Alfa Romeo could be a money spinner for Fiat Chrysler

Fiat Chrysler Automobiles (FCA) will launch the first of a new range of Alfa Romeo cars on Wednesday, the lynchpin of its turnaround plan and potentially an opportunity to attract a cash-rich merger partner.

Chief Executive Sergio Marchionne is betting on the 105-year-old Alfa brand to help FCA take on German rivals BMW, Audi and Mercedes-Benz in the fast-growing and high-margin market for premium cars.

The new mid-sized sedan will have a six-cylinder engine derived from FCA's top-end Ferrari brand and will draw on Alfa's racing heritage to help it stand out against "boring German rivals," supplier sources told Reuters.

But Marchionne faces an uphill battle to convince drivers that Alfa has shed a reputation for poor quality and service, and to persuade investors he has the formula -- and money -- to succeed where previous relaunches have failed.

The new Alfa and seven models expected to follow, including a sport-utility vehicle (SUV), will have to challenge well-established brands which are leaders in innovation and have the backing of financially strong parent companies.

In contrast, FCA is laden with debt, its margins are under pressure in its North American profit centre where demand appears to be nearing a peak, and it is also battling a steep downturn in another major market, Brazil.

"It's not impossible but it's a tall order and there is no margin for error," said Giacomo Mori, a managing director at advisory firm AlixPartners in Italy.

"Alfa has to offer all the technology and perks that are a given in those German cars and something else."

Perhaps reflecting doubts over his ability to fund his 48-billion-euro ($54 billion) turnaround plan for FCA, Marchionne has recently stepped up a campaign to find a merger partner, and targeted General Motors (GM) in particular.

GM, which will be talking up a new Chevrolet line-up at a separate event on Wednesday, has so far spurned FCA's advances. But a strong Alfa revamp would give FCA more credibility in any future merger talks.

Bernstein analyst Max Warburton, who has an "underperform" rating on FCA shares, believes potential partners are the real audience the company will be targeting with the Alfa relaunch.

While the new car will probably "look great and boast huge power and performance ... we think it is still developed on the cheap, far from production ready and unlikely to sell in large quantities", he said.

"It is a high-stakes plan, aimed at building credibility with any potential acquirer of FCA."

YOUNG AND FOOLISH

Fiat bought Alfa, whose red Spider 1600 was driven by Dustin Hoffman in the 1967 cult film "The Graduate", in 1986. But several attempts at reviving the brand have stalled, leaving just four models. Only around 72,000 Alfas were sold last year.

Marchionne is aiming to lift that to 400,000 by 2018, committing 5 billion euros to the brand -- much more than previous turnaround efforts.

Stephanie Brinley, an analyst at forecaster IHS Automotive, said Wednesday's launch alone would not be enough to judge his chances of success.

"It will be the full line up and what they do over the next decade to make it into a truly competitive brand that will be decisive," she said. "It took Audi 10-15 years to come back."

IHS expects Alfa sales to reach about 216,000 cars by 2018.

The new car, meant to compete with BMW's 3 series and Audi's A4 family, will go on sale next year. It will sit on a rear-wheel platform, have close to 500 horsepower and may carry the "Giulia" name also used by a popular predecessor in the 1960s and 1970s, supplier sources said.

Critics cite concerns about distribution, especially in the United States, where Alfa has been absent since 1995 but where FCA hopes to sell 150,000 vehicles annually by 2018.

Falling sales at sister-brand Maserati have also raised concerns over FCA's ability to keep customers happy long term.

There are doubts too whether FCA has the muscle to compete with its German rivals, which have built up formidable global scale in everything from engines to dealer networks, and are pioneering new technologies such as Internet-connected cars.

Marchionne has said he will "pull the plug" on his plan for Alfa or revisit targets if the first model does not take off.

But he is confident of success, having personally tested the new car on the track and repeatedly sent engineers back to the drawing board over the past three years.

"I was a driver of German makes before I came to Fiat. I used to drive a BMW M5 when I was young and foolish ... With (the new) Alfa we are on par if not better," he said at a recent car show.

($1 = 0.8875 euros)