Chrysler's Looming Tag Sale

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Anyone Want a Minivan?

Chrysler has long dominated the minivan market with Dodge Caravan and Chrysler Town & Country—heck, the company basically invented them in the 1980s. It still holds 39% of the market. But minivans have been on a long slide: Only 592,000 were sold by all companies in the U.S. market last year, down from a peak of 1.37 million in 2000. Chrysler has had to offer huge incentives to maintain its hold on the market, discounting the vehicles by $10,000 and more. Over half of Chrysler's 124,000 Dodge Caravan sales last year were to rental and commercial fleets; most of that is not profitable. Nevertheless, Toyota and Honda keep increasing their share.

Families have increasingly been choosing SUVs and crossovers (SUVs built on passenger-car platforms instead of those of pickup trucks). Ford and GM have exited the minivan business. Hyundai is pulling out. And Nissan may leave as well. Volkswagen last fall launched the Routan minivan, which Chrysler builds for the German automaker by adapting its Chrysler Town & Country and allowing VW to slap its brand on it. VW has built more than 22,000 but has sold fewer than 5,600 so far. It will likely exit the business when its agreement with Chrysler expires.

A buyer of Chrysler's minivan business would have to take on the Windsor (Ont.) unionized factory where the vehicles are built, and buy a transmission plant in order to keep building them, unless it shipped the tooling to a cheaper labor market. "There is so much overcapacity for factories for assembly, engines, and transmissions, and for a segment in decline, it is not all that attractive," says former Chrysler President Thomas Stallkamp, now a partner in private equity firm Ripplewood Holdings.

A Crowded Lane for Pickups

On paper, the Dodge Ram pickup-truck business looks like it might be attractive. An all-new truck was launched last fall, and Car & Driver magazine pronounced it better than the Chevy Silverado and Ford F150. But with housing sales and starts so depressed and the general uncertainty about a rebound, there are few investors who want to enter the cutthroat arena of selling pickups against GM and Ford. That says a lot about how the truck market has shifted in recent years.

"So goes the housing market, so goes pickup sales," says Mark Fields, Ford's president of the Americas. "A much bigger percentage of the truck business is going to the traditional work-truck contractor market, not the weekender so much anymore."

Last year, Dodge sold 246,000 Ram trucks, down 31%. Toyota, which has entered the full-size truck market with its bruising Tundra, is running into problems luring traditional pickup buyers. And Nissan, which launched the Titan pickup in 2004 with big expectations, has already said it is quitting the category. Instead of making its own pickup, it has contracted with Chrysler to supply a truck it can re-badge as its own. But Nissan executives say privately they have no interest in buying the whole truck business from Chrysler. "The pickup market is changing, and GM and Ford are going to be the ones to battle for it," says one Nissan official. "We'll let Toyota beat its head against that wall."

Little Value in Passenger Cars

Both the Chrysler and Dodge brands have little equity in the passenger-car marketplace, say industry analysts. Chrysler last year had a 2.5% market share. Dodge, including pickup trucks, had a 5.9% share. But even those figures are deceptive: Industry data show that almost 50% of Chrysler Sebring, Dodge Charger, Dodge Caliber, and Chrysler 300 cars that moved were low-margin or unprofitable sales to rental and government fleets. The industry considers a healthy level to be more like 15% to 20%.

Worse, Consumer Reports did not recommend any Chrysler, Dodge, or Jeep vehicles in its 2009 buying guide—a clear statement for any would-be buyer.

If that's not enough to render Chrysler's car brands near worthless to potential buyers, the factories where those vehicles are made are all unionized. The big makers of small cars—Volkswagen, Toyota, and Honda—continue to build plants in the U.S. and Canada but do not want to buy union-organized plants.

Michigan Land for a Song

The Chrysler headquarters building is a spectacular sight from I-75 in Michigan. But the Auburn Hills edifice and its sprawling campus sit in the middle of one of the most economically depressed areas in the country. When the building was erected in the early 1990s, it was designed so it could be repurposed into a shopping mall without too much modification if the perennially troubled Chrysler should go out of business. But there is no interest in another shopping mall in a commercial corridor where unemployment and foreclosure rates are both above 20%, and one of the best-performing malls in the state, The Somerset Collection, sits 15 minutes away in Troy, Mich.

Fiat's Options

Much will depend on what Fiat is willing to give up to get Chrysler, access to the U.S. market, and the $6 billion of U.S. government loans the White House has placed on the table.

Fiat and Chrysler have a deal in place that calls for Chrysler to use Fiat's vehicles and engines as the basis for new vehicles. Fiat, which would eventually own a majority stake in Chrysler, wants to build Fiats and Alfa Romeos alongside Chryslers and distribute them in the U.S. through Chrysler dealers.

Executives with knowledge of the negotiations between the White House, banks, and Cerberus say there is a growing possibility the Treasury will provide debtor-in-possession financing that would allow Chrysler to enter Chapter 11 and reemerge with Italian automaker Fiat as an alliance partner. But even in that scenario the banks would have to be taken care of, and secured debt holders fare the best in bankruptcy court. Unless Fiat strikes a deal with the banks in bankruptcy court, the Italian carmaker could see some of the Chrysler assets it coveted sold off to other companies.

On Apr. 22, Sanford C. Bernstein issued a report stating it believed Fiat may have to sell its CNH Global agricultural and construction-equipment unit to fund a partnership with Chrysler. That successful agricultural business has at times sustained Fiat while its auto operation rose or fell. That may be one road that Fiat CEO Sergio Marchionne—who would likely run Chrysler if a deal is reached—doesn't want to go down.

Kiley is a senior correspondent in BusinessWeek's Detroit bureau.

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