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Chrysler Canada's Brampton assembly plant © Peter Jones/Reuters

Extra5/1/2009 12:01 AM ET

5 reasons Chrysler may still die

The bankruptcy plan is bold, but the automaker is a long way from solvent. Here's why, starting with a weak lineup of cars.

By Rick Newman, U.S. News & World Report

Give President Barack Obama credit for his boldest bailout plan yet. Unlike some of the open-ended bank bailouts, his Chrysler plan makes hard choices, sets public standards and deadlines and puts some burden on stakeholders besides the U.S. government. By forcing Chrysler into bankruptcy, Obama has committed to a process that will determine winners and losers and force concessions on those unwilling to make them voluntarily.

But Obama's claim that bankruptcy gives Chrysler a "new lease on life" may be wishful thinking. Bankruptcy reorganization and a Fiat merger might be Chrysler's best chance for survival, but the "New Chrysler," as the administration calls it, could end up being no more successful than New Coke, one of the biggest business flops ever. Here's why:

No cars

Obama praised Chrysler's accomplishments in cutting tough deals with its unions and most of its creditors. But it takes compelling cars to succeed in the car industry, and Chrysler still has few. The Fiat merger is supposed to give Chrysler new versions of some popular Fiat vehicles, like the 500 compact car. OK, great. But unless Obama takes the unusual step of waiving U.S. safety and environmental laws, it will take well over a year for such cars to be retrofitted for the U.S. market -- and even longer before they're actually built here, which is one of the conditions the new company must meet to get up to $8 billion in additional aid.

For the next 12 months at least, Chrysler will still be offering the same lineup of inefficient, underperforming vehicles, and losing market share the whole time. (See "5 reasons to buy an American car" and "5 reasons to shun American cars.")

Small margins

The last two years have proven that every successful automaker needs a stable of competitive small cars -- one of Fiat's strengths. But that's just part of the formula. Smaller cars tend to have smaller profit margins, no matter how many you sell, which is why it's vital to have compelling larger vehicles, too.

Chrysler's 300 sedan was a big hit, but it's near the end of its life cycle, and few of Chrysler's other big vehicles are tops in their segment. When the car market was going gangbusters, a few hits in the lineup could make up for a few duds. But with industry sales down 40% from their peak, every vehicle needs to pull its own weight, and even a combined Chrysler-Fiat fleet doesn't seem to have enough standouts.

Lots of competition

The revitalized Chrysler is hardly the only company planning to introduce hot new small cars that will take the market by storm. Chevrolet has the Cruze. Ford Motor (F, news, msgs) has the Fiesta. Toyota Motor (TM, news, msgs), Honda Motor (HMC, news, msgs) and Nissan Motor (NSANY, news, msgs) already build some of the best small cars, and they're certainly not planning to give up their huge edge in the segment.

So even if the 500 and a couple of Fiats are big hits when they arrive in America, the competition is only going to intensify. And other makers already in the market have a key first-mover advantage.

Continued: Convoluted ownership

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