The real Fiat scandal

John Berlau & Mark Beatty Competitive Enterprise Institute
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The real outrage arising from the 2009 Chrysler bailout is not that its parent company, Fiat, is planning to build plants in China. It’s that the politicized bankruptcy process limited Chrysler’s growth potential by tying it to an Italian dinosaur in the midst of the European fiscal crisis. The Obama administration literally gave away ownership of one of the Big Three American auto manufacturers to an Italian car maker struggling with labor and productivity issues worse than those that drove Chrysler to near-liquidation.

As a result, much of Chrysler’s profits from its overhauled line are going to prop up Fiat’s failing, money-losing Italian business, rather than to expanding production and jobs in the U.S. Moody’s had downgraded Fiat’s credit rating to “junk” even before the Obama administration arranged for it to acquire a Chrysler stake, and last month Moody’s gave Fiat another downgrade that the Financial Times described as even “further into ‘junk’ territory.”

That means, as Barron’s put it in a June headline, “This time, Chrysler could bail out Fiat.” Actually, the Barron’s headline is slightly misleading in one respect — Fiat didn’t contribute much of anything to the Chrysler’s bailout. In the 2009 deal overseen by the Obama administration’s auto task force, Fiat paid no money to acquire its initial 20 percent stake in Chrysler — only contributing some of its intellectual property, instead. Fiat would later pay $2.2 billion to raise its stake in the company to 58.5 percent. All the while, the U.S. government was pitching in more than $12 billion in taxpayer infusions.

In “saving” the American auto industry, Obama didn’t just give a tax break to a foreign company — as he accuses his opponent of doing — he gave an American company away. And he gave it away at the expense of pension funds and other secured creditors, which were given a much smaller stake in the new company than they would have been given under traditional bankruptcy proceedings. American manufacturing workers also lost out on the deal; many are now hostages to the woes of Fiat and the Italian economy.

According to Barron’s, “Chrysler’s resurgence has been so strong that it now provides a lifeline for Turin’s Fiat, which faces serious challenges in Western Europe.” Fiat and Chrysler CEO Sergio Marchionne told Barron’s: “The Fiat Group has a future because of Chrysler.” Similarly, Bloomberg reported that, “without Chrysler, the Italian automaker would have posted a first-quarter net loss” in 2012.

The divergence between Chrysler’s profits and Fiat’s European losses is growing. In late October, Chrysler reported that its third-quarter profit surged 80 percent to $381 million.

But ironically, Fiat’s Marchionne has made Chrysler profitable again not by producing more of Fiat’s mini-cars, as the Obama administration urged it to do, but rather by doubling down on Chrysler’s most “environmentally incorrect” light trucks and sport-utility vehicles, such as the Jeep Grand Cherokee and Dodge Durango. In reporting Chrysler’s third-quarter profit surge, Bloomberg noted that these earnings were “boosted by demand” for Jeep Grand Cherokees, while Fiat has “delayed new models such as the Punto hatchback.”

Marchionne deserves some credit. By refusing to follow General Motors’ lead to march in lockstep with the Obama administration’s wishes, he did not turn Chrysler into another “Government Motors,” making its own version of Chevy Volts that nobody wants. As a result, Chrysler is in a better economic position than GM, and less likely to need a new bailout (unless we bail out the entire European Union).

But making more Jeeps and Dodge Durangos is — to use a motoring cliché — sort of like reinventing the wheel. Some other competent CEO could have figured that one out. Yet Chrysler being tied to Fiat’s deepening European woes makes it less and less likely that much of the profit will be reinvested in the U.S. It’s likely that the bulk of that profit will instead be plowed into Fiat’s sinking Italian ship.

In June, The Wall Street Journal painted a devastating picture of Fiat’s bloated workforce at its Turin headquarters. “Too many inefficient plants, coupled with a plunge in consumer demand, have left not only Fiat, but other car makers … bleeding cash.” Yet Fiat, which employs 63,000 Italian workers, “says it has no plans to cut jobs.” Instead, due to antiquated Italian labor laws (that Big Labor champions in the U.S.), it “furloughs” workers when it idles plants and pays them two-thirds of their salaries.

Because of the dysfunction of its Italian operations, Fiat must squeeze all it can out of its new Chrysler cash cow — bequeathed to it by U.S. taxpayers at the Obama administration’s behest. That may mean lowering costs on profitable vehicles like Jeeps by moving operations to lower-cost nations such as China (though Chrysler insists that it will only do so for vehicles sold in China). Whatever the case, Fiat will be reluctant to put many more American workers on its payroll with so many mouths to feed in its native Italy.

Had Chrysler gone through a traditional court-approved bankruptcy before it received any government money (as Massachusetts Gov. Mitt Romney advocated in a 2008 New York Times op-ed), its investors and workers would have had the opportunity to ask questions about Fiat’s financial viability. Even in 2009, Fiat was showing strains as its credit rating had already been downgraded to “junk,” so a good bankruptcy judge might have blocked such a merger.

Both Romney and Obama backed some form of government guarantees for American auto companies. Government aid to a specific business is something free market advocates can never support. But Chrysler’s politicized bankruptcy took away a more fundamental guarantee — the rule of law — and many American workers will suffer as a result.

John Berlau is senior fellow for finance and access to capital at the Competitive Enterprise Institute. Mark Beatty, a senior majoring in political science and economics at Case Western Reserve University in Cleveland, is a former research associate at CEI.