Chrysler Cures a Bankruptcy, but Tests Loom

When President Obama announced the government’s reorganization plan for Chrysler in late April, he promised the bankruptcy would be “quick,” “efficient,” and “controlled.”

And Chrysler is, in fact, hurtling through the process and appears on track to emerge soon as a new company, just one month after its Chapter 11 filing.

Then the hard part begins.

Chrysler will have lower labor costs, less debt, and a new partner in the Italian automaker Fiat. But it will be competing in a brutal marketplace that may make bankruptcy court seem, by comparison, like a refuge.

Americans are hardly in a car-buying mood, and people who are shopping are steering clear of Chrysler showrooms.

Part of the reason is the cloud of bankruptcy hanging over the company. General Motors , which is also on the brink of filing for Chapter 11, is also losing customers because of its fragile financial condition and uncertain future.

But Chrysler is even more vulnerable than G.M. because its products are heavily tilted to pickups, minivans, and sport utility vehicles that have fallen out of favor with fuel-conscious consumers. Fiat has promised to add small and sporty cars to Chrysler’s lineup, but they won’t be available for nearly two years.

Chrysler, which has been subsisting on federal loans since the beginning of the year, will also need to stretch the $7 billion it is getting from the Treasury Department to cover its losses until the Fiat alliance starts paying off.

To save money, Chrysler has idled most of its plants so it can sell off a big backlog of new cars and it drastically scaled back spending to develop new products.

“We have to see the consumer supporting this company by buying their product, which hasn’t been happening,” said Rebecca Lindland, an analyst with the research firm IHS Global Insight. “Just because they emerge from bankruptcy doesn’t mean that all of their problems will be solved, by any stretch of the imagination.”

With its court hearings moving quickly — even two months would be considered lightning-quick — a newly reorganized Chrysler could come out of bankruptcy as early as next week.

When it emerges, the company will have a new ownership structure, with a union retiree trust owning 55 percent, Fiat holding a 20 percent share that could eventually grow to 35 percent, and the United States and Canadian governments owning minority stakes.

It will also have a new board, and a new chairman — C. Robert Kidder, the former chairman of Borden Chemical and of Duracell.

Fiat’s chief executive, Sergio Marchionne, may also run Chrysler. He is already delving into Chrysler’s future product plans and suggesting changes, according to people in the company.

Although Fiat will provide small cars, new engines and advanced technology to Chrysler, the Italian automaker will not put any money into its new partner.

For all the challenges it faces, Chrysler at least will have a chance to succeed, analysts said, because the company has shed its debt, cut workers and factories, and funded half of its health care obligations to retirees with stock.

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“Only time will tell, but certainly all these changes put the company in a position where it can be competitive,” said Mark DeGennaro, a bankruptcy expert at the firm Gruppo, Levey & Company.

While it represents a new beginning for the 84-year-old company, Chrysler has stumbled in two previous attempts to reinvent itself.

In 1998, the German automaker Daimler-Benz stunned the auto world by absorbing Chrysler in a $36 billion merger.

However, the marriage of Mercedes-Benz luxury cars and Chrysler trucks and S.U.V.’s failed, and Daimler put the American division up for sale in 2007.

Its next owner, the private equity firm Cerberus Capital Management, tried to streamline Chrysler and then find alliances with other automakers that would broaden its product lineup. That strategy also stumbled, which, along with a weak economy, led to Chrysler’s bankruptcy filing on April 30.

The process has been pushed along quickly and methodically by Judge Arthur J. Gonzalez. The hearings have shed new light on Chrysler’s troubles.

One of the first witnesses during Wednesday’s hearing, on the sale of many of the automaker’s best assets to a newly reconstituted Chrysler, was Thomas W. LaSorda, who retired last month as Chrysler’s vice chairman.

In his testimony, Mr. LaSorda recounted how he had scoured the world last year for partners or buyers for Chrysler. He discussed deals that fell through with Nissan and G.M., and failed efforts to get Korean and Indian auto companies interested in creating alliances with Chrysler.

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An attorney for a group of Indiana state pension funds, which is opposing the sale, pressed Mr. LaSorda as to whether Chrysler could have sold the company rather than strike a noncash deal with Fiat.

“Nobody was willing to give us a nickel,” Mr. LaSorda said.

Fiat’s offer to provide small, fuel-efficient cars, he said, was “just as good as cash or better.”

After 32 years in the auto business with G.M. and Chrysler, Mr. LaSorda said it was clear to him that the company would continue to spiral downward unless it could update its vehicle lineup.

The Indiana pension funds’ attorney, Glenn Kurtz, spent much of Wednesday’s hearing arguing that Chrysler’s secured lenders, including the funds, could have gotten more money from a liquidation than the $2 billion from the Treasury to eliminate nearly $7 billion in debt.

Mr. Kurtz produced several e-mail messages between Chrysler executives and consultants, and members of the presidential auto task force that, he said, showed the bankruptcy case was being “hurried.”

Nick Bunkley contributed reporting from Detroit and Michael J. de la Merced from New York.

This story originally appeared in the The New York Times