Fiat SpA chief executive officer Sergio Marchionne is nuts

The 56-year-old executive wants to combine his undermanned Italian auto business with bankrupt Chrysler LLC in the US and with the German Opel car operations now owned by the almost bankrupt General Motors Corporation.

Put three losers together and produce profit? Even if this trio were prospering, the notion would border on the insane.

Imagine the cooperation needed among Italians, Germans and Americans. The logistical problems of which unneeded factories to close and which vehicles to produce where would be mind-boggling. Government opposition to eliminating jobs in Germany and Italy might be worse.

Still, considering the destitution of the global auto industry — and the backward thinking of its executives generally — crazy ideas like Marchionne’s may be just what the industry needs.

The US government has already approved Fiat’s plan to take a 20 percent stake in Chrysler in return for small-car technology that Chrysler says is worth as much as $10bn.

Fiat’s stake could grow to 35 percent or more.

Marchionne is also negotiating a deal with General Motors to add the Opel, Vauxhall and Saab brands in Europe — and possibly some Latin American business — to his mix. GM says there are other potential buyers for Opel.

Fiat’s CEO says the auto industry has to expand and contract at the same time. He says Turin, Italy-based Fiat needs to increase its annual production to 5.5 million to six million cars a year, compared with the current two million or so, to get its costs per-car low enough to compete. His plan envisions building 6.8 million cars a year with sales totalling 80 billion euros ($109bn).

At the same time, total industry production exceeds demand by 50 percent and has to be reduced, Marchionne says. American companies, urged on by their government, lead the way toward rationalising the business by closing plants and cutting jobs, he says.

Marchionne, who is also a lawyer and accountant, became Fiat CEO in 2004 after the company had lost money for three years. Fiat lost another 1.6 billion euros ($2.16bn) in 2004 but has been profitable since, earning $2.16bn last year. The company lost 410 million euros ($552.4m) in the first quarter, as recession took its toll in Italy. Fiat shares closed on May 16 at 7.60 euros ($10.24), down from 24.09 euros ($32.46) in July 2007. Marchionne now plans to take most of Fiat’s auto business into a new group, leaving commercial trucks, luxury-cars Ferrari and Maserati and agricultural and construction equipment with the old parent company.

The odds against Marchionne’s dream coming true are enormous. He must be aware of the ill-fated combination of Chrysler and Germany’s Daimler AG. In 2007, Daimler dumped Chrysler on Cerberus Capital Management LP, a leveraged buyout firm, and now the US automaker is broke.

Closing plants and firing workers may not be as easy in Germany and Italy as it has been in the US. The German government said that it might offer loan guarantees to Opel to ease the way for its sale — and to save as many of the company’s 25,000 German jobs as possible. The politicians won’t be happy if Marchionne tries to cut deeply into Opel’s workforce. Marchionne remains undaunted. He’s already talking about an initial public offering of shares in Milan and Frankfurt of his yet-to-be-created company. Marchionne believes in miracles.

My first reaction to mergers, takeovers and empire-building usually is one of suspicion. This one I’m certainly rooting for.

David Pauly is a Bloomberg News columnist. The ideas expressed are his own.

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