Here’s a Fiat Chrysler-Volkswagen Alliance That Could Work

Above: FCA CEO Sergio Marchionne and Volkswagen Group CEO Matthias Müller

Fiat Chrysler is getting out of the small and midsize passenger-car business in North America to focus on crossovers, trucks, and SUVs. It seems radical, but it’s not a bad idea. It could also be a decision that drags the automaker to the altar for an alliance that makes way too much sense not to happen.

Sergio Marchionne, the CEO of FCA, recently revised his business plan to mitigate production issues in North America. He wants to free up plant space in Belvidere, Illinois, where the Dodge Dart is assembled, and Sterling Heights, Michigan, where the Chrysler 200 is assembled, in order to build more crossovers and trucks.
2016 Chrysler 200C Side Profile In Motion 04

2016 Chrysler 200C

But don’t think Marchionne will leave his dealers in the cold. He can’t afford to get out of the passenger-car business because he has to meet fuel economy and emissions regulations like everyone else. Trucks and SUVs won’t get FCA there.

Mr. Marchionne, meet Matthias Müller (above left, right, respectively), CEO of the Volkswagen Group, and Dr. Herbert Diess, head of the Volkswagen brand worldwide. Herr Müller and Herr Diess, meet Mr. Marchionne.

You see, your two companies have matching needs. FCA makes mediocre small and midsize passenger cars that require vast incentives as soon as they hit the dealer lots. The Dodge Dart and Chrysler 200 have cornered the market in indifference, selling only with huge incentives. Two of its dealers have even accused Fiat Chrysler of paying such dealerships for reporting unsold cars as sold before the end of a month to boost total numbers, the Detroit News has reported.

Volkswagen, meanwhile, has two plants in North America—one in Puebla, Mexico, and another near Chattanooga, Tennessee. The latter is quite underutilized, more so now as VW grapples with its diesel scandal, which restricts its Tennessee plant to gas-powered-only Passat sedans.

Volkswagen has a Ford Explorer-sized SUV in development that it plans to produce in Tennessee. And it has been moving at the speed of stone to bring it to market. Then what? One obvious addition to its showrooms could be a VW-badged Jeep Renegade. How about a Ram pickup for VW dealers? A Chrysler-badged Passat for FCA? It’s a nice car.
2016 Volkswagen Passat SEL Top View 02

2016 Volkswagen Passat

There are a lot of problems with the two companies just selling rebadged cars. Historically, consumers smell this out and don’t bite in big numbers. One exception was the Chevrolet Nova/Geo Prizm of the 1980s and ’90s; they were built in the General Motors-Toyota NUMMI plant in Fremont, California, alongside the Toyota Corolla. But when Volkswagen sold a Chrysler minivan as the Routan, a few dozen bought the vehicle. So, success is not a slam-dunk.

The other problem is that Fiat and VW don’t like each other much. Marchionne was pretty blunt in his public comments from 2009 through 2012 about VW dumping vehicles at low cost in Europe during the Great Recession, as a way of grabbing market share and hurting companies such as Fiat, Peugeot and Renault. Meanwhile, then-VW chairman Ferdinand Piech was attempting a forced takeover of FCA’s Alfa Romeo.
But the bottom line is Marchionne is a pragmatist, and he will be attracted to a deal that makes sense. An alliance with VW could free up enough cash at FCA to allow Marchionne to realize his ambitious plans to rebuild Alfa as a credible BMW competitor. And VW chairman Müller must understand by now that VW’s own product pipeline for North America does not lend itself to VW realizing anything close to its target of 1 million vehicles a year. He needs help.

With Chrysler’s advantage in pickups, SUVs and crossovers, and VW’s strength in passenger cars, and both companies in need of spreading electric vehicle and hybrid technology across more vehicles, they would seem to be the right match for an alliance.

What could go wrong? Lots. VW already has too many brands to worry about—Bugatti, Lamborghini, Bentley, Audi, Porsche, VW, Seat, Skoda, MAN, Scania Trucks and Ducati. The organization’s collective head could explode if it tries to manage an alliance with FCA. Volkswagen and Fiat do not trust each other, so that hurts a deal’s viability. But perhaps they have people who have been studying the alliance between Daimler and Nissan-Renault to see how such a relationship can work when grown-ups are tasked with running it.

If neither company can afford to go it alone in North America, as Marchionne has suggested, then perhaps the two companies can figure out a way to harness their respective strengths for mutual benefit.

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