Treasury Lowers The Bar, Fiat Snags Another 5% Of Chrysler

Exactly a week ago, Fiat said it would up its stake in Chrysler “within weeks,” and according to the Detroit News, the deed is now done. Having earned 5% of Chrysler’s equity by building a FIRE-family engine in the US (for use in the Mexico-built Fiat 500), Chrysler had to confirm that it has brought in $1.5b in non-NAFTA foreign revenue, and (according to Chrysler’s LLC agreement [ PDF])

[execute] one or more franchise agreements covering in the aggregate at least ninety percent (90%) of the total Fiat Group Automobiles S.p.A. dealers in Latin America pursuant to which such dealers will carry Company products

in order to bring its stake up from 25% to 30%. We already know that Fiat will achieve this goal by rebadging Chrysler vehicles as Fiats for Latin American markets, a move that is technically compliant with the letter (if not the spirit) of the LLC agreement. But, it turns out that Fiat still had to get the Treasury to amend its agreement in order to bend the rules just a little bit more.

Exactly one week ago, a third amendment to the Chrysler LLC Operating Agreement [see gallery] was signed, making this second opportunity for Fiat to increase its share in Chrysler far easier. Whereas the original “Non-NAFTA Distribution Event” called for franchise agreements “pursuant to which dealers will carry Company [Chrysler] products” (note the plural), the amended version requires

“a distribution agreement… which shall (a) cover in the aggregate at least ninety percent of the total Fiat Group Automobiles S.p.A. dealers selling passenger vehicles in the European Union pursuant to which such dealers will have the right to carry one or more Company products (which may include Company products rebadged under any Fiat Group Automobiles S.p.A. brand name)” [Emphasis added]

The amendment also covers Brazil under the same language, which means Fiat was able to get Treasury to back off on a number of key conditions. First, Treasury only gets agreements to distribute Chrysler Group vehicles in Brazil and Europe, whereas the original called for agreements with Fiat dealers in all Latin American countries that Fiat has a presence. This was apparently too difficult for Fiat to negotiate with all of its Latin American dealers, so it was dropped (Chrysler dealers who were cut in the bailout-era dealer cull, take note). Second, the agreement went from requiring the sale of multiple Chrysler group models at Fiat’s Latin American dealers to requiring only one model to be sold in Fiat’s European and Brazilian dealers (so much for developing robust foreign markets for US-built Chrysler products). Finally, by agreeing in writing to Fiat’s rebadge request, Treasury has written the death warrant for any hopes of seeing Chrysler emerge as even a semi-independent company. Without any effort to push Chrysler’s brands in developing markets, Chrysler will become little more than the US manufacturing and retail arm of Fiat.

Are these amendments pragmatic? Possibly. It may not have been reasonable to expect Fiat to subvert its own global brand-building exercises to pump up Chrysler’s independent value, but that’s just what Treasury’s initial agreement with Fiat did. If Fiat was willing to agree to it when a bankruptcy-rinsed and publicly-refinanced Chrysler was on the line, why would Treasury back away from it after the fact? After all, Fiat was going to sell “at least one” Chrysler in most of its European dealerships anyway (as its Lancia line, and the Fiat Freemont), so why get rid of the multiple-vehicle requirement and leave aside the non-Brazilian Latin American markets? Chrysler Group’s vehicles would have had at least as good of a shot in Latin America as they have in Europe, particularly if Fiat had any intention of developing Chrysler’s brands outside of North America.

What this amendment acknowledges then, is that Chrysler’s opportunities for any kind of standalone independence are not something the Treasury is willing to fight for. Despite the rhetoric about “saving American automakers,” Treasury clearly has no intention of making any effort to preserve Chrysler’s options outside of being subsumed by Fiat. Like the green justifications for Treasury’s intervention in the auto industry, the “preserving American companies” justification has been abandoned in favor of a “we saved jobs” after-the-fact justification. Which would have been fine if Treasury had been upfront about it, and hadn’t signed agreements holding Fiat to conditions that made the bailout seem more favorable to American taxpayers, only to abandon them.

As things stand, Treasury has botched negotiations over Fiat’s “ecological commitment” (or purposefully made the agreement seem more significant than it is), and now it has pulled the teeth out of an agreement that was supposed to guarantee Chrysler some independent viability and access to foreign markets. It’s more than a little bit puzzling that, having been literally deadlocked over whether or not to save Chrysler at all, the president’s auto task force (and its successors at Treasury) decided not to save Chrysler, but to pump it with taxpayer cash and then doom it to becoming a Fiat subsidiary. That this would be accomplished while maintaining the impression that taxpayers were getting some kind of value out of the deal (in the form of the “ecological commitment” and “Non-NAFTA Distribution Event”), speaks to the fact that the rescue of Chrysler was, rather than the act of bravery it is so often trumpeted as, ultimately an act of cowardice.