SHADY car dealers sometimes “cut-and-shut”, welding together two badly damaged vehicles to create a new one that looks sound but is always at risk of falling apart. Chrysler was close to the scrapyard when America’s carmakers sought bankruptcy protection in the wake of the financial crisis. Fiat acquired an initial 20% stake in 2009 in a deal with the Obama administration, and saved the company. Now the Italian carmaker is on course to take full control of Chrysler and merge the two firms into a global giant. But is their pairing an accident waiting to happen or a new model that will run smoothly for years?

Fiat was itself heading for the breaker’s yard in 2004, when Sergio Marchionne, a new boss, came in and turned it around. More recently the slump in Europe—where car sales are at a 17-year low—has led to big losses at Fiat. It would again be in serious trouble were it not for its stake in a newly profitable Chrysler, which it has increased in stages to 58.5%. Fiat’s hope of salvation is to get its hands on Chrysler’s cash to pay for a turnaround plan that will keep both companies running.

Much progress has been made on integrating the two carmakers’ manufacturing operations. The next challenge for Fiat (whose chairman, John Elkann, is also on the board of The Economist’s parent company) is to lift its Chrysler stake above 75%, at which point it will be able to use the American firm’s cashflow to finance itself. It has tried to exercise options over the remaining 41.5%, which a trade-union health-care trust, VEBA, acquired as part of the government’s bail-out plan. But the two sides are at odds over the price of the latest tranche, which will set a precedent for the rest. The case is being thrashed out in a Delaware court.

There is no doubt that Fiat will get its hands on the remainder of Chrysler, with a deal probably struck by the end of the year, reckons Philippe Houchois of UBS, a bank. VEBA needs to sell, either directly to Fiat or through an IPO, to raise money for the growing medical bills of retired car workers. What is unclear is the price: anywhere between Fiat’s valuation of $1.8 billion and the $4.3 billion that VEBA wants.

Chrysler’s cash—perhaps up to $12 billion—is vital to keep Fiat going. It has been forced to scrimp on new models. Mr Marchionne worries that he is now “cutting bone”. His view is that, to keep up with rivals such as GM, Toyota and Volkswagen, the merged Fiat-Chrysler must turn out 5.5m-6m vehicles a year, compared with 4.1m now (see chart), and sell more premium-priced cars. To achieve this will take time and a lot of money.
Will it work? Chrysler’s last association with a European carmaker, an ill-fated takeover by Daimler in 1998, ended nine years later when the exasperated Germans sold it to a private-equity firm. Daimler’s bosses belatedly realised that it made little sense pulling together a maker of technically complex luxury vehicles and a mass-market firm that churned out pickup trucks and SUVs. One of Mr Marchionne’s first jobs on taking charge of Fiat was to end a troubled alliance with GM.

At first sight there is not much overlap between Chrysler’s butch Dodge Ram pickup trucks and Jeeps and Fiat’s tiddly 500s and Puntos. But at least both firms are mass-market operations with similar cost structures, argues Philip Watkins of Citigroup, a bank. As Chrysler owes its existence to Mr Marchionne, its managers have given him the benefit of the doubt as he has got stuck into turning the firm around. His informal management style—he likes to wander about in a jumper—has probably helped too.

Since Chrysler has little of its own to offer in small cars, it needs Fiat to provide platforms such as Alfa Romeo’s Giulietta and its excellent small-engine technology to comply with America’s increasingly strict fuel-economy standards. And building copies of Chrysler’s worldwide hits, such as Jeeps, in idling Italian factories is a way to make use of spare capacity that Italy’s politics make it hard for Fiat to close.

Europe’s depressed car market is not the only reason Fiat needs Chrysler. Conditions in Fiat’s most important market, Brazil, are getting harder. A Fiat insider cheerfully and accurately characterises the firm as a Brazilian carmaker with a few factories in Europe. Its Latin American operations earned profits of €224m ($292m) in the second quarter of 2013 compared with a loss of €98m in Europe. Fiat is Brazil’s biggest carmaker, with 22% of the market. But once-fabulous margins, 15-17% in 2005-07, have dwindled to about 8%. Carmakers such as Renault, GM and China’s Chery are now ramping up production at factories they had been encouraged to build by the previously strong margins and by a change in the tax system to favour local production. This, and the slowing of Brazil’s economy, mean margins will surely fall further.

The tie-up with Chrysler may help in Asia, where Fiat lags behind other big carmakers. Though it makes money in China, a car it launched there based on the Giulietta was a flop. Jeep’s models have better prospects, but the slow start made by both Fiat and Chrysler and lack of a heavyweight Chinese partner mean that they may never be as strong in China as GM.

Moving upmarket
Like Peugeot-Citroën and Opel-Vauxhall (GM’s European arm), Fiat sees a belated move upmarket as both its salvation from chronic European losses and a way into the wallets of the emerging world’s new rich. It plans to boost the sales of Maserati, its luxury-sports-car division, with a more affordable model, the Ghibli. It hopes that at least some buyers of successful German luxury cars like the BMW 5 series can be tempted to abandon Teutonic efficiency for Italian flair. Another Maserati saloon and an SUV are set to follow. The plan should produce good profits, says Max Warburton of Sanford C. Bernstein, a research firm, and the target of selling 50,000 Maseratis a year seems realistic—though BMW is unlikely to lose sleep.

Another element of Fiat’s plan to sell a more profitable mix of cars is Alfa Romeo, a cheaper marque than Maserati. Alfa currently makes only two models, though the 4C, a sleek sports car, will arrive soon. New medium-sized saloons and SUVs are also planned. But it will be an expensive gamble trying to get buyers to desert the big German premium-car makers, which keep powering ahead with constant improvements to their model ranges. Peugeot has already spent a lot trying to do this, with little to show. Mr Marchionne, for all his denials, has been unable entirely to quell speculation that Fiat might sell Alfa-Romeo, as it has contemplated doing before.

The merged Fiat-Chrysler will probably chug along, neither attaining the dominant scale of a VW or Toyota nor the profitability of smaller carmakers like BMW and Jaguar Land Rover. And there is no obvious successor to Mr Marchionne, a clever strategist who has saved two carmakers from oblivion but cannot go on for ever. His joining of two of the world’s weakest firms into one that stands a chance of long-term survival has been a triumph for those whose jobs depend on them. But for the rest of the rich world’s carmakers, it has kept alive a lot of capacity that they would rather have seen close. Fiat-Chrysler’s rivals must wish Mr Marchionne had never picked up his welding gear.