Lifestyle

Turnaround Time at Chrysler—Again?


DaimlerChrysler (DCX) Chairman Dieter Zetsche was surprisingly frank in a presentation early this morning to European analysts and investors. He called Chrysler's expected $1.5 billion loss this quarter "unacceptable."

Sales at the company have fallen 10% in the first half of 2006, which is even worse than the industry average of 4%. Zetsche said he and Chrysler's U.S. management didn't move quickly enough to slow production or make necessary cuts when sales slowed down and trucks and sport-utility vehicles piled up in dealer lots early in the year.

This summer's employee pricing deals didn't slash inventories the way he and his deputies had hoped. So he will cut production by 16% and take a big loss in the second half. That amounts to approximately 135,000 units for the second half of 2006. Says Zetsche, "We had to bite the bullet."

The cuts underscore the fact that even Chrysler, which has avoided the financial crises of Ford Motor Co. and General Motors Corp. thanks to cost cutting and some hot models launched several year ago, is not immune to troubles roiling the domestic auto industry. In Zetsche's conference call, one analyst even questioned if Daimler may want to spin Chrysler out at some point if the company can't stay consistently profitable.

NO RADICAL PLAN. While Zetsche says he has no such plans, he and Chrysler Group Chief President and CEO Tom LaSorda both accepted blame for Chrysler's woes. What they didn't offer was a radical plan to cut plants and jobs in the way proposed by rivals General Motors (GM) and Ford (F). Neither executive was prepared to say that the company's turnaround has been short-lived and that Chrysler, too, will make permanent cuts.

While Zetsche and LaSorda didn't rule out another round of restructuring, right now they have pinned their hopes on a time-honored Detroit tradition. The cavalry is coming over the hill in the guise of the new models coming out now and next year. In a conference call with reporters today, LaSorda said, "Of all the products we'll be selling in 2007, one-third will be less than a year old."

That may be true, but for Chrysler to get back on track without another round of job cuts, the company will have to beat some of the problems that have long plagued Detroit's carmakers. Chrysler will have to find a way to boost sales and make profits with something other than the pickups, SUVs, and minivans which make up 70% of its volume. Its new compact cars and family sedans will have to win in an import-dominated passenger car market. "Dodge cars have no credibility in the market and Chrysler's brand isn't much better," says John Wolkonowicz of Global Insight.

RESURRECTION-PRONE. It's hard to blame Chrysler executives for wanting to see how their cars will do before whipping out the ax. Leaders of the United Auto Workers union have already been worked over by GM and Ford. In fact, they won't even give Chrysler the cuts to health-care plans that their cross-town rivals got.

In fairness to Chrysler, it is the one U.S. company that has historically resurrected itself with hot new designs like the minivans of the '80s, Jeeps of the '90s, and the Chrysler 300 of a few years ago. Its new Dodge Caliber compact is selling well. New models like the Caliber and the similarly-sized Jeep Compass are smaller and more efficient, giving Chrysler hope that the company can appeal to American buyers who are quickly downsizing their everyday rides (see BusinessWeek.com, 8/29/06, "Full Caliber"). "I think this company still has an advantage over its American competitors in creativity, speed, and the willingness to take risks," says John A. Casesa, a partner of automotive consulting firm Casesa Shapiro.

But each of Chrysler's past turnarounds also came with painful bloodletting. In 1980 and in the early 1990s under Lee Iacocca, and in 2001 through 2003 under Zetsche, Chrysler slashed salaries and cut thousands of jobs to get back to health.

REPLACING THE ALSO-RANS. Making sure of success this time won't be easy. Truck profits are tough to come by. Expensive gasoline has undercut sales of SUVs and pickups. Even Chrysler's minivans have been hit by fresher models sold by Toyota (TM) and Honda (HMC). Its minivan sales are down almost 12% this year.

The other big challenge is that the new Chrysler Sebring and Dodge Avenger midsize cars coming out now and early next year replace cars that were also-rans in the hotly contested family sedan market. Even a new Chrysler model will have a tough time breaking into that business, Wolkonowicz says.

Some of Chrysler's new models, such as the Chrysler Aspen large SUV and Dodge Nitro mid-sized SUV are very similar to models sold under other brands by the company.

TURNOVER LAG. Chrysler's new models will have to carry a big load. On average, Chrysler's inventory takes 100 days to turn over, about one-third longer than the average car. Even the once-hot Chrysler 300 sedan turns over its dealer inventory every 101 days, according to data compiled by J.D. Power & Associates. Chrysler has been selling more 300's into rental fleets, says Art Spinella, president of CNW Marketing Research in Bandon, Ore. That is a sure sign that retail demand for a car has slipped—it also means less profit because fleet sales are typically discounted.

Only the Caliber and Jeep Compass small crossover SUV, which is almost too new to the market to measure sales success, turn their inventory faster than the average car.

Meanwhile, Chrysler's profitability has been falling since 2004. Last year was Chrysler's best since 1999 when the Germans first bought the company. Chrysler made about $1.9 billion, but about $284 million came from the sale of its Arizona proving ground. Take that out and operating profits were less than in 2004. This year, first-half operating profits are just $217 million, an 80% decline versus the first half of 2005.

A PRACTICAL JEEP? There are some models that could give the company a boost. LaSorda points out that the new cars come just as consumers shift away from SUVs. The four-door Jeep Wrangler could make a cult hit into something more practical to own. In the fall of 2007, Chrysler will have new Dodge Caravan and Chrysler Town & Country minivans to battle back the share gains made by Honda and Toyota.

For the sake of Detroit, it would be a boon if Chrysler can avoid the kind of job cuts and plant closings that Ford and GM have made. But that's looking tougher to avoid. Still, investors think this might be good news. DaimlerChrysler stock closed up 0.22% at 49.29 a share at the close of trading on Tuesday.


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