Why a Fiat-Chrysler alliance is a bad idea.

In 1998, Jürgen Schrempp, the ebullient CEO of Mercedes manufacturer Daimler-Benz, confidently predicted that only half of the then-20 independent carmakers in the global marketplace would still be around a decade later. It was Schrempp's way of justifying Daimler's astounding $40 billion purchase of Chrysler, a deal he described as a "match made in heaven." Of course, that deal entered the record books as one of the dumbest ever, with Daimler losing tens of billions in market value as a result of the costly 2007 divorce that followed the heavenly match.

This past December, Sergio Marchionne, the rumpled CEO of Italy's Fiat automaker, returned to the idea of global scale. In his reading, Marchionne said he believed that only six automakers could survive. He said that a carmaker needed to produce 5.5 million to 6 million cars annually to stand a chance of making a profit—then admitted glumly that Fiat wasn't even halfway there.

That was undoubtedly the logic behind this week's announcement that Fiat is taking a 35 percent stake in Chrysler, the troubled Detroit automaker. But will the theory of global "economies of scale" in the car business, which sounds so great on paper but has rarely worked in practice, prove to be a winner this time? These deals may have once succeeded on a company's home turf—Volkswagen in Europe—but they never seem to successfully cross international borders. Quite apart from the financial difficulty of arranging a car-business alliance, there's the delicate task of melding different management styles and corporate cultures—a problem that helped torpedo the Daimler-Chrysler marriage.

Haven't we heard this tune before? BMW bought Britain's Rover for $1.2 billion in 1994 and then poured in another $4 billion in investment, only to admit failure and give the company away for a 10 pound note. (The new owner went bankrupt, too.) Or how about Ford's promises to achieve economies of scale by integrating upmarket Jaguar and Land Rover into its more plebian manufacturing fold, only to sell them at a loss to Tata Motors of India. Then, of course, there was General Motors' dubious 2000 plan to integrate with ... yes, Fiat. GM was supposed to learn the secret recipe for making profitable small cars from Fiat, but that venture cost GM $4.4 billion, and in the end they had nothing to show for it. Imagine what GM could have accomplished if it had invested that money in its own concerted effort to develop a small, fuel-efficient car.

That doesn't mean there aren't benefits from the Fiat-Chrysler alliance. Under the terms of the deal, Fiat will make available its advanced small-car manufacturing expertise to help Chrysler produce similar cars in North America. The Italian automaker will gain access to Chrysler showrooms—however many are left—where it can sell Fiats for the first time since 1983, when it pulled out of the U.S. market because of persistent complaints about poor quality. (The joke was Fiat stood for "Fix It Again, Tony.") And Chrysler will gain access to Fiat dealers in Europe and South America, though there's little sign of demand for gas-guzzling American SUVs and minivans in those markets, as Daimler earlier discovered.

In fact, the real reason for the alliance may have more to do with financial engineering than powertrain design. Chrysler, which is now 80.1 percent owned by private equity firm Cerberus Capital Management, received a $4 billion bailout from the federal government last month to avoid bankruptcy. The firm hopes to get another $3 billion in handouts, but to qualify it must submit a detailed plan for a viable recovery to the federal government next month, convincingly showing that it is making strides to produce more fuel-efficient vehicles. And it just turns out that the Fiat deal fits that bill.