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What Fiat brings to the new Chrysler

Tara Baukus MelloAfter emerging from one of the shortest bankruptcies in history, a new Chrysler is beginning to take shape. Officially, Chrysler Group LLC is now majority-owned by the United Auto Workers union, with a total 10 percent stake held by the U.S. and Canadian governments and 20 percent stake by Italy's Fiat Automobiles SpA. However, it is the alliance with Fiat that will shape the new Chrysler's future.

The terms of this alliance, which were approved by the U.S. government June 10, require Fiat to help Chrysler add smaller, more fuel-efficient cars to its product line. Fiat's share of Chrysler can increase to 35 percent if it helps the smallest of the Detroit Three bring a new, fuel-efficient four-cylinder Chrysler to the U.S., which will be based on the Fiat 500.

Consumers can start looking for the Fiat 500 next year. It's been a popular small car overseas, receiving Europe's Car of the Year award last year, an award organized by seven European auto magazines, and the World Car Design of the Year award this year. When it arrives at Fiat-Chrysler dealerships in the U.S. at the end of 2010, it will be wearing a Fiat label, according to the company.

The retro-styled 500 is a small four-seater with a look that is part Volkswagen New Beetle and part Mini Cooper. With a starting price of around $16,000, it is expected to sell to U.S. buyers who are looking for a unique, small, fuel-efficient car in much the way that buyers bought the New Beetle and Mini Cooper when they were first introduced in the 1999 and 2002 model years, respectively.

"With its small size and retro look, the 500 will be a niche vehicle, selling about 15,000 units, according to our forecasts, which means it won't be a huge profit center for the company," says Dan Hall, vice president of the market research firm AutoPacific in Tustin, Calif. "And although Fiat has a great reputation for quality products in Europe in recent years, American baby boomers are likely to remember Fiat's reputation for poorly built vehicles when they were last sold in the U.S. in the early '80s." Baby boomers are the logical demographic for the Fiat 500.

In addition, the terms of the alliance state that the new Chrysler must also produce a car in the U.S. based on Fiat architecture with a 40-mile-per-gallon fuel rating. These new Chrysler products will not simply be rebadged Fiats. They will be cars specifically designed for the U.S. market that use Fiat technology underpinnings and advanced-fuel powertrains.

This shift to smaller, more fuel-efficient cars for Chrysler and its Dodge and Jeep brands could be a difficult pill for U.S. shoppers to swallow. Chrysler's strength has been in less fuel-efficient vehicles, such as its minivans, pickups and sport utility vehicles, including its Chrysler Town & Country minivan, Dodge Ram pickup and Jeep Wrangler. In addition, all of its products have fought quality problems in recent years.

But while gas prices have risen steadily for the past six weeks to a current national average of $2.67 per gallon, they will have to surpass $3 per gallon nationally to make consumers switch in large numbers to small cars, if last year's buying trends are any indication.

While the company has said Fiat will begin the process of transferring its small- and midsized car technology, platforms and powertrains into Chrysler's factories right away, this shift to smaller cars is not going to happen overnight. Producing a new car, even if you start with an existing platform and add a different body, engine and interior, generally takes at least 18 months and, often, a few years.

In the meantime, the new Chrysler will be faced with selling its existing product line at least through 2010, while more fuel-efficient vehicles are phased in and the slowest-selling of its larger, gas-guzzling models are phased out. This is good timing for the company in terms of meeting the new CAFE standards for fuel efficiency. But it remains to be seen how keen Americans will be to buy these cars.

It's interesting that the first Chrysler plant to reopen this week makes the Dodge Viper, the sleek, 600-horsepower sports car that sells for $90,000. Apparently, speed is still fashionable in a recession. Chrysler's seven other factories will open by the end of the month.

To be sure, if Chrysler's new small cars have the hip appeal of the Fiat 500, Chrysler may find itself getting a boost, in the same way BMW's bottom line was helped by the Mini when sales of large "Bimmer" sedans and crossovers slowed with high gas prices and a struggling economy in 2008.

Still, this question could remain unsolved for months: Will consumers help Fiat and Chrysler CEO Sergio Marchionne bring what is now the sixth largest automaker in the world back from the precipice of near extinction?

Read more Driving for Dollars columns and Bankrate auto stories.

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