What GM Sees in Chrysler

General Motors sees a profitable, if risky, path in gaining Chrysler's revenues and slashing costs

By David Welch

A man looks through binoculars on the General Motors stand at the Paris auto show on Oct. 10. Olivier Laban-Mattei/AFP/Getty Images

When news first leaked out that General Motors (GM) was interested in buying Chrysler from private equity firm Cerberus Capital Management, the general reaction from auto-industry watchers was: Are they crazy?

Chrysler's sales are down 30% and the company is losing money. Its product lineup is loaded with trucks and sport-utility vehicles and its cars are also-rans. The Chrysler and Dodge brands don't have enough strong passenger cars and crossovers. Even the beloved Jeep brand is suffering as SUV sales have tanked.

But on that very troubled landscape, some of GM's top executives see an opportunity. Chrysler, after all, has managed to sell 1.2 million vehicles so far this year, and it reported $1.1 billion in earnings before interest, taxes, depreciation, and amortization (EBITDA) for the first half. But the company admits it is still losing money and burning cash. Chrysler had sales of $61 billion in 2006, the last full year for which it was required to report its financial performance.

Looks Good on Paper

If GM executives determine that Chrysler can be restructured, they think it could be a great opportunity to add sales and a handful of good products while boosting profits by slashing costs. Their plan: Grab the tens of billions in Chrysler revenues, cut overhead costs at headquarters, and book a nice profit.

On paper, it all looks good (BusinessWeek.com, 10/11/08). GM gets a nice book of business and eliminates a competitor from the scene, giving every survivor a shot at more sales and better pricing. The hard part will be getting the union to accept the cuts needed to get to the profitable revenue stream that GM covets. To sell the benefits of buying Chrysler to its own board of directors and shareholders, GM would have to build a case that the costs that come with buying out thousands of United Auto Workers and winding down Chrysler's bloated chain of dealers won't dwarf the benefits. Concedes one GM executive: "No deal comes without risk."

GM wouldn't keep the whole company. The biggest of the Big Three likes Jeep, the minivans, the Dodge Ram pickup, and cars like the Chrysler 300. Other vehicles, such as the Chrysler Sebring and Dodge Avenger, or big SUVs like the Dodge Durango, could disappear. GM already has strong products for buyers of those Chrysler vehicles.

Workers and Plants Would Be Cut

But here's where the strategy breaks down. Getting rid of cars GM doesn't want means dumping plants and workers, too. Already, there is union opposition to a deal. Appearing Oct. 14 on WWJ radio in Detroit, UAW President Ron Gettelfinger said he wouldn't endorse a GM-Chrysler deal because, "I personally would not want to see anything that would result in a consolidation that would mean the elimination of additional jobs."