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Fiat Buys American in Chrysler Deal


Merger could allow entry into small-car market.

If you've ever driven a Fiat Spider or had a friend who owned one, you know the good-looking car was a mechanical horror.

Chrysler has a great brand in the Jeep, but is generally known for building so-so cars.

This raises a basic question: Will an agreement between Fiat and Chrysler allow them to take on the formidable reputation for quality Toyota (TM) and Honda (HMC) have rightly earned?

In a joint statement, Fiat and Chrysler announced they've signed a non-binding agreement to share technology and vehicle frames. Fiat will take an initial 35% stake in Chrysler, but won't make and an immediate cash infusion in Chrysler and isn't committed to future funding. Instead, Fiat will share its successful small-car platforms and its fuel-efficient engines with the American automaker.

The lack of cash may suggest that Chrysler is desperate for fresh technology and therefore a cheap date. The deal doesn't mean Chrysler, 80.1% owned by Cerberus Capital, can return the $4 billion loan it received from the US Treasury.

But Chrysler gets what it needs - a leg up in the small-car market.

The Italian company pulled the Alfa Romeo from the US market in 1995 and yanked the Fiat in 1983, limiting its offerings to the pricey Ferrari and Maserati. Fiat is probably too small to survive on its own and the deal could increase its marketing clout through Chrysler dealerships. But keep in mind that the Italian company also made the Fiat Strada, one of the all-time worst cars in creation.

Does anyone remember the Dodge Aspen and its thumb-sucker twin, the Plymouth Volare? Or the Chrysler Cordoba? Probably not. "Corinthian" leather -- concocted by an advertising copywriter -- is good for a hoot, but that's about it.

In 1979, Chrysler was close to going bust when it was saved by the charismatic Lee Iacocca of Ford (F) Mustang fame. He secured federal loan guarantees -- a whopping $1.2 billion -- and cooked up a new generation of compact cars: the Dodge Aries, Plymouth Reliant, Chrysler LeBaron and Dodge 400. The K-cars, unceremoniously named for their platform, were simple, nuts-and-bolts, front-wheel-drive sedans and station wagons followed by convertibles. Each had a fuel-efficient 4-cylinder engine and provided seating for six.

In 1984, the frame was stretched into the first minivan - the Dodge Caravan and Plymouth Voyager.

About 3 million K-cars were sold between 1981 and 1995, not counting the stretched versions. The vehicles were affordable, light years away from sexy and generally acceptable. The K-car kept Chrysler alive, but didn't mark the company's renaissance.

It's doubtful that buyers looking for quality and reliability will turn to Chrysler-Fiat first, second or even third. But Chrysler's deal with Fiat may keep both automakers alive during the current economic crunch, and in an increasingly competitive worldwide market.
No positions in stocks mentioned.
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