How the Fiat 500 Will Help Chrysler

The Italian minicar is a happy surprise, but Chrysler's turnaround requires a lot more horsepower.

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Was the Chrysler bailout worth it? Tough question, with strong opinions on both sides. But American taxpayers are finally getting a glimpse of what they paid for.

You may not have spotted one on the road yet, but the much anticipated Fiat 500 subcompact hit showrooms earlier this year, with a summer advertising campaign now announcing its arrival for those who may not have noticed. The verdict so far: It's nice to have the Italian carmaker back in America.

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For anybody whose memory of the shotgun marriage between Fiat and Chrysler is a little hazy, here's a quick recap. When the Obama administration had to decide whether to save General Motors and Chrysler in 2009, it made some tough distinctions between the two. GM was considered so big and essential that saving it was an easy, if unpopular, call. Chrysler was smaller and more expendable. What clinched the Chrysler bailout was an agreement by Italy's Fiat to take a minority ownership stake in the company, infuse it with small-car technology, and hopefully increase its control as Chrysler recovered from bankruptcy. All of that happened. Chrysler has now repaid about 80 percent of its government aid, with Fiat set to buy out the government's share in Chrysler and increase its stake to about 53 percent. A Chrysler employee group and the Canadian government own the rest, and Fiat could eventually buy their shares, too. Or, the company could go public. Meanwhile, Chrysler has reached another key milestone: It's become profitable.

The cutesy-tootsie Fiat 500 is the most visible manifestation so far of what the new Chrysler can do. The design and overall concept are imported from Europe, where the Cinquecento is a popular runabout. To retool it for the U.S. market, Fiat included a new engine manufactured in Michigan, enlarged cupholders and seats (sorry to say), and a stiffened rear axle, for more stable cruising on wind-blown highways. The result is a modish hipster of a car that's cooler than the Honda Fit, more muscular than the pipsqueaky Smart fortwo, and a better value than the overhyped Mini Cooper. Here's what it will do for Chrysler:

Freshen the brand. When it emerged from bankruptcy, Chrysler had the most tired lineup of any major automaker, with aging trucks and SUVs, rental-quality sedans and also-ran compacts. Since then, Chrysler has revitalized a few models, such as the Jeep Grand Cherokee, Dodge Durango and Dodge Charger, earning improved marks from Consumers Reports and other reviewers. But those have mostly been incremental improvements to models whose reputations Chrysler is trying to revive. The 500, by contrast, is brand new to America, with no old baggage to unpack. "It gives Chrysler fresh appeal, with a high-style aspect that's European and chic, says analyst Bill Vinsic of car-research site Edmunds.com. "Chrysler has not been much about chic.

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Enhance its credibility. Critics lampooned Chrysler in 2009 when it announced plans to bring the 500 to North America, as if a single European model smaller than 99 percent of the cars on U.S. roads could fix the fortunes of a manufacturing dinosaur. Fiat had been here before, leaving behind a reputation for temperamental rustbuckets when it pulled out of the U.S. market in the early 1980s. Fiat changed over the years, building a reputation for trendy, affordable designs and innovative technology. But American car buffs have long memories, and many gleefully recalled the days when Fiat was synonymous with "Fix It Again, Tony, the fond if pejorative putdown for spicy cars that always seemed to be in the shop.

The 500 easily exceeds those meager expectations, with a crisp and spirited ride, funky interior, and generous set of standard features, including Bluetooth connectivity and a full suite of safety gear, for prices that start at about $16,000. It will still take a year or two to gauge the car's reliability, but early returns are encouraging. In U.S.News's car rankings, for instance, the 500 ranks 11th out of 33 cars in its category, ahead of popular models like the Mazda2 and Volkswagen Jetta. Chrysler has delivered a fun little car that holds its own on American roads, which is what it said it would do.

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Attract small-car buyers. The 500 arrived just in time for the latest run-up in gas prices, and it's an appealing choice for buyers looking for good mileage in a car that's still enjoyable to drive. The 500 averages 30 mpg in the city and 38 on the highway, which makes it one of the most efficient gasoline-powered models in any showroom. The tradeoff, of course, is space. Though it has a back seat and, in theory, holds four passengers, the 500 is tiny by American standards, smaller even than the Mini or Fit. The back seat is inhospitable to adults, and there's no four-door model, which limits the 500s appeal to people who will rarely need it to haul people or stuff.

Those types of limitations are a reminder that the 500, for all its heart, is far from a cure-all for the still-struggling automaker. Here's what it won't do for Chrysler:

Significantly boost profitability. Even though interest in small cars spikes every time gas drifts upward toward $4 per gallon, compacts and subcompacts are not big moneymakers. Many automakers barely break even on small cars, and earning money at the bottom end of the lineup usually requires a high volume of sales. "We're not going to see the kind of numbers with the 500 that will make much of an impact on the bottom line, says Vinsic of Edmnuds. Top-selling small cars, like the Honda Civic and Toyota Corolla, typically notch annual sales of more than 200,000, while Chrysler expects sales of the 500 to be just 80,000 or so by 2013, when Fiat has about 165 dealers in place. So while it might draw admiring glances, the 500 on its own won't be nearly enough to keep Chrysler afloat.

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Draw buyers to other Chrysler products. Most automakers have a layering strategy in which smaller, less profitable cars are meant to introduce buyers to the brand so they can upgrade to more upscale—and more profitable--cars down the road. Some automakers do that with different brands under the same corporate umbrella, like Toyota does with its Scion brand or BMW does with Mini, which it owns. Other manufacturers have a single brand with clear upward steps, like Ford does with its Fiesta entry-level car, the Focus compact, and the more upscale Fusion sedan. For now, Chrysler's Fiat strategy seems to have a few missing links. While there are several trim lines, the 500 is likely to be the only Fiat model available for a few years at least, so there are no other Fiats to upgrade to, if buyers should feel so inclined. Fiat might bring its Alfa Romeo brand to the United States in the future, so those might serve as the move-up cars for Fiat owners. But not for several years.

In the meantime, most Fiat showrooms—known as "studios—are co-located with Chrysler/Dodge/Jeep dealerships, which is sort of like selling cappuccinos at a hot-dog stand. The culture clash may not harm any of the four brands, but it's hard to see much synergy, either, since there's probably little overlap between the psychographic of a Fiat buyer and somebody who might buy a Dodge Challenger muscle car or a Chrysler Town & Country minivan.

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Improve the rest of Chrysler's lineup. What Chrysler needs most of all is a full lineup of vehicles that are competitive in their class, with a few home runs mixed in. It's still far from that goal. Despite improvements, Chrysler 's sedans and crossovers are still middling. Its minivans remain popular, but that segment is shrinking. And Chrysler is still overreliant on pickup trucks and SUVs. Chrysler says several new and compelling products are on the way. If the 500 is an indication, then American taxpayers ought to get some interesting new cars to choose from. Let's just hope they don't put Tony back in business.

Twitter: @rickjnewman

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