Why Chrysler and Fiat belong together.

Why Chrysler and Fiat belong together.

Why Chrysler and Fiat belong together.

Answers to your questions about the news.
March 30 2009 7:11 PM

Why Does Obama Want To Combine Chrysler and Fiat?

Because their products and markets are complementary.

A Fiat car. Click image to expand.
A Fiat car

Chrysler has 30 days to complete a merger with Italian automaker Fiat, or the U.S. company will be cut off from further government loans, according to a report released Sunday by the president's auto-industry task force. How did the White House pick Fiat, of all the car companies in the world?

Because Fiat makes fuel-efficient cars and sells them everywhere but the United States. The administration believes that Chrysler can be viable only if it starts to offer more fuel-efficient cars. Right now, no Chrysler vehicle gets more than 30 mpg, and even the company's most efficient models compete poorly against their U.S. and Japanese counterparts. (General Motors has eight cars rated above 30 mpg and is nearly ready to take its electric vehicle and 45-mpg compact model to showrooms.) Fiat, on the other hand, focuses almost entirely on fuel-efficiency, with almost all models getting more than 30 mpg and some getting more than 60. If the two companies merged, Chrysler could sell Fiat's fuel-efficient models to U.S. consumers without spending money it doesn't have on research and development.

In addition to small-car technology, Fiat could teach Chrysler to be more flexible in its manufacturing. American car manufacturers have historically produced very few models per plant, leaving them exposed to sudden changes in the market. Japanese and European automakers, on the other hand, have more versatile assembly-line equipment that allows them to meet demand for whatever vehicle happens to be selling best. For example, foreign producers often have multifaceted stamping presses and painting robots that can be used to build several different kinds of car.

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Meanwhile, Fiat has been seeking a partner for several years. According to its own CEO, the Italian company is too small to survive in the long term. Because cars are expensive to develop, automakers need to sell a certain number just to break even. As research costs go up, Fiat will struggle to recoup those expenses without penetration into the U.S. market. Through the merger, the automakers can offer vehicles like the Fiat 500, which gets a combined 46.1 mpg, to thrifty American consumers. Moreover, the company could sell Chrysler-made Jeeps, rather than its own underperforming larger vehicles, at dealerships in Europe, South America, and Asia.

This is not to say that Fiat was the only potential partner. Chrysler had merger talks with General Motors at the end of last year. Chrysler also announced a partnership with Nissan last spring, but that fell through when both companies decided they were too cash-poor to undertake the venture. A small company like Tata in India might have been a good choice, since, like Fiat, it produces a wide range of fuel-efficient vehicles. However, Fiat offers a much broader dealership network than Tata.

Nevertheless, many analysts question the administration's decision to condition additional funding on the completion of the merger, which the two companies have been publicly discussing since January. They argue that a Chrysler-Fiat alliance might steal market share from GM, which could render both companies unable to compete with their Japanese rivals. Moreover, the adaptation of European cars to fulfill U.S. emissions and safety requirements can be very expensive, which might cut deeply into the merger's value to Chrysler.

Got a question about today's news? Ask the Explainer.

Explainer thanks Susan Helper of Case Western Reserve University, Glenn Mercer of the International Motor Vehicle Program, Jesse Toprak of Edmunds.com, and Josh Whitford of Columbia University.

Brian Palmer covers science and medicine for Slate.