Q1. Expand on the rationale behind the Fiat and Chrysler strategic alliance.
In December 2008 Fiat witnessed such a drop off in its demand for cars that they were forced to close for a month and lay off close to 50,000 workers. The company indicated that amid the financial crisis it was looking for a partner who could give the company the much needed push in the North American market. Fiat learned about Chrysler’s bankruptcy problems and put an offer on the table for the purchase of Chrysler. Experts felt the alliance was part of Fiat’s expansion and risk diversification strategy.
On Jan 20th, 2009 as part of its bankruptcy filing, Chrysler announced its plans to establish a global strategic alliance with Fiat. The rationale for this alliance is very simple. Commenting on the alliance, CEO of Fiat and Chrysler Sergio Marchionne summed it up by saying, “This transaction represents a constructive and important solution to the problems that have plagued not just Chrysler in recent years, but the global automotive industry as a whole. Bringing together Fiat’s world class technology, platforms and power trains for small and medium sized cars and its extensive distribution network in Latin America and Europe with Chrysler’s rich heritage, strong North American presence, and talented and dedicated workforce will create a powerful new automotive company while helping preserve jobs and a manufacturing industry that is critically important to the US and Canadian economies.
The alliance is a good example of horizontal integration.
Benefits of horizontal integration include:
Reducing costs- horizontal integration allows company’s to grow and therefore to realise economies of scale. As part of the alliance both of the companies would reportedly launch seven new vehicle models in the US market. This will be cheaper to do as they will use Chrysler’s plants across North America aswell as Fiats complementary technology and expertise.
Observers think the alliance promises opportunities to create value for both Fiat and GM shareholders through significant synergies in such areas as parts cost reduction, optimisation of activities regarding powertrain modules, efficiency in financial service operations, cross-sharing of automotive technologies, common platforms and architectures.
Product bundling- horizontal integration can allow the company to offer a wide range of products that can be sold together for a single price.
Managing industry rivalry- horizontal integration helps companies manage industry rivalry by reducing excess capacity in the industry.
Market power/ Consolidation- The pooled skills and capabilities of the companies should generate synergy. Although Fiat is returning to a country from which it was driven out by poor quality It could be worth it to get back into one of the worlds largest markets
-Americans used to quip that its name stood for "Fix It Again, Tony". This is a big risk. But the reward is to get back into one of the world's largest markets and gain the scale that will promote Fiat from a smallish European firm (albeit with a successful business in South America) to the ranks of global carmakers. Its home market in Italy is too small, and its operations there too uncompetitive, to provide the basis for long-term survival. Merging with Chrysler will mean sharing development costs and technology, but will also mean having to turn around an ailing firm with competitiveness problems of its own. In sum, Fiat is playing double or quits. (Economist). (2010))
According to some analysts the reason for Fiat showing an interest in Chrysler was that forming an alliance with the company would help it in re-establishing its presence in the US market. We also believe this would...
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