Chrysler still faces massive challenge

Roland Jones • Profile • E-mail

Chrysler may have sealed its alliance with Italy’s Fiat, but the automaker still faces the serious challenges, according to analysts. The automaker must integrate operations with its new owner and bridge a product gap until a new line of small cars is available late next year.

“Chrysler’s going to come out of bankruptcy leaner and meaner, but they haven’t answered the product question,” said Tom Appel, associate publisher of Consumer Guide Automotive, a guide for car buyers.

For a glimpse at the future of Chrysler, take a look at the updated Fiat 500, a remake of the company’s iconic “city car” that the Italian automaker recently showed off on the streets of New York. The tiny car, likely to hit U.S. roads in late 2010, will mark Fiat’s first return to these shores since 1983 when it pulled out of the market, its brand having suffered from a reputation for shoddy workmanship and poor reliability.

The 500 is emblematic of a plan to change Chrysler’s fortunes by shifting its product line toward small, fuel-efficient vehicles based on Fiat platforms and technology. The smaller models will round out Chrysler’s existing product range, overly focused on big pickup trucks, minivans, Jeeps and large cars like the Chrysler 300 and the Dodge Charger.

The question, Appel said, is how long will the automaker take to redesign its product line.

“It’s going to be a long road,” Appel said. “Basically, we have about 18 months until we see the first 500s and then about another year after that until we see any new vehicles emerge. We just have to hold on until all these new cars are available over here.”

Appel said he is a bit worried that Chrysler has little else in its product line aside from a new Jeep Grand Cherokee, due next year, and it’s unlikely to bring any Fiat vehicles in the United States for another year.

The new Chrysler will likely emerge from bankruptcy having shed 789 dealers, or about a quarter of the total. It will be majority owned by a trust fund created to ensure health care obligations are met for retired unionized Chrysler workers. The trust fund will own 55 percent of the new company, followed by Fiat at 20 percent, the U.S. government at 8 percent and the Canadian government, 2 percent.

Fiat will have an option to raise its stake by an additional 15 percent in three increments as it meets certain vehicle platform and distribution goals but cannot become a majority owner until all U.S. government loans — approximately $10 billion so far — have been repaid.

The small car segment, including compact and subcompact vehicles, represents about 15 percent of all U.S. vehicle sales, and is extremely important to Chrysler’s future, said Michelle Krebs, editor of Edmunds.com’s AutoObserver.com Web site.

“You’re going to see smaller, more fuel-efficient efficient cars coming from Chrysler because they have not made anything successful in that area, and that is where the growth was last year,” she said.

Small car sales last year were boosted as gas prices rose above $4 a gallon, shifting buyer interest away from larger, gas-guzzling vehicles.

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