John Calvin

Management Essay on The 2009 Chrysler-Fiat strategic Alliance

The 2009 Chrysler-Fiat strategic Alliance

Executive Summary

In history, Chrysler has always been ranked third among the largest manufacturers of automobiles in North America. It is only preceded by General Motors (GM) and Ford in terms of market share and has continued to maintain this position designation even after entering intothe new Asian OEMs. Chrysler was founded in 1925 by Walter Chrysler and manufactured cars for the common citizens and their models included the Dodge Ram, Grand Caravan, Charger, and Ram amongst others (Chrysler 2009, p.8).However, it faced many challenges such as lack of superior technology and adequate funds which both its competitors had. These challenges led to dissatisfaction on the quality of Chrysler’s brands, reduction in consumer loyalty and subsequently reduction in profits. It thus was in dire need of technological and financial boost to get back on track and compete for the market share.

Fiat is a European based company, which began its operations in the US market at around 1908 and was renowned as the successful manufacturer of brands such as Lancia Delta, Maserati Gran Turismo, and Ferrari 458 amongst other brands. However, with time, customers complaints regarding the quality emerged and within no timeFiat experienced decreased sales, just like Chryslerand this made it halt its operations in the US(Chrysler Group LLC and Fiat Finalize Global Strategic Alliance 2009, n.p.).

Chrysler and Fiat were once competing against each other but they entered into an alliance, which meant that they shared the common interest of wooing the American market. Besides interests, these two companies share similar competitors, like Mercedes- Benz, Ford and Toyota, amongst others, that can potentially affect their proceeds (Chrysler Group LLC and Fiat Finalize Global Strategic Alliance 2009, n.p.).

Introduction and Case Overview

In terms of profitability, the automobile market is one of the leading markets and has been controlled mainly by very successful companies, which have survived through economic hurdles that significantly reduced demand for automobile. The Chrysler and Fiat are two successful companies that have shown prominence in the automobile industry are Chrysler and Fiat and they controlled the industry at the end of the 1900s. Whilst Chrysler is an American based company that held a strong position in the automobile industry since the early 1900s,  Fiat is an Italian based automobile manufacturer and one of the leading automobile companies in Europe (Chrysler Group Llc 2009, p.25).

Due to the decrease in the market share and production of monotonous brands, both companies drastically weakened their market appeal amongst their clients and this resulted in reduced profits. This situation forced Fiat to leave the US market in the 1980s, while Chrysler held on despite a drop in sales and reduced demand. An alliance between the two companies held the promise of increases customer base as well as prospective profits(Chrysler LLC and Fiat Group 2009, n.p.).

The increase in oil prices and the global recession resulted in Chrysler LLC becoming bankrupt,  and the company was compelled to sell almost all of its assets to a new corporate entity that would operate as Chrysler Group (Warburton 2009, p.531). These were the regulatory demands that were stipulated by the US Bankruptcy court and a number of other regulatory and antitrust bodies.

Chrysler fell behind to become the third leading producer of automobiles (after General Motors (GM) and Ford) in the US, and the vast, advancing nature of the US and international automobile manufacturers, the corporation required immediate improvement and appeal in order to compete at their level (Butler2010, p.99). Fiat, on the other hand, desired to get back its status in the American market. Therefore, a strategic alliance between the two was seen as the most viable option that would benefit both companies.

The Chrysler and Fiat Groups sealed their agreement to form the strategic alliance in 2009. Fiat was charged with the responsibility of contributing its technology, platforms for small and medium-sized, economical cars that are environmentally friendly and in high demand within the consumer market(Fiat Group et al. 2009, n.p.). Additionally, Fiat’s operational expertise in the automobile industry and its ready international supply system outside of North America, would be of great profit and a learning platform for Chrysler and the alliance at large.

The agreement stipulated that the Fiat Group would acquire 35% stake of Chrysler Group and also buy an additional 20% stake after the first year of the alliance and working together. The agreement was meant to benefit both companies as it would strengthen them and enable them to overcome their weaknesses. Nevertheless, it was agreed that until the taxpayer money is refunded, Fiat would not acquire a majority stake in the Chrysler (United States 2010, p.738).

After the formation of the alliance, the two corporations implemented new ownership restructuring plans for Chrysler and changes for Fiat to fit in the Italian labor laws, while striving to transform negative perceptions by clients and ultimately solving their market share problems. The alliance would later on create a single, powerful, worldwide competitor that would advance in the automobile market with great purpose and in a manner that each of the companies would not have managed separately (Chrysler Group Llc 2009, p.25).

Case Analysis

Whenever a global economic recession hits, companies have to devise serious strategies and enforce careful procedures to ensure the survival of companies because in most case very many individuals depend on them for their livelihoods (Mellahi n.d.). In another angle, the management teams of different companies are usually under a lot of pressure to come up with mechanisms that would ensure that these companies survive through the hard economic times and emerge triumphant, so as to protect the investments that are made by the shareholders and the many other businesses that would be affected.

The Italian Fiat and the American Chrysler came to an agreement to establish an international alliance in January 2009, taking into consideration that the arrangement seemed more feasible because of their functions, compatibility and long term synergies. It was definitely imperative for the alliance to happen because Chrysler needed to recover from the huge losses they incurred in 2006, which almost drove them to bankruptcy and made them struggle to sustain operations in the turbulent economy (Warburton 2009, p.531). On the other hand, Fiat needed to re-enter the automobile market of North America which it had earlier on exited and compete effectively with other leading automotive manufacturers.

Chryslerhad experienced a major drawback when its partner, Daimler, resolved to withdraw its partnership. By so doing, Daimler sold its eighty percent stake to the Cerberus at a value that was estimated to be less than 1/4 of the actualvalue they had acquired it and this move sent Chrysler into crisis, leading to poor performance as it was not able to keep up its operations.  Coupled with the high oil prices and the worldwide economic recession, these factors compelled Chrysler to declare bankruptcy (Warburton 2009, p.531). The only proposed salvation plan that was agreed to bythe federal government was for Chrysler to form a strategic alliance with another automobile company (United States 2010, p.738).

On its part, Fiat, had recorded success in the European market,but had a fair share of problems. It had been forced out of the North American market in the nineteen eighties because it could not keep up with the losses. The strategic alliance, would help Fiat to re-enter the North American market without having to put up too much effort because Chrysler was already an established brand in this market(Chrysler Group LLC 2009, n.p.).

This strategic deal would give Fiat the opportunity to acquire selling technologies and help it gain access to new markets by introduction other vehicle brands. It would also enable it toexpand into the US market, where the company had performed poorly before. Simultaneously, the agreement would enable Chrysler to recover from its huge losses which had been made during the sale of its trucks and sports utility vehicles.The agreement for Fiat to acquire 35% of the Chrysler share and get additional 20% after the first year of their alliance comprised the strengths of the deal between the two corporations and made the alliance a profitable venture(Chrysler Group LLC 2009, n.p.).

Some of the potential weaknesses of the alliance included the risk of Chrysler not being able to improve its sales and production hence being unable to increase its customer appeal. Such a scenario would mean that Chrysler would fall back to the crisis they had just been rescued from(Chrysler Group LLC 2009, n.p.). It would further imply that Fiat would abandon the deal, just like other companies have done in the past, hence losing out in terms of the investment it had made in Chrysler.

The main threats to this strategic alliance would come from the dominating automobile companies which would otherwise increase and perfect their strategic advantages so as to gain any potential profits that could have been directed towards the Chrysler/Fiat partnership. Some of the opportunities that exist in the alliance are that Fiat would restart the its operations and production of cars in the US market, while Chrysler would potentially gain proceeds for future product lines through rejuvenation of their plan (Chrysler Group LLC 2009, n.p.).

Fiat specializes in manufacturing small cars, luxury models, diesel engines and transmissions. even though access to Fiat’s technology would be a big boost for the operations and productions of Chrysler, the company would still need funds and the capacity to develop new vehicles.

Stakeholders in this alliance would either benefit or lose out depending on the timing that they chose to invest. The credit holders and other investors under Fiat that is Chrysler LLC were more likely to gain from this alliance. Stakeholders in this case may be used to refer to the economy, proprietors, customers, workers, strategic allies, the government among other entities.The stakeholders from the previously separate corporations had the choice to either quit or carry on having a stake in the alliance.

On the other hand, the potential dominance that could be created by this alliance was bound to attract a fresh type of stakeholders. The Chrysler/Fiat alliance would be in the best interest of their different stakeholders and would also be a strategy to aid the companies in attracting and gaining strong stakeholders that would be able to support the alliance both in the good and the bad times. With the evidence of potential progress and successprojected by the alliance, the stakeholders would definitely raise their stake.

From the SWOT analysis, the strengths for the stakeholders are in the form of the potential revenues that they are likely to make if the alliance succeeds. The weaknesses would take the form of  departure of a section or all the stakeholders from the alliance in case of disloyalty or if they lack sufficient confidence to proceed with the deal. The opportunities to be explored would be driven by a combination of the revenues coupled with worldwide presence, while the threats would include any advantages of the competitors that could prevent the alliance from making profits (Baldi 2013, p.27).

The two partners have devised prospective plans for their brand lines that are meant to retain the existing stakeholder and attract other new stakeholders to their companies. From this strategic alliance, Fiat not only intends to establish their operations in America once again, but also come up with completely new brand lines (Chrysler Group LLC 2009, n.p.). It expects that it will gain access to some of Chrysler’s plants, and this will promote its capacity to produce more of the brands. Chrysler, on the other hand, projects that the alliance will enable it to continue with the production of their successful brands,like Jeep, and to employ Fiat’s technology to modify some of its brands and appeal to more clients.

Conclusion

Many companies use diverse strategies to expand and prevail over the challenges that they  face as a result of the evolving business environment. One of the strategies best used by business enterprises is the formation of alliances to facilitate expansion as well as ensure that their operations remain relevant in the product markets(Mellahi n.d.). However, the managers of the partnering companies must thoroughly examine and comprehend the pros and cons of such arrangements before they resolve to enter into any alliance.

The alliance initiative coincides with a major milestone in the rapidly changing phase of the automobile sector and gives a confirmation that Fiat and Chrysler were indeed committed and determined to keep on with their significant role in automobile production within the global arena. The agreement would provide a much needed and timely opportunity for the two companies to gain access into the most relevant auto mobile markets, which are synonymous with producing vehicles that are environmentally friendly. It would also help the two companies venture into the European market in which Fiat is reputable as a global leader and enjoy the benefits from extra cost synergies.

The partnership between Fiat and Chrysler was an excellent match as it led to the creation of a powerful, fresh global competitor(Baldi 2013, p.27). It provided Chrysler with numerous strategic benefits, which included the access to the products that complemented their current portfolio,the formation of a distribution network outside North America, in addition to the cutting on costs from the expense incurred in the creating designs, engineering, purchases, manufacturing and marketing.

The deal would later put Chrysler on the global map for producing a range of competitive automobiles that meet the needed global standards of emissions and fuel efficiency. The company had to abide by the conditions of the government loan and also make sure that the alliance provided a return on investments for the American taxpayers through sustaining prospective product and technology advancements, securing the continuing viability of the Chrysler brands, and creating a renewed confidence in the customers, whilst maintaining the jobs of the Americans(United States 2010, p.738).

 

References

“Chrysler Group Llc and Fiat Group; Chrysler Group LLC and Fiat Finalize Global Strategic Alliance; New Chrysler Emerges as a Stronger, More Competitive Global Company”, 2009, Journal of Transportation, , pp. 25.

“Chrysler Llc; Fiat Group, Chrysler LLC and Cerberus Capital Management L.P. Announce Plans for a Global Strategic Alliance”, 2009, Biotech Business Week, , pp. 1437.

“Chrysler, Fiat finalize alliance”, 2009, S S G M, Service Station & Garage Management, vol. 39, no. 7, pp. 8.

Baldi, F2013, Options in Alliances: Valuing Flexibility in Inter-Firm Collaborations, Dordrecht: Springer, Pp. 27.

Butler, J2010, Navigating today’s environment: The directors’ and officers’ guide to restructuring, London: Globe White Page Ltd. Pp. 99.

Chrysler Group LLC and Fiat Finalize Global Strategic Alliance; New Chrysler Emerges as a Stronger, More Competitive Global Company 2009, , London.

Chrysler Group LLC and Fiat Finalize Global Strategic Alliance; New Chrysler Emerges as a Stronger, More Competitive Global Company 2009, , New York.

Chrysler LLC and Fiat Group Announce Global Strategic Alliance to Form a Vibrant New Company 2009, , New York.

Fiat Group, Chrysler LLC and Cerberus Capital Management L.P. Announce Plans for a Global Strategic Alliance 2009, , New York.

Mellahi, K.n.d., Global Strategic Management.

United States, Obama, B & United States, 2010, Public Papers of the Presidents of the United States: Barack Obama, pp. 738.

Warburton, A 2009, Understanding the Bankruptcies of Chrysler and General Motors: A Primer. Syracuse L. Rev.60, p. 531.

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