The 2009 CHRYSLER-Fabbrica Italiana Automobili Torino (Fiat)

STRATEGIC ALLIANCE

http://www.youtube.com/watch?feature=endscreen&v=cpi2IAec9Ho&NR=1

Case Study Summary

• May 2007-Chrysler LLC sold 80% of stake to Cerberus Capital Mgt.

• Daimler paid 36Billion USD /Acquire Chrysler 1998-lost 29billion

• Daimler/Chrysler de merger-setback for Daimler

• Problems-integration/corporate culture problem

Case Study Summary

• Cerebus did not get tangible benefits because of 08/09 global financial crisis/high oil prices/recession.

• May 2009-market share down/limited clout• April 09/high profile strategic alliance with

FIAT /20% stake• Other Big Auto dealers not interested• -global ops/compatibility/long term synergy

Case Study Summary

• Chrysler NO 3 In US –GM/Ford• Issues with Quality/consumer satisfactiom• Focused on middle class• Downgraded by Japanese

attack-Toyota/Honda/Nissan• Famous for Minivan /JEEP brand• Iacocca time –good rating/lack quality/C

satisfaction.

Case Study Summary

• Daimler propose merger 1998-capitalize on new markets/technology

• 8 years serious issues –lay off• 2007-Daimler /Chrysler announced that

Cerebus acquired 80% of Chrysler at 7.4 Billion USD

• Cerebus deal –bad luck/global recession in 08/09

Case Study Summary

• April 09 –Chrysler intro –strategic alliance with FIAT

• FIAT’s problems• -labor crises,technology shift,quality,negative

business environment• -Entered US but Exited in the late 80’s

CASE Study SUMMARY

• Global Auto Industry/Changing Profile• -thousands of parts/highly linked• -single disruption-havoc• Many years –cross border strategic alliance

emerged• 2009-3 American Auto Players

prevailed-GM/Ford/Chrysler & Japan-Nissan/Honda/Toyota/Europe-Daimler/Volks/Fiat/Renault-Nissan

CASE Study SUMMARY

• Changes in the Industry• -usually structural –R&D,Distribution/JV/equity

stakes/Evolutionary Processes Improvement.• -Changing demographics,cost up,large players

need to relocate to cheaper cost EM/demand in EM

• Can only win –strong equity/competitive technology

Case Study SUMMARY

• 2009/Chrysler-FIAT S Alliance• S alliance –combining manufacturing

resources/know how• Tie up-R&D/product Dev/Distribution

Network/Knowledge sharing/Economies of Scale/productivity

• -Great weapon to move forward

Case Study Summary

• FIAT’s Role in S Alliance• -technology related expertise/assembly

platform/main aim to make Chrysler Survive• -Create small-efficient fuel autos in North

American• -no cash injection by FIAT• 20% stake /2013 35%-Certain conditions met

Case Study SUMMARY

• As Alliances are created –global competition intensifies-consolidation/downsizing/weak consumer demand /US labor/Debt Crisis.

Strength/Weakness F/C Alliance

• -Chrysler part of Bankruptcy/survival• FIAT can share technology by building small

cars in North America• Chrysler will get loan from US GOV• FIAT quick access to North American

market/exited in 80s• Combining production capacity/target 5

million cars/economies of scale

Case Study Summary

• Weaknesses• -corporate integration/technology

sharing/mismatch of brand portfolios/changing market needs

• -issues in R&D/control/regulatory/antitrust/distributionownership problem

Case Study Summary

• 90s Chrysler –low cost• Lee Iacocca-instrumental in success in 90s• After Iacocca-lost competitive advantage/global

competition/expensive labor contract• FIAT made recovery with fuel efficient cars/lean

integrated organization.• 2009-FIAT assemble quality vehicles/dealer

network

Case Study Summary

• TIE –UP benefits• -save on R&D know how/joint platform• S Alliance-major savings in JV product

development• FEB 09-Obama auto bailout

target/GM/Chrysler and Ford• 08 –Chrysler lost 8 Billion USD/GM 30 .9

Billion USD

Case Study Summary

• US GoV gave Chrysler 8 Billion USD/GM 13.4 Billion

• US GOV Proviso -2 Changes• -File Bankruptcy• -Availability of FIAT’s technology Platform/Techno

sharing• FIAT supplies 2 types of Engines/help in small car

techno

Case Study Summary

• FIAT famous for small car mould.• FIAT CEO –Marchionne expert on turnaround.• -08-improve technology/profit up/product

cycle cut from 4 years to 18 months• Left USA -80s• -limited market

share/quality/mismanagement.• Re-entry requires a well established partner

Case Study Summary

• Globalization –Major Force .Chrysler and FIAT can target small cars/hybrid

segments in Europe and US and Emerging Market.

Case Study Summary

• What is ahead for C/F Strategic Alliance?• -technology platforms,distribution

networks,management expertise• -Strong leadership by Marchionne –Chrysler

long period without a CEO.• Chrysler losses can be controlled-if alliance

works out well.• -depends on bankruptcy

proceedings/restructuring chrysler

Case Study Summary

• Major structural changes in Management and Manufacturing in Chrysler.-effects job cuts/plants closed/consolidation of dealer network.

• Long term challenge 4-6 years-recasting of image of Chrysler & Fiat products.

• -dealing with labor Union in America and Europe

• -redesigning mgt structures

Case Study Summary

• -Formulating new global synergies for long term.• C/F need strong global presence/competitive

brands/efficient technology platforms• Chrysler not strong in Europe.• -brand portfolios like passenger and commercial

vehicles-re invigorate.-short term.• 4 years time –if C/F –achieves cost cutting/techno

sharing/global integration/product rationalization/R&D

Case Study Summary

• With Chrysler bankruptcy proceedings and FIAT’s ambition in North America-transatlantic auto alliance could be a success.

• The challenges are:corporate culture/control/value chain operations.

Case Questions

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

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

3. Compare and contrast Chrysler and Fiat in the area of global operations and manufacturing?

4. Analyze 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 and long term?

5. What did you learn from Chrysler-Fiat Strategic Alliance regarding managing multinationals in the changing global business? What role did the US gov’t play in the formation of this alliance?

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.

History of Chrysler• Founded in 1924 by former exec of Buick Motor Co. Walter Chrysler

• 1928: intro Plymouth and DeSoto

• 1940’s: domestic car production was banned; made trucks, tanks and armaments WWII

• 1960’s : entered Euro mkt

• 1970’s: focused on ‘gas guzzlers’; saw 26% fall in production

• 1978: Lee Iacocca becomes CEO; “Lead, follow or get out of the way”

• 1980: received $1.5 bil loan from US gov’t

Con’t• 1996: gained 16.2% mkt share; but still ranked 3rd. US auto industry

• 1998: Merged with Daimler-Benz, became DaimlerChrysler, HQ moved to Stuttgard. Cost $36bil

• 2001: cut 26,000 jobs due to competition, quality issues, changing mkts

• 2005: good sales of Ram, Sedan and Magnium brought $2bil in profits

• 2006: net loss of $1.5bil due to competition and changing mkts

• 2007 Feb: cut 13,000 jobs (16% of workers)

• 2007 May: de-merger; Chrysler sold to Cerberus Capital Mgmt sold for $7.4bil

Con’t

• 2009 Apr: recession and high gas prices forced Chrysler into Chapter 11 bankruptcy

• 2009 Sept: Fiat obtained 20%

History of Fiat• 1899: Fiat formed by Giovanni Agnelli (fam still owns 35%)

• 1969: acquires Lancia and 50% of Ferrari (now 85%)

• 1970-80’s: operating loss due to labor strikes and oil shocks

• 1976: Libyan gov’t bought 10%; protest to deal by Italian businesses

• 1980-85: cut 100,000 jobs

• 1986: obtained Alfa Romero, becomes largest Euro automaker

• 2000: GM purchases 20% for $2.4bil

Con’t

• 2004: Sergio Marchionne becomes CEO

• 2005: GM pays $2bil in cash to end 5 yr partnership

• 2009 Feb: Fiat gained 20% in Chrysler (non cash, should provide tech and markets)

• 2009 Sept: merger concluded, Fiat owns 20%.

Ownership Structure of Chrysler before and after 2009

Features of Global Auto Industry

• One of the largest industries

• Socio-political element (local politics, regulation, national pride, part of military industrial complex esp war time)

• Relationship with unions

• Hundreds of alliances, joint ventures, collaboration, consolidations over past 20yrs

• Change in demographics, demand in emerging mkts and high costs lead to

estab. plants in low cost economies (seeking max. return on investment)

Future Trends

• Global consolidation and mergers (may result in closure of plants, dealers, jobs)

• Restructuring and efficiencies due to flexible manufacturing, product dev, and supply / value chain

• “A painful realignment made tougher by falling sales..Change in coming, and it’s coming with gut-wrenching speed..This time no one is calling a downturn, but a permanent change in direction of the North American industry.” ~ The Harbour Report ’08

• Classic example of competition, evolution and creative destruction

Chrysler and Fiat strengths and weaknesses Chrysler Strengths

Estab. brand and distribution in North America

Major maker of utility trucks

Jeep and minivans very popular

Fiat StrengthsStrong leadership under Sergio Marchionne; resulting in successful turnaround strategy, improved business practices and culture.

Reinvigorated in Europe

Popular in small car segment, with many new models

Improved quality

Pay –off of alliances (eg. Tata, Ford, GM)

WeaknessesDe-merger created problems

Quality issues

Financial Losses (-4% sales growth, ‘08)

Alliances with Mitsubishi & Hyundai unproductive

Weaknesses

Lacks charisma in global mkt

Limited product portfolio in global mkt

Corporate Tie-up

Aim is to create optimality from R&D, product dev, distribution, knowledge sharing, i.e. economies of scale

Fiat to provide tech-related expertise and assembly platforms to Chrysler for it to dev small, fuel efficient autos in North Am (e.g. 2013 Dodge Dart) http://bcove.me/xm22gffp

Non-cash deal; initially 20% stake, could increase to 35%, after 2013 up to 51%...must meet conditions, i.e. fuel efficient cars and small auto engines in North Am.

Part of US gov’t bailout and bankruptcy proceedings; Obama admin provided $4 bil to Chrysler with conditions

Fiat to receive access to lucrative North Am mkt (quick market penetration strategy)

Opportunities to target small / compact car and hybrid segments where Fiat is strong

Possible weaknesses: poor corporate integration (differences in corporate culture), mismatch of brand portfolio, R&D priorities, control issues, regulation & antitrust issues, distribution & ownership problems

Outlook

• “…he will create a new company consisting of Fiat Auto (without Ferrari, Maserati or the rest of Fiat group), Chrysler and GM Europe…stakeholders would be Agnelli family, UAW union health-care fund and GM..In a normal year that could expect revenues of $100bil from sales of 6mil cars-just above Mr. Marchionne’s viability threshold.” ~ The Economist.

Your Take

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

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

3. Compare and contrast Chrysler and Fiat in the area of global operations and manufacturing?

4. Analyze 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 and long term?

5. What did you learn from Chrysler-Fiat Strategic Alliance regarding managing multinationals in the changing global business? What role did the US gov’t play in the formation of this alliance?

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.

My Take

Alliance may have drawbacks, but seem to be good fit for both. Chrysler needed the alliance due to bankruptcy and conditions of bailout and a partner to bring innovation, R&D, low-cost tech and access to EU mkt; Fiat will have access to North Am market and distribution.

Synergies may not all work due to issues of culture and integration, however opportunities exist to reduce costs, and provide low-priced fuel -efficient automobiles.

In short run Chrysler will have gain new platform for fuel efficient vehicles, a segment it is not presently competitive in and access to EU; Fiat will gain entry to Am mkt. In Long run, new technologies may result from partnership.

Opportunities can result from a crisis. Chrysler can increase mkt share in mid and low size segments and Fiat entry to the North Am market.

The Dodge Dart introduced but very slow sales.

Negotiations with unions in Italy have been ongoing; Fiat set to cut jobs due to losses of 700 billion euros.