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Fiat hits roadblocks to increasing Chrysler stake

by Bill Cawthon on

Fiat CEO Sergio Marchionne is now saying the Italian automaker may delay taking a majority position in Chrysler. Fiat still hopes to gain a 35% share in the American company, which it has controlled since Chrysler’s government-engineering bankruptcy in 2009 but is running into some unanticipated problems in achieving the requirements set out by the Obama administration.

The first hurdle, which will increase Fiat’s share from 20 percent to 25 percent, will be cleared late this year or early in 2011, with the rollout of the Fiat 500 for the North American market. The new 500 will be built at the Chrysler plant in Toluca, Mexico. Another five percent will accrue with the introduction of a high-efficiency engine capable of delivering 40 miles per gallon. That milestone should also be reached in 2011.

Gaining the last five percent requires international distribution of Chrysler products and it’s this area that is giving Marchionne headaches.

“Fiat is technically in compliance with that requirement,” Marchionne told participants in a conference call. “The execution of that obligation is something which is fraught with difficulties.”

Fiat is already set up to handle Chrysler distribution in Europe but there are challenges in the crucial Latin American market, specifically Brazil. Fiat sells more vehicles in Brazil than it does in Italy and it’s the best-selling automotive brand in Brazil, which is one of the four BRIC (Brazil, Russia, India and China) markets that are predicted to be the hottest growth markets for auto manufacturers in the near future. However, the plan to introduce Chrysler vehicles to Latin America’s largest market is hampered by Brazilian rules governing management of dealer networks.

Fiat leaders are talking to representatives of the U.S. government to see if a mutually agreeable replacement for the original terms of the agreement can be worked out or if a solution to the problems can be found. Marchionne is still optimistic a satisfactory resolution can be reached and Fiat will have its 35 percent share by the end of 2011.

Once Chrysler has repaid the loans it received from the U.S. government, Fiat has the option to buying another 16 percent of Chrysler, giving it majority ownership, but Fiat’s board of directors hasn’t made a decision on such a purchase. Fiat has not and will not have to part with any cash to get the first 35 percent, a condition Marchionne set before agreeing to the Italian-American partnership.

Bill Cawthon grew up in the auto industry in the 1950s. His Dad worked for Chrysler and Bill spent a number of Saturdays down on the plant floor at Dodge Main in Hamtramck. Bill is also the U.S. market correspondent for just-auto.com, a British auto industry publication, and a member of the Texas Auto Writers Association, which has named the Jeep Grand Cherokee the “SUV of Texas” several times and named the Ram 1500 as the “Truck of Texas” two years running.

Bill has owned five Plymouths (including the only 1962 “Texan”), one Dodge and one Chrysler and is still trying to figure out how to justify a Wrangler. He also has owned at least one of every 1:87 scale model of a Chrysler product. You can reach him directly at (206) 888-7324 or by using the form.

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