Dr. Z's Painful Cure for Chrysler

Daimler's CEO will slash 13,000 jobs, and may even spin Chrysler off. Either way, the U.S. carmaker faces a smaller, bleaker future

by David Welch

It used to be that Chrysler could make it at least a decade before going through another major restructuring. But these days, DaimlerChrysler's (DCX) struggling U.S. carmaker lasted just five years before another overhaul was deemed necessary.

Daimler Chairman Dieter Zetsche and Chrysler Group Chief Executive Thomas LaSorda unveiled their restructuring plan on Feb. 14, announcing they will cut 13,000 jobs in the U.S. and Canada while eventually closing one plant and cutting shifts at two others. The move comes after Chrysler lost $1.4 billion last year, as sales fell 5.5% in the U.S.

"The status quo is clearly unacceptable," LaSorda says. "This is a three-year plan geared to return us to profitability in 2008." (For earlier coverage, see BusinessWeek.com, 2/6/07, "Chrysler: After the Cuts, What Next?")

Who Wants It?

While LaSorda at least gave a timetable for bringing Chrysler back into the black, there are still plenty of unanswered questions. The biggest one is whether Daimler will eventually divest Chrysler through a sale or a spin-off. When asked about spinning off Chrysler, Zetsche said, "all options are on the table."

What it boils down to is whether the restructuring plan, which is LaSorda's to carry out, returns Chrysler to health fast enough to satisfy increasingly annoyed German shareholders. Zetsche already started considering all options because of pressure from shareholders. Says Thomas Stallkamp, former Chrysler president and a partner with private equity firm Ripplewood Holdings, "If Chrysler doesn't show an operating profit by the third quarter there will be a shareholder revolt."

But if Daimler wanted to cut Chrysler loose, who would want it? Selling a company like Chrysler, which sold 2.6 million cars and trucks last year, would yield just a small handful of suitors. The company has expensive union wages and benefits, and relies too heavily on the competitive North American market for sales.

Synergy Matters

Even worse, Chrysler is largely a North American company that sells mostly pickup trucks, sport-utility vehicles, and minivans in a market where rising fuel prices have hurt sales of all three. LaSorda says rising gasoline prices were one factor hammering Chrysler's financial results. The company's lack of hybrid technology and dearth of popular passenger cars have hurt sales as gasoline prices have risen.

There are a few possible buyers. Renault-Nissan (NSANY) is one, says John Casesa, a Wall Street veteran and partner in investment fund Casesa Shapiro. The company's hard-charging CEO, Carlos Ghosn, has said he would like a North American partner in his alliance (see BusinessWeek.com, 10/31/06, "Could Ghosn Save Chrysler?").

There are some natural synergies. Nissan has struggled to gain a strong foothold in the large-pickup, SUV, and minivan markets, where Chrysler is strong. And Chrysler lacks the global volume and scale to compete in compacts and mid-sized cars, says Michael Robinet, vice-president of Northville (Mich.) research firm CSM Worldwide. Says Robinet: "Chrysler is a regional car company, like Fiat (FIA) or Peugeot."

Chinese Exchange

Casesa says PSA, the corporate parent of French carmakers Peugeot and Citroen, would be another possible partner for Chrysler. It mostly does business in Europe and could use North American sales volume. PSA could give Chrysler help with its passenger-car lines, Casesa says. But PSA has stated no intention of any kind of tie up.