 per cent stake to Cerberus for less than 1/4th of the price they bought it for. Chrysler was doing badly, and although known as the “Number Three” car in North America, it was not able to keep up and had to declare bankruptcy and was told to form a strategic alliance with a company as a part of the Obama Administration rescue plan.

Fiat has had its own share of ups and downs, but in the European market it has proven to be successful. It withdrew itself from the North American market in the nineteen eighties as it could not keep up there. But now, with its strategic alliance with Chrysler, it can benefit by entering into the North American market without having to push too much as Chrysler is already a well-known brand there.

The Strategic Alliance was definitely very important for Chrysler as it had huge losses in 2006, had to lay off over 13000 people, and was going bankrupt. It could not keep up with the turbulent economy and needed to be bailed out. For Fiat it made sense over GM, Toyota or Volkswagen to form an alliance with Chrysler, as it fit in the long term plans of the new CEO, Sergio Marchionne of re-entering the North American market. For Fiat it also made sense as the alliance meant that in 2009, Fiat would own 20% of the stake without cash injection, but sharing the technological expertise, R&D, assembly platforms, and production in order to achieve economies of scale. And then over time, after restructuring and helping Chrysler develop small, fuel efficient cars it could own 35% stake by 2013 and later a 51% stake in the company.

For future prospects in the auto industry, I believe achieving economies of scale and reducing costs would be extremely important as the industry is shifting focus to the Emerging Markets where the demand for small, fuel efficient cars is increasing tremendously. So it is important to cut costs and at the same time be able to produce a lot. The distribution network of Fiat is strong in Europe which is important as the Eastern European economy is booming.

Since almost every car manufacturer is facing problem at this point and due to the various alliances that are formed in the auto industry where everyone is trying to make the best use of their money, this is an important move for Chrysler if it wants to stay in the game at all. And for Fiat which is currently doing well, it is a great way of expanding their market. Without any current statistics, if I had to make an assumption about the future based on the case, I would have to say that the for Fiat it is a bit risky as Chrysler has had its fair share of problems, but it is definitely a way ahead and as it fits with the long term plans of the management, it should do well provided the alliance and restructuring and sharing of the technological expertise happens smoothly. As for Chrysler it is definitely a blessing in disguise as the setback after Daimler sold off its stake could have erased it from the tremendously competitive market. Together, they should be able to expand, stabilize and achieve their targets.

2. Analyse and evaluate Chrysler and Fiat’s strengths and weaknesses before and after their 2009 strategic alliance.

Chrysler and Fiat before Strategic Alliance
Chrysler has had its ups and downs. The company was founded in 1924 and also produced trucks, tanks and other armaments for the US army during the Second World War. Chrysler was concentrating on producing big cars/gas guzzlers and that led to production fall of 26% due to the oil embargo in 1973. It then developed minivans and repaid the $1.5 billion loan from the US government and also bought American Motor Company for $800 million and took over the Jeep brand and by 1996 became the “Number Three” car in North America. The Daimler-Chrysler merger that happened in 1998 for $36 billion went kaput when Daimler sold its 80% stake in 2007 for merely $7.4 billion. Over this time, the Chrysler introduced a new range of products that helped it get $2 billion in profits. Yet it had to lay off 13,000 workers and reported losses of $1.5 billion in 2006. Fiat and Chrysler form a strategic alliance in 2009 and Fiat owns 20 per cent stake of Chrysler. All in all the company’s strengths lay in its brand visibility in North America along with its strong distribution network there. Its weakness was that the company did not have a good reputation and visibility as well as a strong distribution network outside of North America. Fiat on the other hand, after suffering its own problems due to Italian labour laws, business environment and cost issues, managed to reinvent itself by bringing new products in the European markets. But it did not have any visibility in North America or many Asian and African countries.

Chrysler and Fiat after Strategic Alliance
Due to the strategic alliance, both companies could fill in the major gaps they had in terms of market penetration. For Fiat it was easy to do so in North American market due to Chrysler’s reputation, and for Chrysler it was the same in the European markets. Also, both companies share technological expertise, leadership under the ‘visionary’ and turnaround artist Sergio Marchionne who helped reduce the product development cycle from 4 years to 18 months, and have the same long term goal: to develop smaller fuel efficient cars in order to also penetrate the Emerging Markets. They are saving a lot of money by sharing assembly and joint technology platforms at low costs and achieving economies of scale along with global reach and a strong distribution network in North America, Europe and now Asia. In 2012, Fiat already owns 58.5% stake in Chrysler and Chrysler is reporting profits while the Italian automobile manufacturer is surviving its losses in Europe due to Chrysler doing so well.

3. Compare and contrast Chrysler and Fiat with 5 other global manufacturers (GM, Ford, Toyota, Volkswagen and Daimler) in the areas of global operations and manufacturing issues.

Global operations

* Sales and Distribution:
Chrysler is a North American brand and holds a strong sales and distribution network there. GM is the biggest car manufacturer in North America and also the most well-known. It also maintains a good distribution network worldwide. Ford has a good distribution system worldwide and is the 3rd largest automaker in the world. Volkswagen is very popular in Europe and has an excellent distribution network there but not so much in the overseas market. Toyota is a strong global player but has limited market share in Europe. Daimler has a good distribution network in North America, Europe and Asia. Fiat has a good reputation in Europe along with a good distribution network and sales but not a lot of presence within North America, which they are trying to fix through the strategic alliance with Chrysler.

* Brand Visibility:
Chrysler is well known in North America and has a good quality reputation. But the leader is GM (largest exporter of vehicles from the US), followed by Toyota and then Ford. Volkswagen has limited brand visibility in North America but is extremely well known in Europe. Fiat has had its ups and downs but it has a lot of brand visibility in Europe but not in North America or Asia. Daimler also has limited presence in some markets of Asia and Latin America but has strong visibility in North America, Europe and Asia.

* Research and Development
Daimler and Toyota are highly focused on R&D. Toyota is the leader in Hybrid cars which is very important due to rising fuel prices. So is Fiat and it has improved their product quality. Ford is also concentrating in small cars and investing heavily in R&D to develop cheaper cars for the Emerging markets.

* Management.
The management of Chrysler has changed quite a few times due to the merger and then de-merger with Daimler. Now Fiat has taken over more than 50% of their stakes (2012) and the company is doing a lot better under Sergio Marchionne. Fiat’s corporate culture and business practices have improved under the new management. GM is a very big company so they seem to be slow on change and bureaucratic which makes it difficult to make and implement quick decisions. Toyota’s corporate culture is myopic and plans on changing leadership. Ford has had to do some major reorganization to address new brands and market development.

Manufacturing issues
Chrysler and Fiat formed a strategic alliance in order to overcome manufacturing issues and are aiming at being able to produce massively also through shared assembly platforms. Earlier, Chrysler had to shut down plants, move headquarters to Stuttgart, Germany during the Daimler-Chrysler merger. For GM, the product development cost is high and also expensive labour contracts. Volkswagen suffers from cost-overruns and limited product offerings and brand portfolio. Toyota manufactures good quality cars while Ford has had some manufacturing issues in the past.

4. Analyse Chrysler and Fiat’s brand portfolios in the world auto industry. How do you see both companies revamping and overhauling their brands in the short (1-2 years) and long(5 - 6) years?

Chrysler and Fiat’s Brand portfolio shows that they have a wide variety to offer. They have cars in all forms ranging from Compact cars to midsize cars to MUVs and luxury cars. Additionally, Chrysler also has the Jeep model and a limousine while Fiat has the famous sports car: Ferrari. Together they cover almost all segments of cars and SUVs. But they are yet to develop hybrid cars. But they are both concentrating on small sized fuel efficient cars. The website also states that their cars are smart solutions and every Fiat is designed keeping in mind the needs of the customer.

Although Fiat has had its share of ups and downs, it has managed to gain its reputation in Europe. It has become a trustworthy brand. Chrysler does not have the same reputation but being under the Fiat name can help it a lot to penetrate the European market. The same goes for Fiat in North America which is practically absent while Chrysler is the “Number Three.” So by capitalizing on the brand visibility of Chrysler, Fiat can easily re-enter this market.
In terms of revamping their brands in the short term Fiat and Chrysler will have to keep their inherent values intact, the values and culture that made the companies so big. In terms of management, Sergio Marchionne is a great leader to fill in the leadership vacuum in Chrysler. Together they have to concentrate on creating a global presence and this will be achieved by major structural changes, especially for Chrysler which will result in short term losses in terms of plant closing and layoffs, but in long term (4-6 years), it will definitely pay off. The companies have to keep that in mind in the short term and be open to changes keeping the long term goals in mind. The best part is that both companies together want to increase their expertise and production of small fuel efficient cars and as long as their core goals are the same, they should be able to manage the small short term problems for the future, greater good.

5. What did you learn from the Chrysler-Fiat Strategic Alliance regarding managing multinationals in the changing global business? What role did US government play in the formation of this alliance?

The biggest lesson from this case was how the auto industry is fiercely competitive and has to do whatever it can to save costs because it is very difficult for even the giants to survive. The need for low cost of production, economies of scale, low distribution costs, cheaper labour contracts along with developing more hybrid/fuel efficient cars and expanding to the emerging markets is pushing car manufacturers across the world to form many strategic alliances in order to be able to compete effectively. The market is a bloody red ocean and strategic alliances help dying companies that were once global players to retain their positions in the market and for the other company; it gives them a bigger market share. The entire auto industry is intertwined with many alliances like the Fiat-Chrysler one. It is bewildering to see how complex the structure of the auto industry is now as there are thousands of suppliers and part manufacturers from all over the world. The auto industry can no more afford to just be a matter of the nation’s pride like BMW for Germany or GM for America. In the last 20 years, the auto industry has witnessed hundreds of cross-border strategic alliances, joint ventures and other tie ups in order to compete and for economies of scale and other value chain efficiencies. This means that it is more and more important for the auto industry to be able to make use of the worldwide potential and price competitiveness of various nations and not stick to their own homeland.

Managing multinationals is becoming easier in the changing global business. The world is becoming smaller and the means of communications have never been better. Of course there are various barriers and cultural differences, but if managed correctly with more awareness, sensitivity and knowledge, the problems can be managed.

The Obama Administration or the US government bailed out Chrysler by advising it to declare bankruptcy and form a strategic alliance with GM, Nissan, Toyota, VW, Tata Motors, Hyundai, etc. The US government had to bail out GM and Chrysler almost at the same time and gave Chrysler $4 billion. For Fiat this was also a good opportunity to re-enter the North American market.
The Obama Administration had the following to say to this:
“Chrysler has not only been an icon of America’s auto industry and a source of pride for generations of American workers; it has also been responsible for helping build our middle class. As a result of the sacrifices by key stakeholders and a substantial commitment of U.S. government resources, Chrysler has an opportunity to thrive as a long-term viable 21st century company. To execute this agreement, Chrysler will use Section 363 of the bankruptcy code to clear away the remaining impediments to its successful re-launch.”

6. What has happened to the company since this case was written as the alliance was being formed? Give an update as of the time of your reading this case.

As Fiat had planned, by September 2009 it took over 20% of Chrysler’s stakes. The future plans were to help Chrysler in technological advances, shared research and development, shared assembly platforms in order to help it grow and develop small fuel efficient cars and then acquire 35% of its stake and by 2013 to gain 51% of its stake.
All this has happened as per planned, maybe even better than planned. In 2012, Fiat’s stake in Chrysler is 58.5%. Also in 2012, Chrysler showed first quarter net income of $473 million, up from $116 million a year ago. Chrysler's auto sales increased 33 per cent to 523,000 vehicles in the quarter, led by its home U.S. market where it gained market share on a first-quarter sales jump of 36 per cent versus as the industry-wide showed a gain of 13 per cent. Chrysler said its quarterly revenue of $16.35 billion in 2012 was an improvement over $13.12 billion a year earlier.
The No. 3 U.S. automaker also reported modified operating profit of $740 million, up from $477 million a year ago. Chrysler confirmed 2012 guidance made in January of achieving net income of about $1.5 billion, eight times the 2011 net profit of $183 million. Last year's profit was the first annual profit for Chrysler since 2005 when it was owned by Germany's Daimler AG

Fiat will have paid in the end about $2.3 billion for its stake in Chrysler, if it buys the remaining stakes as well. Sergio Marchionne plans to combine the two manufacturers to boost sales to more than 100 billion euros by 2014, and is relying on the Chrysler’s profit as Fiat struggles to end losses in Europe. Without Chrysler, the Italian company would have posted a first-quarter net loss. All this only proves that the strategic alliance between the two companies was a brilliant effort and very well managed that has helped both companies tremendously and looks like will continue to do so.