Chrysler's suppliers and assembly workers have taken significant hits in the auto maker's turnaround plan. But on Jan. 29, it'll be its dealers' turn to feel the pain. Chrysler Senior Vice-President M. John MacDonald will inform his 4,400 dealers of a sweeping plan to cut $456 million in cash payments to dealers for advertising support and showroom subsidies, BusinessWeek Online has learned. The carmaker also plans to cut dealer margins by 3% on lucrative vehicle options such as CD players and security systems. Most of the changes will be effective immediately.
Chrysler CEO Dieter Zetsche hashed the plan out himself with members of Chrysler's dealer council during the week of Jan. 22-26, after dealers vehemently opposed an initial plan that would have required even more severe cuts in some areas. Dealers remain upset but credit Zetsche for modifying the plan to meet some of their demands. "The initial plan was like facing a firing squad. This plan is more like a life sentence," says Dick Withnell, a member of the Dodge dealer council and principal of Withnell Dodge in Salem, Ore. "It's really a story that we're still talking." And Withnell adds: "At least we're talking to [Zetsche] and not his executives.""
The deal is part of an ongoing reorganization plan. Suppliers were asked to cut prices by 5% Jan. 1 and by 10% more over the next two years. A Toledo (Ohio) plant will be closed, and thousands of other assembly workers have been on temporary layoffs to help the company trim excess inventory. Chrysler Group is trying to stem losses that have already cost the U.S. unit of DaimlerChrysler an estimated $2 billion in the last two quarters. More details, including white- and blue-collar layoffs and plant closures, will be spelled out on Feb. 26.
"NECESSARY." Even Chrysler admits that the cost cuts won't be easy on dealers. "This is not something they are going to love. But it's something they will recognize, under the current situation, as necessary. And in the end, I think it will be something they can live with," says Jay Cooney, Chrysler senior manager of sales and marketing communications. The dealer plan affects five key areas:
-- Chrysler is ending an existing 15-day grace period before dealers must pay for the vehicles on the show floor. But to offset some of the losses, it's also adding a new plan called the Dealer Market Performance Allowance. The program will give dealers cash based on the percent of a sales target they meet. If they sell fewer than 75% of the vehicles expected in a month, they get nothing. If they sell from 75.1% to 99%, they get $150; 100% to 109.9% is $250, and anything more than 110% of the sales target nets $500 per car. This new plan starts Tuesday.
-- Dealers will no longer get $40 per vehicle for fuel. Vehicles are shipped with only a few gallons of fuel for safety reasons, and the carmaker gets the cash to fill them up after the sale. Considering that Chrysler sells about 2.5 million vehicles a year, this change alone saves $100 million. Dealers also agreed to cancel a $75-per-vehicle fee they were collecting to offset increased telecommunication costs at dealerships. That could save $188 million.
-- The plan eliminates $50 per vehicle, or $125 million, in advertising fees that dealers use for local ads. Dealers still get 1% of the manufacturer's recommended sales price for advertising.
-- The time dealers are paid to prepare vehicles for delivery to customers will drop from 1.4 hours to 0.9 hours. With dealer labor costs running about $55 a hour, that means a cut of about $27 per vehicle, or $69 million.
-- Dealer margins will drop 3% on option packages, from 14%-18% to 11%-15% for such items as luxury upgrades, security systems, improved stereo systems, and other uprades.
The next big challenge facing Chrysler and its dealers is the replacement of former sales and marketing chief Theodor C. Cunningham, who was sacked in November when Zetsche took over. Cunningham was popular with dealers. Now they want an insider, such as MacDonald, to replace him. It's not clear whether Zetsche will succumb or bring in someone from outside. But these are not happy times for DaimlerChrysler. By Jeff Green in Detroit