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Fiat takes Chrysler stake as France readies aid

  Italy’s Fiat took a 35% stake in Chrysler, launching a venture designed to secure the beleaguered US carmaker’s future, as France asked its auto industry to commit to output targets in exchange for aid.

Chrysler said on Tuesday the deal, which involves no cash investment, formed a key component of plans to secure its future, and would grant it access to Fiat’s more fuel-efficient vehicle platforms, engines and transmissions. News of the transatlantic partnership broke as politicians struggled to fashion a coordinated response to the worst crisis to hit the auto industry in decades.

French Prime Minister Francois Fillon said his government was considering an aid package for the country’s carmakers worth €5-6 billion. “I think all European governments share this opinion ... There is an emergency. We need a massive response on the automobile sector’s financing,” he told a French car industry summit. Measures would be announced in the coming days, he said.

But as German carmakers also took steps to bolster hemorrhaging cash reserves, Chancellor Angela Merkel critized US subsidies to the sector and warned that state bailouts risked distorting competition and did not offer a long-term solution to the crisis.

ECONOMIES OF SCALE

The Chrysler stake, which Fiat’s vice-chairman John Elkann said might be increased, will give the Italian carmaker the scale it needs to survive. Chrysler can expand its portfolio to include small, less-polluting cars, meeting criteria for access to US funds.

The US carmaker’s CEO, Bob Nardelli, told employees in a letter the Obama administration would provide $4 billion of initial funding to Chrysler, and that the company would assist in bringing its partner’s brands to the US market. Cost savings from the collaboration are estimated at $3-4 billion, according to the European edition of the Wall Street Journal on Tuesday.

In Germany, a spokesman for Daimler, which owns 20% stake of Chrysler, said the German carmaker was continuing efforts to sell its holding and welcomed any initiative that served to stabilize the situation at the US carmaker.

Domestic rival BMW became the latest in a long line of manufacturers to scale back production amid a relentless rise in inventories as industry sales plummet at their fastest rate in decades, putting 26,000 German staff on shorter working hours in February and March. The Munich-based carmaker also reiterated it may apply for German government guarantees for its financing arm.

WEAKEST OF ‘BIG THREE’

The weakest of Detroit’s three car makers, Chrysler got $4 billion in US government loans to avoid collapse and its chief executive said last week he was counting on $3 billion more. Like General Motors, which also got government money, Chrysler was required to meet cost-cutting targets as a condition for the loans as well as show its plans are viable.

It also has to show it is committed to developing a new line of vehicles that produce fewer harmful emissions. Analysts had questioned whether Chrysler could survive without a partner. Most of its sales are in the US market, where Chrysler posted a 30% drop last year.

The Fiat deal is the latest in a series of alliances that car makers have formed over the years to cut costs and improve their profit margins. Dutch car navigation systems company TomTom on Tuesday reflected the impact of the sharp sales decline on ancillary manufacturers as it cut its 2008 revenue and profit outlook. (Reuters)