Change in the Automotive Industry – Chrysler and Fiat

Change and learning often come in pairs, although not always at the same time; learning from previous experiences may lead to change…

The case is that of the Chrysler and Fiat alliance. It is an operation that doesn’t involve cash. This seems logical in these “cash-is-king” times. Chrysler will cease 35% of its capital to the Fiat group. In return the Chrysler group will “receive access to technology to develop smaller and more efficient cars.”

This is a deal that can be profitable for both in times of crisis. Fiat wishes to return to the US with additional business beyond the present market for Masserati and Ferarri targeting a potential “return of Fiat and Alfa Romeo.” And Chrysler is looking for fixing a gap in market demand and current supply for smaller and less consuming cars. Details about how this could work are obviously not revealed. Additionally, a synergy effect is calculated to be about 3,5 billion dollars.

This new picture seems promising when comparing it to the previous merger. First of all this new structure is not a merger. That is probably one of the lessons from the previous deal — a merger — with Daimler (Daimler still has a stake of 20% in Chrysler and is not sure what to do with it). A logical reason to choose for an alliance above a merger is due to the severe market conditions which limits the budgets on both sides. But also the lessons learned with the previous merger help to this new approach: first a partnership (alliance) to remain flexible and open for any next step. A wait and see strategy without the expensive integration of systems and methodology that was the case in the previous deal.

What also has changed is the market-configuration. At the time of the Daimler-Chrysler merger the focus was still on growth whereas the focus is now more on “survival of the fittest” and (thus) building smaller cars can offer a competitive advantage.

Then the cultural lessons. Fiat and Chrysler offer a better match in complementing each others cultures where both producers complement each other in the overall product catalog; this was not too clear in the previous merger where both automotive producers were engaged in a similar type of business.

Culture becomes an issue when a single business is managed with different backgrounds. With a complementary business like in this case there is no cultural issue other than learning how smaller cars can be produced (on the Chrysler side) or how the Italian cars can be sold in the US.

Although then the question is, once the market is recovering and Chrysler knows how to build smaller cars, how will that fit the situation where also the Italian cars are to be sold in the same market? There remain some challenges. (Like that of the synergy-effect of 3.5 billion) But that’s why a partnership seems a good match for the moment. It leaves enough space for future developments on either side. It also fits the current risk-culture where what matters most is solving today’s problems. The future in the automotive industry is still far away. But this deal sheds some light on where things are heading.

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