Chrysler's Lowball Strategy

Without additional investment from owner Cerberus Capital, CEO Nardelli has to turn the automaker around on the cheap

by David Welch

Insiders at Cerberus Capital Management deny that they're just trying to strip out costs and flip Chrysler. But they are leaving nothing to chance when it comes to managing its money.

Chrysler is proving to be a tough test for the private equity giant. Despite announcing the company's second restructuring plan (BusinessWeek.com, 11/2/07) this year on Nov. 1, the good news for new CEO Robert Nardelli and his two vice-chairmen—incumbent Tom LaSorda and former Toyota Motor (TM) North America boss James Press—is that they have the autonomy to make decisions much faster than Chrysler could under Daimler (DAI). The hard part for the trio: They're being asked to turn around a company in an industry that burns cash like no other while spending as little as possible.

Cerberus is managing Chrysler to conserve cash. After spending $7.4 billion in August to acquire 80.1% of the automaker, it doesn't want to plow in any more money, because creating more equity would reduce the firm's the return when it eventually sells the company.

Unchanged Budget

This is in stark contrast to auto deals such as the Renault-Nissan (NSANY) alliance. When Renault bought into the Japanese automaker in 1999, the French company injected $5 billion in cash and later sold billions in assets to pay off debt and develop a slew of new models. Volkswagen (VOWG) made a big investment in Bentley, as well.

Cerberus could raise more money. But Mark Neporent, its chief operating officer, says Cerberus has enough right now. Besides, the capital market is an unfriendly place at the moment. Cerberus also could call on a slew of hedge funds in its equity syndicate for more money, but the private equity firm is loath to invest more cash unless it absolutely needs to. Standard & Poor's says Chrysler has enough liquidity to handle its restructuring and the expected weakness of the car market.

That means Nardelli has to work with the same $3 billion capital budget that Chrysler had under Daimler's ownership. Unless he can cut costs, he won't get much more. "Making improvements and limiting the capital budget aren't mutually exclusive," says Tim Price, a Cerberus managing partner.

Undaunted, Nardelli is making changes—and fast. He's not a car guy, but the former Home Depot (HD) CEO, Press, and LaSorda met with engineers at the company's test track in August to examine the lineup for problems. After jumping in the slow-selling Dodge Avenger and Chrysler Sebring, Nardelli complained about the noisy engines. In all, Chrysler's new team found about 300 improvements they need to make to current and future products as possible. "We said: 'Here's what's wrong, now fix it,'" LaSorda says.

Finding Savings

How will Chrysler pay for the improvements? By cutting elsewhere, says Frank Klegon, Chrysler's executive vice-president for product development. He says Chrysler is looking to low-cost providers for parts such as headlamps and electronics, components that only a mechanic would touch. The savings will pay for stuff that drivers touch.

Chrysler also is going the low-cost route in terms of overseas expansion. While General Motors (GM) has spent billions building factories and expanding its presence in emerging markets, Chrysler, which has no global operations, must pair up to do so.