Posted by: David Welch on February 26, 2007
The latest rumor coming out of Europe is that Canadian parts supplier Magna International has an interest in buying Chrysler. Maybe they really want it. Maybe they’re just snooping around to see if they could get it in a fire sale. Magna is a very well-run company and it has been successful at a time when making money in the parts business is very tough. Magna has long harbored had an interest in making cars, and not just assembling them for other auto makers like it does now.
But the way I see it, selling Chrysler to any company except a global auto maker just puts the smallest of the “Big Three” right back where the company was before the merger with Daimler. It would be just another regional auto maker trying to compete in a viciously competitive global business.
Just look at Chrysler’s problems. On its own, the company would have a tough time developing small cars, mid-sized family cars and coming up with new technology like clean diesels and hybrids.
Think about it. Chrysler relied on Mitsubishi (not exactly one of the world’s heralded carmakers) to get the platforms for its Dodge Caliber compact and Dodge Avenger and Chrysler Sebring mid-sized cars. It got diesel technology from Daimler and uses an alliance with General Motors for its hybrid technology. Chrysler has a tough time coming up with cash for that stuff on its own.
Back in 1998, Chrysler’s leaders didn’t think the company could go it alone. “That’s why we did the merger with Daimler,” says former Chrysler President Thomas T. Stallkamp, now a partner with private equity firm Ripplewood Holdings.
One argument says that Chrysler could develop its own passenger cars, just like it did in the old days. It could continue to get hybrid technology from GM and keep a venture with Daimler for diesel.
OK, that makes some sense. But I still don’t think Chrysler could make it on its own. The company would be competing in the car business with companies like GM, Toyota, Honda and Nissan, all of which have global sales volume to lower the costs of their passenger cars. That makes it tough for Chrysler to make real money on those vehicles.
Chrysler could make nice profits if consumers paid more money for Chrysler’s passenger cars. But that has never been the case. Those vehicles aren’t Chrysler’s forte. And they certainly don’t have the brand strength to command fatter sticker prices than a Camry, Accord, Altima, Civic or Corolla.
It’s tough to see how Chrysler will make the kind of fat margins it made as an independent company back in the mid-1990s. The party line is that the latest move to trim production and cut 13,000 jobs will make Chrysler profitable next year. They can rebuild profits as they cut cut low-priced sales to rental firms and drop rebates. That works if Chrysler can stop its sales freefall. Two weeks ago, Daimler Chairman Dieter Zetsche said that shouldn’t be a problem because Chrysler’s sales have been pretty stable. Well, they fell 7% last year even with massive overbuilding of its cars, which were then foisted off on dealers who were jammed with inventory.
A deal with Magna just creates an independent Chrysler. That may make Daimler‘s shareholders happy, but I don’t see how it boosts Chrysler’s prospects. Unless Magna has something else up its sleeve, I just don’t see the logic to this one.