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Nissan, Chrysler in new partnership

The two automakers announce a new manufacturing deal, fueling speculation that this could be the start of something big.

By Alex Taylor III, senior editor

(Fortune) -- The whispers that began in January were confirmed Monday: Nissan and Chrysler have agreed to make cars for each other, in a move that will be crucial to each company’s success. And that has spurred speculation about even closer cooperation in the future.
Here’s what’s being announced: Nissan (NSANY) will make an all-new fuel efficient small car for Chrysler, similar to the Versa, at one of its factories in Japan. It’s slated to reach markets in North America and around the world in 2010.

For its part, Chrysler will build Nissan a version of its Dodge Ram at a plant in Mexico, to replace the current Titan pickup truck in 2011.

This is the third production agreement between these two companies, and the second to be disclosed in the past four months. The pace and scope of the deals reflect the operating styles of two opportunistic CEOs: Nissan’s Carlos Ghosn and Chrysler’s Bob Nardelli.

Renewed speculation

Both believe in moving quickly and smartly to keep pace with larger, more established competitors. And they like to outfox the competition by zigging instead of zagging.

The deal is bound to renew speculation about stronger and deeper ties between the two companies.

Ghosn has often stated a desire to link up with a North American partner, despite his failed attempt with General Motors (GM, Fortune 500) in 2006.

Nardelli meanwhile, wants to get Chrysler back on solid footing so that its owner, Cerberus Capital Management, can squeeze out a return for its investors.

A new subcompact could boost Chrysler’s annual sales by as much as 200,000 units per year, plugging a big hole in its product lineup and providing dealers with fresh product for their showrooms.
Both sides are experienced in making product-sharing arrangements like these work. For years, Chrysler sold cars made by Mitsubishi that it labeled as Dodges and Plymouths, and it recently announced that it would build minivans for Volkswagen.

Back in the 1990s, Nissan cooperated with Ford (F, Fortune 500) in the design and manufacture of a minivan. Under Ghosn, Nissan has been busy around the world, striking joint-venture deals in recent months in India, China, and Japan, for the manufacture of everything from batteries to commercial vehicles.

Higher stakes

The two companies already have one arrangement in place - Nissan has agreed to supply Chrysler with a Versa derivative to sell in South America - but the stakes are much higher this time around.
For one thing, there are two production agreements to smooth out, not just one. For another, the vehicles involved - the pickup and the subcompact - are vital to each company’s future.

Chrysler badly needs a high-volume small car to cushion it from the precipitous falloff in its pickups and SUVs, as well as to meet stringent new federal fuel economy regulations in 2020. With sales this year down 15.5% - more than any other major automaker - Chrysler also needs to demonstrate more vitality.

Nissan starts from higher ground. It is one of the world’s most profitable automakers and its sales in the U.S. have slid only 3.3% this year (compared with 8% for the total industry). What Nissan needs is a cost-efficient way to replace its disappointing Titan pickup truck. Originally forecast to generate annual sales of 100,000 units, it is idling along at a rate of less than 50,000 a year.

Assuming the relationship between the two companies continues to blossom, what would a marriage between them look like? If it follows the Renault-Nissan model, it would be structured as a cross-shareholding alliance, not a merger. Nissan would gain access to Chrysler’s dealer network, its lineup of trucks, and SUVs, and the still-vital Jeep brand.

Chrysler would benefit from Nissan’s growing capabilities in technology and alternative fuels, its Infiniti luxury brand which is increasing in stature, and its skills at manufacturing, engineering, and purchasing.

Unpleasant memories at Chrysler remain about the failed merger with Daimler-Benz. A permanent partnership between Ghosn and Nardelli could go a long way towards erasing them.

As one high-ranking Chrysler executive said Monday: "We’re going to keep an open dialogue between the parties."