Posted by: David Welch on March 16, 2009
Here’s a message from Chrysler CEO Robert Nardelli to the company’s employees. Chrysler is viable as a stand-alone company. The company doesn’t need an alliance with Italy’s Fiat to survive. But a tie-up with the Italian carmaker would give Chrysler $8 billion to $10 billion in value through technology and savings. That’s what Nardelli said in a companywide email sent out today.
Nardelli said Chrysler has made the same case to President Obama’s Task Force, which is weighing over the next several weeks whether to give the automaker another $5 billion in loans. In the email, Nardelli also made the case that the company’s forecasts for both its sales are quite conservative. Since its profit and cash flow projections are based on those conservative sales predictions, the plan is credible, he said.
When it comes to the size of the car market, Chrysler is quite realistic. Chrysler says that its prognosticators don’t see sales passing 13 million cars and trucks in the U.S. even before 2014. Sales barely passed 13 million cars last year and are predicted to be around 10.5 million this year. All Chrysler has to do is hold market share at about 10.7% and the company will generate enough cash to pay down its debt.
The plan isn’t crazy. Chrysler’s financial statements submitted to the Treasury Department show that the company is within striking distance of breaking even. But there are a couple of questions. The first is, how much does Chrysler have to spend on incentives to hold that market share? Chrysler actually gained market share in February, but only after spending $5,566 a car, according to Edmunds.com. That was a monthly record for incentive spending and about $2,000 more than the next higher spender, rival General Motors. The second question is whether Chrysler can hold market share in the long run as it is cutting back on capital expenditures and has trimmed capabilities to make new models.
On one hand, Chrysler won’t make a model for every purpose like it once did. On the other, the domestic carmakers have long underspent on new cars compared with the Japanese. They blew too much cash on union benefits and rebates, while short changing the cars of tomorrow. That has meant leaving cars on the market too long or cutting corners on them. The market is too competitive today to make cars on the cheap. It’s hard to see a company spending more than $5,000 a car on rebates without jeopardizing the future.
Chrysler’s cars must sell on their merits. And that’s the big question I have. Can Chrysler make cars that consumers love—not at a discount—while designing them on a reduced budget? That has been Detroit’s failed reality for a long time. And that’s why the Fiat tie-up may have to work for Chrysler to make it in the long run.