An all Canadian bid for Chrysler

The possibilities are emerging - for the viability of Chrysler as a viable going concern. The old paradigm of platform synergies which was purported by the large auto-makers as the reason for acquisitions has proven to be wrong on many counts. First off, there was a huge operational and execution risk. Banks provided reckless financing as on-paper the idea sounded excellent. Clearly, within the auto industry there are hurdles not quite visible to the analyst community. Plus down-market consolidation has proven to be a disaster. BMW learnt that lesson early in the game when they divested the Rover group. Daimler after considerable bleeding has now agreed on divorcing the marriage-made in heaven.

The two elements which have been reported to cause serious damage to the marriage were: pensions and health funding costs, exacerbated by the labor union vows and their reluctance to provide concessions. A Canadian bid by Magna supported by Onex Corp could be a a good combination of muscle and brain. This move will definitely allow the private equity managers to draw bargains from the unions.

But other than these apparent reasons, there are significant other factors which make sense to move this deal forward. First off, NAFTA. Under the Canadian-US FTA Canadian automotive manufacturers, parts suppliers have an unhindered tariff-free access to the US markets. In return, Canada has given similarly lucrative access to the US to its vast oil & gas reserves (oil reserves are reportedly the second largest after Saudi). However, times for the automotive industry are not good, but with rising oil prices Canadian oil sands are now ready to be exploited.

On the heels of NAFTA, Canadian auto-supplier industry grew rapidly. US auto makers also moved part of their production facilities to the north of the border. This was well-suited to the US-based auto companies, as health costs are just a fraction because of public health system in Canada. However due to large excess capacities and declining popularity of North American models, auto industry in Canada has suffered. Widespread lay-offs which have partially been offset by growth in the service economy. Ontario in particular has been at the receiving end of the bad news. There even has been a talk of moving the head offices of Canadian banks to western Canada, where the action is. After all, the banks' presence in Toronto was due mainly to the growth and financing requirements of auto companies.

This grim situation could be reversed from developing into a full nightmare. An acquisition by Magna + Onex Corp of Daimler's failing unit Chrysler, and significant tax incentives to auto manufacturers and consumers to develop and acquire environmentally friendly vehicles. Canada now has a chance to be at the forefront of innovation in auto-manufacturing. While Chrysler acquisition could potentially further the agenda of green cars, and make the North American models more appealing to buyers.