June 18 (Bloomberg) -- Late last Aug. 5, the Sunday after New York buyout firm Cerberus Capital Management LP bought Chrysler LLC, the automaker's public relations team was huddled at headquarters in Auburn Hills, Michigan. First on the list was rewriting speeches to introduce the new top brass.

For chief executive officer, they inserted the name of Robert Nardelli, who'd been a Cerberus consultant since Home Depot Inc.'s board ousted him as CEO in January.

Next, they deleted Wolfgang Bernhard, who'd also been hired as a consultant and was slated to become chairman. During his tenure at Germany's DaimlerChrysler AG, Bernhard, 47, had struggled for four years as chief operating officer to increase Chrysler's production.

Nardelli, 60, gave his Cerberus bosses a different take on their $7.4 billion purchase.

The worst U.S. housing crisis since the 1930s was spilling into car buying. Chrysler, which had survived past struggles thanks to a 1980 federal loan guarantee and Daimler-Benz AG's $36 billion purchase in 1998, needed to face reality and forget about making more cars. The U.S. would be lucky to sell 15.5 million vehicles in 2008, 9 percent fewer than Chrysler's forecast.

Nardelli's bearish assessment helped win him the top job, and Bernhard quit, according to people familiar with the matter.

Reducing Models

Since then, Nardelli has announced he'll stop selling four of the carmaker's 25 models: the Chrysler Crossfire, Pacifica and PT Cruiser convertible and the Dodge Magnum. He's unveiled plans to slash 12,100 jobs on top of the 13,000 DaimlerChrysler executives targeted before he arrived.

The cuts, which helped Chrysler match Toyota Motor Corp. in factory productivity, are further decimating the ranks of the 71,578 employees Chrysler had at the end of 2007. He's also sought alliances with Nissan Motor Co. and others to infuse Chrysler with the compact cars it lacks.

``Bob is one of the best and toughest CEOs in the country, which is exactly what the auto industry needs,'' Cerberus founder Stephen Feinberg, 48, wrote to investors five months after Nardelli's appointment. ``We bought the company very cheaply, and we do not need to be heroes to earn a good return. Reasonable execution should be enough.''

Even with fewer models, a smaller workforce and Nardelli busy at the helm, Chrysler is losing ground. The automaker will burn through $2.5 billion of cash this year, according to a person familiar with the situation. In May, it slid to fifth place in U.S. sales, a monthly ranking it has held only twice before. Buyers shunned the trucks, minivans and sport utility vehicles that make up 66 percent of Chrysler's U.S. fleet.

Short Timeline

At an average of 22.8 miles per gallon, Chrysler is tied with Ford Motor Co. for worst fuel economy among the eight major automakers, according to the U.S. Environmental Protection Agency.

``With the company using this much cash and with high gasoline prices, Chrysler has months, not years, to establish alliances to get products it doesn't have,'' says John Casesa, managing partner of Casesa Shapiro Group, a New York-based consulting firm. ``The timeline has been shortened dramatically,'' says Casesa, who predicts Chrysler is unlikely to survive as a free-standing car company.

Nardelli, who left Home Depot with a $210 million exit package and a spot on executive compensation research firm Corporate Library's list of highest-paid chief executives of worst-performing companies, is banking on an overhaul of the Dodge Ram pickup. Nardelli and Jim Press, who joined Chrysler from Toyota in September as co-president of sales, tell Chrysler employees the new Ram is an essential part of the automaker's revenue plan for 2008.

Overhauled Ram

``It has been made very clear to Mike and me how important this project is,'' says Scott Kunselman, vice president of truck projects, referring to chief engineer Michael Cairns. ``Everything depends on it.''

The new version of Chrysler's most popular vehicle comes with satellite TV, a carlike ride and a bin in the cargo box for hauling 10 cases of beer. It's set to go on sale in September, not the best time for a pickup that gets about 15 mpg in city driving and can cost more than $40,000.

On June 3, General Motors Corp. said it would close four truck and SUV factories as CEO Rick Wagoner bemoaned gasoline prices that topped $4 a gallon. The same day, Ford reported that May sales tumbled 16 percent as consumers steered away from pickups and sport utilities. Chrysler's May sales skidded 25 percent.

`Month to Month'

``Chrysler is hunkering down,'' says Kimberly Rodriguez, a Grant Thornton LLP consultant in Southfield, Michigan, who specializes in reorganizing distressed automakers and their suppliers. She predicts Nardelli and Feinberg will try to pilot Chrysler as a smaller company or sell it whole or piecemeal in the next two years.

``They're just trying to get through month to month without writing a big check,'' she says.

Nardelli declines to talk about a sale.

``We're focused on running the company,'' he says, seated in the dome-covered display room in Auburn Hills where executives approve new designs. ``Strategic decisions will be driven by the owners, Cerberus.'' Feinberg declined to be interviewed for this story.

Tim Price, a Cerberus partner, won't discuss the possibility of additional alliances.

``We believe Chrysler is going to be a successful investment,'' he says. ``Auto sales aren't going down every year forever.''

Credit Crisis

John Snow, 68, the former U.S. Treasury secretary who is Cerberus chairman, and DaimlerChrysler CEO Dieter Zetsche, 55, announced the acquisition on May 14, 2007.

For Cerberus, timing hasn't made a Chrysler revival -- or a Cerberus exit -- easy. Last year, GM alone lost $38.7 billion and hung on to its crown as the world's biggest car company versus Toyota by 3,000 vehicles out of 9.4 million.

The credit crisis exploded just as Feinberg was buying the 80.1 percent stake in Chrysler. Price says that as a general rule, Cerberus doesn't commit more than 5 percent of the capital of any of its funds to a single investment. It bought Chrysler with co- investors, whom he declined to identify.

Cerberus also borrowed $7 billion from Bear Stearns Cos., Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley to invest in Chrysler. In turn, the banks planned to sell most of the debt to reduce their own exposure to Chrysler. They targeted pension funds, hedge funds and other investors with collateralized-debt obligations, or bonds derived from pools of assets including mortgages and bank debt.

Out-of-the-Money

By that time, investors were learning that some AAA-rated CDOs included mortgages to people with poor credit, helping trigger $335 billion in bank writedowns. The market for CDOs collapsed.

In April, Goldman sold a $500 million block of Chrysler debt at 63 cents on the dollar, says Robert Schulz, an analyst at New York- based Standard & Poor's. Goldman spokesman Michael DuVally declined to comment.

``Everybody considered Cerberus smart money until very recently, but now they've got some black eyes,'' says Keith Bachman, a portfolio manager at Aberdeen Asset Management Inc. in Philadelphia. ``Lenders committed to the Chrysler debt when credit markets were in an absolute bubble, and now they've got to live with it.''

As Bachman sees it, Cerberus's stake in Chrysler is worthless unless Nardelli can pull off a turnaround.

``I consider Cerberus's equity an out-of-the-money call option that may or may not achieve value,'' says Bachman, referring to options that are trading below the price at which they can be exercised for a profit.

Daily E-mails

Nardelli, who spends most weeknights at the Townsend Hotel in nearby Birmingham, Michigan, and commutes home to Atlanta on weekends, gets constant reminders that he's racing the clock at Chrysler. Every day, he and his top executives receive an e-mail from the treasurer's office showing how much cash Chrysler has on hand.

The carmaker started 2008 with $9.5 billion, a person familiar with the situation says. After tapping a $2 billion credit line from Cerberus and Daimler AG and setting aside $1.6 billion to repay a loan from the United Auto Workers union for a retiree health fund, cash will drop to $7.7 billion at the end of 2009, the person says.

Chrysler needs $2.5 billion-$3 billion to fund its day-to-day requirements.

Nardelli says the e-mails he got in May showed Chrysler had more cash than planned. He declined to say how much.

``We would love to have a little bit of wind in the sails relative to the economy, but it is what it is,'' he says. ``Failure is not an option.''

Cutting Costs

For now, Nardelli says, Chrysler must make money as a smaller company. He expects it will lose less this year than the $1.6 billion in 2007, declining to give an estimate.

In one cost-saving move, Nardelli is requiring Chrysler to pay the lowest global price for every part it buys, regardless of the location of the supplier's factory, says Tom LaSorda, who runs engineering, purchasing and manufacturing. In the past, Chrysler based decisions on prices in North America.

Nardelli wants to slash purchasing costs by 25 percent over three years. LaSorda declined to say what costs are now.

Nardelli is also limiting new models. In the four years starting with the 2009 model year, he'll replace 51 percent of Chrysler's fleet, Merrill Lynch & Co. analyst John Murphy says. That compares with 72 percent for Honda Motor Co. and 80 percent for Nissan.

To Murphy, the lack of fresh vehicles signals that Nardelli may be less concerned about competing in the future than with gussying up existing lines for sale.

Lagging Pipeline

``Chrysler's product pipeline severely lags the industry,'' Murphy says. ``We believe this is an active decision by new owners to rationalize the product portfolio in advance of a breakup or sale.''

John Gunning, owner of Manassas Dodge in Manassas, Virginia, worries about Nardelli's cuts for different reasons.

``You can't, in six months, or a year, or 18 months, change the product line,'' Gunning says. ``Until we come to grips with that, we are not going to be a viable company.''

For Nardelli, an auto industry novice, scaling back is a turnabout from the expansions he directed at General Electric Co. and Home Depot.

He was born in Old Forge, Pennsylvania, where his father, Raymond, was a GE engineer and manager. The younger Nardelli worked at GE from 1971 to 1988 as a manufacturing engineer in the lighting and transportation units. He returned from 1992 to 2000.

During his final five years, he boosted revenue at the division that makes power plant turbines to $20 billion from $5 billion, in part by buying 30 companies in 18 months.

Welch's Praise

Former GE CEO Jack Welch, 72, credits Nardelli with spotting opportunities and jumping on them. Welch says Nardelli tapped the Czech Republic to cut manufacturing costs.

``Bob Nardelli is the best operational executive I have ever met,'' says Welch, who retired from GE in 2001 after 41 years, including 20 as chairman. ``I don't know anybody who could ramp up production of something like that as fast as he did.''

Even so, the performance wasn't enough to win Nardelli GE's CEO job. Welch told reporters in 2000 that Jeffrey Immelt won the succession race because he was eight years younger. Immelt had also doubled sales at GE Medical Systems in three years.

A week after Nardelli was passed over, Home Depot hired him to replace CEO Arthur Blank, a co-founder who became co-chairman. During the next six years, Nardelli more than doubled profit to $5.84 billion and helped build a home improvement behemoth by boosting sales to $81.5 billion from $45.7 billion.

He ran all purchasing out of the Atlanta headquarters and linked all 1,100 stores through a single e-mail system. He tinkered in smaller ways too -- replacing 157 individual performance review forms with a single version.

Better Than the Feds

Nardelli was on top of things, says Richard Tripodi, owner of grout supplier Roanoke Cos. When he arrived at Home Depot, Nardelli organized a crisis center in Atlanta to deal with natural disasters. When Hurricane Katrina struck New Orleans in August 2005, Nardelli was at a banquet with Tripodi and other suppliers in Atlanta. He got updates on the storm every 15 minutes, says Tripodi, who sat next to the CEO.

``They were far better prepared than the local governments and possibly the federal government,'' Tripodi says. Of the eight Home Depot stores severely damaged by Katrina, six reopened within a week.

Along the way, Welch says, Nardelli clashed with some of Home Depot's old guard.

``He was the opposite of the entrepreneurial guys that started a retail business,'' he says.

Welch, who's been a consultant, author and teacher since his retirement, says he's stayed in touch with Nardelli socially. He was not a consultant for Home Depot.

Chicken Suit

One of Nardelli's biggest obsessions was costs. He reduced full-time employees in Home Depot's workforce to 63 percent from 74 percent in his first two years, according to SEC filings. He added part-timers who drew less in benefits. Then he pushed store managers to increase sales and reduce inventories, even though they had fewer experienced workers, says Richard Ferlauto, director of pension and benefit policy for the American Federation of State, County and Municipal Employees.

``He certainly ran a command-and-control model, and that model was not that of the founders,'' says Ferlauto, who oversees the AFSCME pension fund, which owns 3 percent of Home Depot shares.

Unrest bubbled over in May 2006. A protester in a chicken suit marched outside Home Depot's shareholder meeting in Wilmington, Delaware. Inside, shareholders slammed directors for approving Nardelli's pay, which included a $2.2 million salary, a $7 million bonus and $3.5 million in additional compensation, according to SEC filings.

Shareholders Gripe

Nardelli stood on a stage between two large digital clocks that timed shareholders' comments. After one minute, the microphones cut off.

Shareholders had further reasons to gripe after Nardelli's departure. During his tenure, Home Depot stock fell 7.9 percent to $40.16 compared with a 3 percent rise in the S&P 500 Index.

In January 2007, Nardelli walked away with a package valued at $210 million. Of this amount, $20 million was a cash severance, according to SEC filings.

Most of the rest was in stock options that Nardelli hasn't exercised because the share price is too low. He can cash in 3.5 million options at $40.75 and 1 million at $36.20, according to the filing. After he left, shares fell 33 percent to $26.87 on June 17.

Nardelli declines to talk about most aspects of his Home Depot tenure. Of his exit pay, he'll say only that he's received significantly less than $210 million.

``The lesson learned: It's hard to get a stock up when you come with a 50 P/E,'' referring to the price-earnings ratio of Home Depot in 2000.

At the time, competitor Lowe's Cos. had a P/E of 24.8.

Office of Chairman

At Chrysler, Nardelli doesn't have to worry about stock prices, investors or angry mobs at public meetings. He shares power in a so- called office of the chairman with LaSorda, 53, who was Chrysler's CEO under Daimler, and Press, 61, who was a senior managing director of Toyota. Nardelli won't do media interviews unless LaSorda and Press are there too.

He's not afraid to play hardball with suppliers. On Feb. 1, Nardelli tried to seize machines and tools from Plastech Engineered Products Inc., a closely held auto parts maker. Plastech sparked the dispute by requesting financial assistance from Chrysler for the third time in a year. It then thwarted Nardelli by filing for Chapter 11 and getting court permission to keep the tools until a bankruptcy auction on June 16. At the auction, Plastech asked the judge for approval to sell its two largest businesses to Johnson Controls Inc. and Magna International Inc.

Before that, Nardelli was forced to join Ford and GM in an $87 million loan to keep the supplier operating.

Fewer, Stronger

Billionaire Wilbur Ross, whose International Automotive Components Group supplies Chrysler with plastic parts such as instrument panels, applauds Nardelli's stand as a sign Detroit automakers are breaking with their tradition of propping up weak suppliers to ensure multiple competitive bids. Toyota and Home Depot want fewer but stronger suppliers, he says.

``When did you hear of key suppliers at Home Depot going bankrupt?'' Ross asks. ``You didn't.''

Press is trying to shake up Chrysler by emulating Toyota's policy of building only the cars that dealers order. To do that, he has to scrap Detroit's habit of setting production schedules to meet market forecasts and then discounting unwanted cars or selling them at a loss to rental companies.

Most of Chrysler's recent sales decline has come from its decision to deliberately cut back on such low-margin sales, Press says.

Consumer Reports

Nardelli also reduced the number of dealers, leaving 3,488 at the end of May compared with 3,625 at the end of last year. He cut vehicles in transit or sitting on lots from 647,000 in June 2006 to 412,009 at the end of May. This drop saves dealers $1.2 million a day in interest charges, Press says.

For all of his cash-saving ideas, Nardelli faces a long list of ills. Some, like poor quality, have plagued Chrysler for decades.

For 2008, only 2 of 21 Chrysler vehicles are among Consumer Reports' recommended models: the Dodge Charger and Chrysler 300C. That compares with 17 of 21 for Toyota and 5 of 8 for Hyundai Motor Co.

Other woes, like a lack of overseas sales, stem from the breakup with Daimler.

Without its German parent, Chrysler sells 22 percent of its vehicles outside the U.S., mostly in Canada and Mexico, compared with 59 percent for GM.

``When you go through a divorce, somebody gets the house and somebody doesn't,'' Nardelli says.

The company also lags behind rivals in technology to meet mandates for fuel economy and emissions.

`Cherry-Pick'

Since 1997, Toyota has sold 1 million gas-electric Prius hybrids. Chrysler's first hybrid trucks go on sale in September with an electric drive system co-developed with GM. Chrysler won't start selling a hybrid car for at least three years. To conserve cash, the company plans to rely on alliances, LaSorda says.

``We can cherry-pick the technology,'' he says.

By the end of this year, Nardelli wants to sell a subcompact car in South America that's designed by Wuhu, China-based Chery Automobile Co. He intends to build minivans for Volkswagen AG this year and pickups for Nissan in 2011. He also plans to sell compact cars built by Nissan in the U.S. in 2010.

Jerome York, 70, remembers a similar alliance with Mitsubishi Motors Corp. when he was Chrysler's chief financial officer from 1990 to 1993. Chrysler earned a gross profit of about $1,000 for each Mitsubishi vehicle compared with $3,000 or more for its own vehicles. As a result, Chrysler officials were more likely to give rebates on their cars than to Mitsubishi's, he says.

``The long-term history of these alliances, in many cases, is not good,'' says York, who's advising billionaire Kirk Kerkorian on his effort to take a 5.5 percent stake in Ford.

Ram's Importance

For Nardelli, who unveiled the Challenger sport sedan and Journey SUV this year, the Ram pickup is his most important vehicle introduction.

The most powerful model will come with a 5.7-liter engine that, after acceleration, shuts off half of its eight cylinders. That helps boost gas mileage as much as 20 percent over the previous version, chief engineer Cairns says.

To relieve customer anxiety about fuel prices, Chrysler may extend a program to reimburse customers for three years whenever gasoline costs more than $2.99 a gallon.

Nardelli has been all over the truck, test-driving it three times and sounding off in half a dozen executive reviews. He warned engineers that there was too much vibration when the engine shifted to four cylinders at high speed, Cairns says. Nardelli also balked at a clay-brown color for the seats.

``What the hell color is that?'' Cairns remembers him asking. ``It looks like a turd.''

Switching Color

Cairns got similar -- though less graphic -- feedback from dealers and decided two weeks after Nardelli's comment to switch to a traditional beige.

``When the CEO points something out, things happen much faster,'' he says.

Six months after the new Ram goes on sale, Nardelli will have enough data to see whether it's a hit. Until then, the cash clock is ticking.

As he trims models, cuts workers and seeks alliances in yet another turnaround effort at Chrysler, Nardelli's ultimate success might come in proving that what had looked like a savvy investment won't leave Cerberus in the breakdown lane.

For related news:

To contact the reporters on this story: John Lippert at jlippert@bloomberg.net. Michael Ramsey at

Last Updated: June 18, 2008 00:01 EDT