Chrysler's Lowball Strategy

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In a bold move to develop more compact and subcompact cars, LaSorda says Chrysler will work with Chinese partner Chery Automobile (BusinessWeek.com, 9/26/06). His goal is to increase overseas sales from 250,000 this year to 300,000 next year, while committing little of Chrysler's capital. LaSorda points to the deal with China Motors to build minivans in Taiwan. It's a joint venture using the partner's plants and no capital from Chrysler. To strike more deals like that, Chrysler hired L. John Cataldo from General Electric (GE), where Nardelli earned his stripes as a turnaround specialist, to scout alliance deals.

The strategy has its critics. James Hall, vice-president of consulting firm AutoPacific, says that building cars with partners takes too much time. Cutting costs on parts to spruce up the cabins in Chrysler's cars—a weakness identified by Cerberus and Chrysler managers—risks improving the products in one area only to make detectable downgrades in another. "That's not how you do it," Hall says. "You spend more on the cars to get better pricing in the market."

Mending Dealer Relations

Still, Chrysler's latest moves should solve some near-term problems. This year's restructuring should cut plant capacity from 2.8 million cars to about 2 million. That should help dealers to hit Chrysler's goal of cutting inventory from 455,000 vehicles to well below 400,000 cars. "The old management didn't view the dealers as customer," says a Cerberus executive. "Rather than shove a bunch of cars on them, we want to ship them the cars they want."

The company also is moving to mend relations with dealers, many of whom were fed up with Chrysler's salespeople forcing cars on them. Press and Steven Landry, Chrysler executive vice-president for sales, have revamped the company's dealer incentives. Rather than giving dealers bonuses just for moving volume, they're giving them $200 when they order a car and another $200 when they sell the car. Dealers can pocket the money if they want, or pass it along to the buyer, but either way the strategy supports the dealers, Landry says. Chrysler hopes the plan and the production cuts will spur dealers to order cars that customers want, vs. selling excess inventory. "We're trying to get to the spot where dealers are calling us," Landry says. "We haven't been there for a very long time."

"Not a Game of Monopoly"

In a signal of Cerberus' commitment to Chrysler, it has put at least five advisers on Chrysler's payroll and more may be coming. Of the five, four took jobs in financial disciplines, including former Chrysler finance guy Thomas Gilman, who will take over the Chrysler Financial Services lending arm. Cerberus leaves carmaking to the car guys, Neporent says. "We know what we don't know."

Cerberus executives swear that its Chrysler investment is more than just a money play. They say reclusive CEO Stephen Feinberg is determined to fix the company to prove that America can succeed in the car business. They point to a meeting held past 2 a.m. just before Cerberus finalized the deal to buy Chrysler in May. At the meeting, some of Cerberus' strategists were war-gaming Chrysler's breakup value. Feinberg cut them off. "This is not a game of Monopoly. We're talking about an American icon," Feinberg said, according to sources familiar with the meeting. "One option that was off the table was failure," says Cerberus' Price.

Click here to see a roundup of Chrysler's hits and misses.

Welch is BusinessWeek's Detroit bureau chief.