Jenkins: The U.S. Bailout of Fiat

Jenkins: The U.S. Bailout of Fiat

 

How a troubled Italian auto maker became a beneficiary of Obama's zany fuel-economy targets.

 

 

By Holman W. Jenkins, Jr. in the Wall Street Journal

 

Things are going well for Chrysler. Ipso facto, they aren't going so well for President Obama's fuel-economy schemes or his partner in the Chrysler bailout, Fiat F.MI in Your Value Your Change Short position Chairman Sergio Marchionne.

Chrysler has now reported nine straight quarters of profits on the strength of strong selling pickups and SUVs, not exactly the fuel-sipping cars Mr. Obama envisioned. This performance, moreover, comes despite the late arrival of the new Jeep Cherokee. The vehicle is getting rave reviews, but why was its rollout stalled? Chrysler needed time to fine-tune the software driving its nine-speed transmission.

Why a nine-speed transmission? Because of fuel-mileage overkill driven by Mr. Obama's new rules, which require Chrysler steadily to increase its fleet average to 54.5 miles per gallon by 2025 from 20.6 last year.

Why do we say overkill? Because the technology adds more in cost than it does in value for consumers, given the declining price of gas. At $3.25, the price of gasoline today per mile traveled, in real terms, is lower than it was in the 1950s. By one academic estimate, gas would have to reach $5 before consumers would voluntarily buy the 35.5 mpg cars Mr. Obama requires carmakers to sell in 2016.

Now multiply this value shortfall by, oh, the $157 billion that even the Obama administration estimates the auto industry will have to spend to meet the mileage mandates just between 2017 and 2025. The tension is modest now, as exemplified by the Cherokee's nine-speed gambit. But in the years ahead it will drive the industry off a regulatory cliff as America's domestic energy resurgence (which Mr. Obama failed to notice) likely keeps real gasoline prices well within their historical range.

Let's turn to Mr. Marchionne. Fiat, which owns a majority stake in Chrysler, received its original 20% share free from the Obama administration in return for a promise to build Chrysler the teensy eurocars Mr. Obama wants Americans to buy.

Another bailout beneficiary was a United Auto Workers health fund, which holds a 41.5% stake. Mr. Marchionne wants to buy this stake to complete a merger of the two companies, but he and the UAW are at loggerheads over price. And with every surge in Chrysler's financial results due to surging demand for highly profitable pickups and SUVs, the price gets more out of reach for Fiat, whose fortunes have been blighted in Europe's debt crisis. Chrysler's profits are keeping Fiat in the black nowadays, yet Fiat's own credit rating and turnaround efforts would be jeopardized at any price approaching the $5 billion the UAW fund is reportedly asking and that Chrysler increasingly appears to be worth.

Chrysler's own advisers recently valued the company at $10 billion, implying a lower earnings multiple than Ford or GM. GM in Your Value Your Change Short position After all, Chrysler is a small regional player, though its Jeep brand has global potential. Chrysler's valuation is also diminished by the fact that it's shackled to a flailing European car maker. Its value is further diminished by the fact that it lacks the electric cars that Obama mandates will eventually require it to build and sell even at a loss.

Even so, investors are saying Chrysler is worth three times what Fiat is worth once Fiat's stake in Chrysler is subtracted.

This is why, despite his confident talk, Mr. Marchionne's impasse with the UAW health fund may prove intractable. He would undoubtedly say our valuation comparisons are unfair: Chrysler would not be doing so well if not for Fiat's contribution; Chrysler would be doomed under the Obama mileage mandates without Fiat.

But these assumptions are questionable, especially since the Obama mandates are likely to be rolled back after Mr. Obama leaves office so his successor won't face a new round of auto bankruptcies.

Meanwhile, the UAW health fund has every reason to complain that it's being offered a bum deal for its minority stake in Chrysler, whose implicit value is diminished with every suggestion that its profits and cash would be pillaged to fund a Hail Mary makeover of Fiat.

Chrysler is a tragedy in the full Greek sense. The 1990s and early 2000s, when America's fuel-economy rules were allowed to lapse into irrelevance, were actually an era of vast improvement in automotive reliability, quality and, yes, fuel efficiency—though the gains were deployed mostly to give consumers more power, safety and comfort for a given level of gas mileage.

Then, George W. Bush, grasping vainly for political juju to exorcise his Iraq demons, and Barack Obama, posing as planet savior, took turns upping the ante on fuel-economy mandates that require car makers to begin making economically insane trade-offs. Follow the chain of consequences and you have today's bizarre Chrysler situation, in which Chrysler's taxpayer-financed rebound is in danger of being hijacked by Fiat using our own fuel-economy rules as a club.