Sergio Marchionne reckons that Chrysler can help save Fiat from itself and from Italy. It is a gamble, but one he has to take

IN JANUARY Fiat cars will be back on sale in America for the first time in 27 years. The tiny, retro-styled Fiat 500 will appear in the showrooms of 130 dealers across the country. It was launched at the Los Angeles motor show last week, alongside a revamped Chrysler range. Fiat's return to America is the first visible result of what is intended to be an ever closer union with Chrysler, agreed on last year when the Detroit giant was in bankruptcy. The two companies are betting that the Fiat 500—designed by Frank Stephenson, the man behind BMW's transatlantic success with the MINI—will also prove as popular with Americans as it has with Europeans.

Returning to a country from which Fiat was driven out by poor quality—Americans used to quip that its name stood for “Fix It Again, Tony”—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.

Fiat acquired 20% of Chrysler as part of a rescue backed by the American and Canadian governments and the United Auto Workers union. This will shortly increase to 35% in return for the Italian firm's technology being deployed to revive Chrysler's ageing product line. In a partial flotation of Chrysler, expected this time next year, the two governments will sell their stakes and Fiat will take majority control.

However, managers from Fiat have been in charge from the beginning, working towards a full merger. Fiat's chief executive, Sergio Marchionne, an Italian-born Canadian, has also become Chrysler's boss. His most pressing worry is Chrysler's high borrowing costs, which turned its trading profit of $565m for the first nine months of this year into a net loss of $453m. Debt will need to be refinanced at lower rates to prepare Chrysler for the flotation, the prospects for which have brightened since General Motors' recent successful return to Wall Street.

Merging Fiat and America's weakest carmaker, each a struggling regional manufacturer with annual sales of barely 2m vehicles, will produce a global competitor which can realistically aim to sell 6m, enjoying the same economies of scale as rivals like Volkswagen and Toyota. As well as volume, Chrysler brings a powerful global brand—Jeep—that is ripe for wider sales outside its American heartland. Mr Marchionne wants to align it with Fiat's other premium brands, such as Alfa Romeo, Ferrari and Maserati.

The risk is that Fiat will stumble, as Germany's Daimler did during its nine unhappy years of owning Chrysler. Despite pouring billions of dollars into the American firm, Daimler could never quite get its Mercedes brand to mesh with Chrysler's. It also failed to wean the Detroit firm off its dependence on SUVs, sales of which slumped when fuel prices started rising. In May 2007 Daimler sold Chrysler to Cerberus, a private-equity firm, which struggled to revive it in the face of the gathering economic storm. Two years later Cerberus was about to give up and liquidate Chrysler when the two governments brought in Fiat and staged a last-minute rescue.

Chrysler's product-development pipeline had been neglected during these changes of ownership, so in the short term—since it takes up to three years to develop new car models from scratch—Fiat is having to tart up Chysler's current, somewhat dated range with smarter interiors and smoother suspension. From 2013 completely new Chryslers, with improved engines and gearboxes based on Fiat's technology, will come to market.

Mr Marchionne's first reaction to the economic crisis, which halted his successful turnaround of Fiat, had been to try to grab Opel, the European bit of GM, which was up for sale. But his radical plans to close factories made his approach unwelcome in Germany. The feeling at Fiat's headquarters in Turin now is that this was a blessing in disguise. Opel would have made Fiat stronger in Europe, but the Chrysler merger will make it a global force.

The Chrysler deal will also further weaken Fiat's ties to its home country. Italians still regard Fiat as essentially a national firm, even though for some years much of its production and most of its carmaking profits have come from South America. Fiat's joint venture in Russia with Sollers is set to become the second-largest carmaker in that growing market. The Fiat 500s sold across Europe are made in Poland, and those about to go on sale in America will come from a Chrysler factory in Mexico. As Mr Marchionne puts it, “We're a global octopus now.” That means Fiat-Chrysler has the means to move production wherever it is cheapest.

This is a good job: the productivity gap between Fiat's Italian factories and its foreign operations is astounding. In Italy, 22,000 workers spread across five assembly plants make about 650,000 cars a year. In Fiat's huge Brazilian factory, just 9,400 workers turn out around 750,000 cars; and its Polish plant does even better, with 6,100 workers turning out 600,000 cars. Chrysler is somewhere between these extremes: it has 50,000 workers (whose numbers include those making engines and gearboxes, unlike Fiat's) in ten factories in America, Canada and Mexico turning out 1.6m cars.

Ciao, bella?

Mr Marchionne recently denied having any plans to stop making cars in Italy. For a long time, that would have been unthinkable anyway. But Fiat no longer dominates its home market as it used to—its share in Italy is less than one-third, having long been more than half. Although an abrupt pull-out from Italy remains unlikely, it is now easy to imagine Fiat leaving its plants there to wither while pumping investment into countries where sales growth and productivity are much higher.

“We are losing money in Italy. We can't go on losing money like this,” says Mr Marchionne. He describes how Fiat's plants there are hobbled by rigid work practices, rampant absenteeism and lightning strikes that mean about one in three workers down tools on any given day. He has slimmed the factories and avoided mass closures. He is now promising a doubling of production in Italy, to meet expected demand resulting from the Chrysler merger—but only on his terms. In return for investment to increase production, he is insisting on tearing up national wage deals and replacing them with factory-level agreements that provide more flexible working to fit peaks and troughs in demand.

Whether the Italian plants will march Mr Marchionne's way, or the highway, is so far unclear. When he announced plans to transfer production of the Panda (300,000 a year) from Poland to a factory near Naples, sustaining the 5,000 jobs there, some workers at first spurned this opportunity because they would have to make a downmarket model as well as the posher Alfa Romeos they currently turn out (at a rate of just 30,000 a year). Mr Marchionne feels he is winning the argument with most workers but, he says, a group of leftists, amounting to around one-eighth of the workforce, is bent on disruption.

Such bloody-mindedness is reminiscent of the death throes of British Leyland in the early 1980s. Mr Marchionne may now be at his “Thatcher moment”, in which he loses patience and gets tough. Given Fiat's weakness in its home market and the obstinacy of some workers there, its boss is sure that it is worth running all the risks involved in merging with Chrysler and re-entering the American market. Indeed, these bold steps may be the only guarantee of its survival.