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Chrysler Short-Term Gain Fails To Dispel Long-Term Worries

Real Test Awaits U.S. Reaction To Fiat-Based New Cars

Chrysler has emerged from bankruptcy, but investors are cautious about its survival prospects despite reporting profits in the third quarter.

Chrysler, 20 per cent owned by Fiat of Italy, racked up an operating profit of $239 million in the third quarter and now expects a total of $700 million for the whole year, compared with a previous forecast for 2010 of $200 million. That’s the good news. After factoring in loan payments to the U.S. government though, Chrysler posted a net loss in the quarter of $84 million, for a total net loss so far this year of $453 million.

Deutsche Bank is impressed, but not convinced yet that Chrysler will survive.

“While these achievements are certainly solid and ahead of its initial plan, we note that sustainability of these levels is yet to be seen. We continue to maintain our view that successful launch of joint Fiat/Chrysler products from 2012 onwards and the broadening of Chrysler’s portfolio will ultimately show whether or not the company/combination is viable in the long term,” said Deutsche Bank analyst Gaetan Toulemonde.

Fiat’s stake in Chrysler should rise to 35 per cent by the end of 2011 as the Italians complete agreed deals on sharing engineering and car designs.  Fiat will launch the 500 mini-car in America in January. Fiat-based new models will include a new Dodge compact saloon in 2012 to replace the Caliber. A Chrysler compact-based Fiat is planned for 2013. The Dodge compact should deliver 40 miles per U.S. gallon, and this is one of the milestones for Fiat to raise its stake to 35 per cent, without money changing hands. Fiat is expected to eventually raise its stake to 51 per cent, but this is complicated by the fact that Chrysler must first repay its U.S. and Canadian bailout loans.

The Financial Times Lex column also had reservations on Chrysler’s future, and said the real test will come when Americans contemplate the new Fiat-based Chryslers.

Car Tsar
“The real issue is not Chrysler’s lack of earnings today or its near-term product plans but its very viability. If the U.S. car market recovers and Chrysler holds its ground then headline numbers should improve – former car tsar Steven Rattner predicts that GM and Chrysler will be “gushing profits” once U.S. car sales return to 15 million units,” Lex said.

“But that is one-third above today’s level and Chrysler’s break-even levels is nearly one-fifth above today’s sales. More significantly, this leaves it a car industry minnow until its “global platform strategy” with Fiat creates economies of scale. The true test of customer acceptance will not come until 2012, as will the appeal of Fiat vehicles in the U.S. market after a long absence,” Lex said.

Fiat pulled out of America almost 30 years ago, tripped up by poor quality. There’s no reason to think that today’s buyers will paying any attention to that unreliable history, although any major failures in quality are likely to be fatal to the venture.

Neil Winton – November 15, 2020

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