Inside GM's Plans for Chrysler

General Motors has a detailed strategy for merging the two car companies. But it still needs a bargain price and union concessions to make the deal work

by David Welch

There is now no doubt that General Motors (GM) is interested in Chrysler. It's even more obvious that its German parent, Stuttgart-based DaimlerChrysler (DCX), wants to cut it loose. As BusinessWeek.com reported on Feb. 18, GM executives have recently looked closely at the benefits of a deal, even before Daimler Chairman Dieter Zetsche said he would consider selling the company. GM is serious enough about the prospective acquisition that it has consulted with its board of directors (see BusinessWeek.com, 2/18/07, "Why GM Is Serious About Buying Chrysler").

GM executives have also war-gamed specific strategies for cutting costs and streamlining operations if they do acquire Chrysler. They have picked through various product lines to determine whether two or more can be built on the same platform to trim costs and simplify purchasing. Possibilities include building the next-generation Dodge Ram pickup with the same platform as the Chevrolet Silverado and using the Jeep Wrangler platform for the Hummer H4 concept car from GM. GM executives also see an opportunity to improve Chrysler's profitability by buying parts from around the globe.

DaimlerChrysler looks determined to jettison the company it acquired almost nine years ago. Zetsche said on Feb. 14 that the company was considering all options for Chrysler, including a possible sale. But a deal with GM is far from assured. There are other potential bidders for Chrysler, including Renault-Nissan (NSANY) and Hyundai, both of which seek growth in the U.S. market.

The Union's Blessing

Even if no serious alternative bidders step forward, a lot has to happen before GM can walk away with its longtime rival. Sources within GM say that, first of all, they would have to get Chrysler just about for free. And to make the deal work, the United Auto Workers union would have to make a big concession to both companies on retiree health-care liabilities, says one source close to the situation.

Analysts say that would be the only way to make such a challenging deal happen. GM's health-care liabilities are between $50 billion and $60 billion. Chrysler's are $22 billion. Combining them "is just compounding the problem," says David Cole, chairman of the Center for Automotive Research (CAR) in Ann Arbor, Mich. "If they can't get something related to that long-term health-care liability, they can't get a deal done."

Then there is the possibility that the two companies would close plants and marry their manufacturing operations. Sean McAlinden, chief economist at CAR, says that alone could mean the reduction of 10,000 to 15,000 union jobs. The UAW would have to come to the table willing to make significant concessions.

Streamlining Dealerships

If GM ends up buying Chrysler, McAlinden says it would cost GM a fortune to get rid of many of the 3,400 Chrysler, Jeep, and Dodge dealers. Chrysler is already trying to thin out its herd of dealers. A streamlined Chrysler would need even fewer. State franchise laws all but require a buyout to get rid of dealers, even if the manufacturer doesn't need them. "Every one of them has a lawyer and a state legislature on their side," McAlinden says.

GM has looked at plenty of reasons to try to buy Chrysler, though. In addition to adding its $62 billion in revenue while gutting the white-collar staff that makes up a lot of the structural cost, GM has already looked at how the two companies could complement each other.

GM could, for example, try to accelerate Chrysler's existing plan to combine Chrysler, Dodge, and Jeep at the dealer level so that every dealership sells all three brands. GM has had success with a similar plan that has put Buick, Pontiac, and GMC models under one roof in many markets.