GM buying Chrysler? Don’t count on it

Of the many stories swirling around Detroit concerning Chrysler’s future, reports that rival General Motors is in talks to purchase the struggling automaker are the most eye-catching. But don’t count on seeing a merger of the two automakers.

A trade publication reported Friday that GM, the world’s biggest automaker, is in talks to purchase Chrysler from its German parent company, which put it on the block this week by saying it is considering all options for its struggling U.S. division. But while the two companies might cooperate more closely on future products and technologies, an outright purchase of Chrysler is unlikely, analysts say.

The report by Automotive News cited unidentified sources in both Germany and the United States. GM declined to comment other than to say it routinely has discussions with other automakers.

Talk of the deal comes after DaimlerChrysler revealed its long-awaited turnaround plan for its money-losing U.S. division. The company plans to cut about 13,000 jobs — 16 percent of its North American work force — in a bid to profitability by 2008.

Jim Hall, an automotive analyst at consulting company AutoPacific, points out that GM already bears a heavy burden of $5 billion to $7 billion a year in health care and pension costs for current and retired employees. That’s money the world’s biggest automaker can’t spend on product development or marketing, and taking on similar obligations at Chrysler would increase those costs by a minimum of 30 percent, he said.

“I don’t think the acquisition is realistic,” Hall told CNBC. “Car companies talk all the time, but in the end this has to make sense for the shareholders, and if I’m a GM shareholder I don’t want to hold a piece of Chrysler.”

George Magliano, director of automotive industry research for the Americas at Global Insight, said that GM and Chrysler match each other in their problems and deficiencies, which include their pension and healthcare costs, their efforts to reduce factory capacity in the face of shrinking sales.

“So this is not complementary,” he said. “Their product line-up is similar, and they both have gaps when it comes to small and family cars, and on top of that you’d have to wrestle with both GM and Chrysler’s recoveries at the same time.”

Still, Magliano cautions against dismissing outright talk of takeover.

“This doesn’t seem to be an idle rumor — there seems to be some substance here because while no one is confirming it, no one is denying it either,” he said. “And some are saying this is a defensive move on the part of GM, because there’s a long list of those that might want to grab Chrysler — a Chinese manufacturer or a private equity group. And for GM it could be a quick way to pick up some market share.”

A more plausible scenario for is the prospect of Chrysler and GM building deeper ties by sharing vehicle technologies and architecture, including common components, to reduce costs, analysts say.

“I don’t doubt that these two companies are talking,” said Hall of AutoPacific. Ford and GM have developed a transmission together, he said, and it has been very successful. Developing components together to cut costs is a good idea, he added, but an outright purchase “will not happen.”

Reports in The Wall Street Journal and The New York Times Friday said Chrysler and GM have held discussions related to developing a large sport utility vehicle like the Chevrolet Suburban or Tahoe, which Chrysler doesn’t have in its current product lineup. The Journal also said the two are looking at sharing small cars developed by a unit of GM in South Korea.

Despite the growing popularity of smaller, more fuel efficient cars, there is still a sizable market for large SUVs although it is expected to shrink a little, said Tom Appel, editor of Consumer Guide Automotive, which offers buying advice. In 2006, GM sold 425,000 units of its large SUVs, including the Tahoe and Suburban, up slightly from 2005, he said.

“Chrysler doesn’t make a large SUV,” he said. “They have large midsize SUVs, like the Durango and the Aspen, but they are not selling well because it seems consumers either buy a large one or they go for crossover vehicles.” Crossovers, based on car platforms, are the fastest-growing segment of the U.S. vehicle market.

“I see value for both sides here,” he continued. “Chrysler can purchase a large SUV from GM and put on it the design influence they want, and they don’t have to pay for the research and development, while GM, which has spent multiple billions of dollars developing their new big SUVs, gets more exposure and they don’t have to pay for the advertising and marketing — they just build a few more.”

Chrysler already has alliances with GM, including one to develop gasoline-electric hybrid engine technology. If a deeper product-building alliance works, closer ties could be forged in the future, he said.

“[An alliance over SUVs] is a start, and it’s possible I could broaden to other technologies and product alliances,” Magliano said. “Everyone is looking for something in this market, so we wouldn’t rule out an alliance broadening.”