What's next for Chrysler

NEW YORK (Fortune) -- The Chrysler rumor mill is spinning again. Ever since its parent, DaimlerChrysler, announced that it would consider all options for Chrysler, the speculation about potential owners who would take over the damaged company has been intense and churning. So far, though, none of the usual suspects looks like the ideal buyer.

Most of the early talk focused on a competing automaker - American, European or Asian. General Motors (Charts), Renault Nissan, Hyundai and the Chinese got most of the attention. Now Magna International (Charts), the big - and ambitious - Canadian parts maker, has shown interest.

More recently, the buzz has been about private equity, this year's sexy financial play. Bids are expected from a partnership of Blackstone Group and Centerbridge Partners, as well as from Cerberus Capital. The latter is getting the most visibility because its partners include former Ford executive David Thursfield, as well as former Daimler and Volkswagen wunderkind Wolfgang Bernhard, who was recently hired as advisor. Bernhard was Chrysler's chief operating officer from 2001 to 2005 and presumably knows how to avoid the kind of problems that plunged Chrysler into a $1.5 billion operating loss last year.

But just as it is difficult to visualize another automaker taking on all of Chrysler's multiple complications - from union contracts to restructurings - it is even more difficult to envision a private equity firm moving in.

Auto companies are big complex organisms, with thousands of moving parts that all interact with each other. Running a company like Chrysler is a lot more complicated than managing a supplier or a dealer, and the penalty for mistakes can be very costly.

Change something as simple as the engine on a minivan and it affects multiple operations up and down the line: purchasing, manufacturing, marketing, sales, and service. The history of the auto industry is littered with tales of outsiders who thought they could make a troubled company healthy again - but instead made it worse.

In addition to getting all its pieces to work together, Chrysler's new owner will have to deal with the auto workers union, which has already announced it will fight any sale to private equity. The union's master contract expires this year, and bargaining will be particularly tricky because Chrysler is seeking concessions on health and pension benefits and work rules.

Some have suggested that the successful buyer will be a partnership between private equity and another automaker. It would be a combination of brains and brawn: The auto company would provide the expertise and private equity the financial discipline. But it is difficult to imagine either side giving up enough control to make such a partnership work. Can you imagine the car marketing department going to the New York money guys when it wants to boost incentives?

Finally, there has been talk about breaking up Chrysler and selling its pieces to the highest bidder. The minivans could go to GM while Renault Nissan scoops up Jeep, Toyota (Charts) grabs some of the empty plants, and the Chinese snag the Chrysler and Dodge brands. That is a fascinating idea - except that union representatives on Daimler's supervisory board have said they would agree to such a bust up only over their dead bodies. Not to mention the fact that apportioning the overhead in such a carve-up would require Solomon-like wisdom that is in short supply in Detroit these days.

Who could benefit the most from getting Chrysler? The answer is its current owner, DaimlerChrysler (Charts). Chairman Dieter Zetsche surely knows how to make the place work, having spent five years running it himself. Besides, the rationale for the merger put forth in 1999 remains intact. Chrysler can benefit from Mercedes' engineering know-how, Mercedes profits from Chrysler's economies of scale, and both companies can get together on meeting the very stringent fuel economy and exhaust emission requirements of the future. All it takes is somebody with the determination to make the combination work.

With the current crisis as a wake-up call, both the German and American sides of the company can finally buckle down. Once they get Chrysler off the sick list, they can go about fixing Daimler's far more serious problem: Squeezing a profit out the Smart small car that has run up losses as big as Chrysler's and looks to provide a far skimpier payoff down the road.

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