The car business is one of the few industries in which companies can go from being darlings to financial disasters in less than a year. This is especially true in Detroit. Chrysler made almost $1.5 billion last year but said last week that it lost that much in the third quarter.
It's gotten so bad that there are once again whisperings from Germany that parent DaimlerChrysler (DCX) might even be thinking of spinning it off if they can't fix it again. One source close to Daimler management says that top executives are worried not only about Chrysler's heavy costs, but that its product lineup is completely out of step with what consumers want. Its sales are 70% trucks and minivans in a market where consumers remain gun-shy about buying SUVs, even as gasoline prices have fallen from their $3 a gallon summer high toward $2 a gallon.
An Eager Suitor So what's Daimler's German brain trust going to do? Right now the plan is to fix Chrysler. Chairman Dieter Zetsche did that job himself a few years ago when he ran the unit before taking over the top job on Jan. 1 and is confident he can do it again.
But on the earnings call last week, Chief Financial Officer Bodo Uebber did not rule out an eventual spin-off. German magazine Der Speigel reported that Daimler's supervisory board is mulling several exit scenarios.
If Daimler gets to that point, the company may have an eager suitor. How about Renault-Nissan (NSANY)? Its overachieving chief executive officer, Carlos Ghosn, has been rebuffed by General Motors (GM) in his quest to add a North American carmaker to his alliance. Ford Motor (F) says any alliance talks are on hold until new CEO Alan Mulally gets a chance to root through the company's problems.
A Possible Deal But Chrysler could be available. There are no talks going on, but one high-level Renault executive says the idea has at least been casually pondered.
While a sale may not be in the cards, on paper at least the two companies marry up nicely. Chrysler lacks expertise in designing compacts and midsize cars, especially now that its joint development deal with Mitsubishi is kaput. Since Daimler doesn't play in those segments in Europe, Chrysler is really trying to compete with the likes of GM, Ford, the Japanese and Koreans, all of whom can spread development costs over global sales volume. Renault-Nissan is very good at making those models and has global scale.
The deal could make sense for Renault-Nissan, too, since Ghosn said in a call with analysts last week that he is still interested in a North American partner. Nissan has just 6% of the U.S. market, and its attempts to break into the full-size pickup, large SUV, and minivan segments have not done well. Those are Chrysler's strengths. Chrysler also has a presence in China—albeit a small one. But Renault-Nissan could use Chrysler's presence to build a distribution channel.
Alliance Benefits Making a complex merger like that work is another question. That's especially true now that Ghosn is still tinkering under the hood of Renault and Nissan. Given the problems at both companies, it's easy to question whether it's wise for Ghosn to try to either acquire or form an alliance with another automaker.
Still, it's clear someone in Boulogne is thinking about Chrysler. When presented with the benefits of pulling Chrysler into the fold, the Renault executive told BusinessWeek that some form of alliance with Chrysler makes business sense. Some analysts see advantages, too. "If you assume gas prices are not going to come down, it would make sense for Daimler to get someone on board to help Chrysler with small and medium-size car expertise," says Michael Raab, analyst at Sal. Oppenheim, a private bank in Frankfurt, Germany.
Daimler would have other options, as well. Two people close to Daimler say that forging an alliance to engineer passenger cars with Renault-Nissan, its French rival PSA, or Korean Hyundai also makes some sense.
Cutting Costs Still, none of this will happen anytime soon. With competition being so fierce and so many major players in trouble, everyone in the car business appears to be talking to everyone else.
In the meantime, Zetsche is trying to quickly fix the company he resurrected just three years ago. That's why he has three German executives shuttling back and forth across the Atlantic to see what can be done to fix the American carmaker. One of these executives is Chief Operating Officer Rainer Schmueckle, who was in Auburn Hills, Mich., two weeks ago. He is known as a relentless cost-cutter with brash manners. There are seven teams under Schmueckle looking at every aspect of the business. A fix-it plan might be divulged as soon as late January.
But to get anything done, the Germans will have to rely on Chrysler Group CEO Tom LaSorda to win over the United Auto Workers. That's where it gets tough. Expect Chrysler to continue to hound the UAW for health-care cost cuts, especially if losses keep piling up in the coming quarters. The company needs to slash its health-care costs, which add up to $1,400 a vehicle in the U.S. If you include Chrysler's plants in Mexico and Canada, where health care is a small expense, the cost drops to $600 a vehicle, says Sean McAlinden, chief economist for the Center for Automotive Research. That's not as bad, but still triple what Toyota (TM) pays.
Plant Closings Also, look for the kind of plant closings and job cuts that GM announced. McAlinden says Chrysler needs to take out 5,000 of its 48,000 UAW hourly workers. Like Ford and GM, the company will likely offer buyouts and severance packages. LaSorda can do that without opening an existing labor pact.
That means two assembly plants and a few smaller parts plants could go. Michael Robinet, vice president of CSM Worldwide, a Northville (Mich.)-based consulting firm, says the company will likely shutter its Newark (Del.) plant, which builds the Durango model. The company may also close a minivan plant in St. Louis or another across town that builds Ram pickups. As many as four parts plants may go, too.
Unfortunately, Chrysler proved it wasn't immune to the ills plaguing Ford and GM. It looks like it's about to get some of the same medicine.