The retreating automaker will restructure to get fresh government funds, insists the CEO. There's little cash and few new vehicles coming
After a round of massive job cuts and some executive departures, there is plenty of speculation that Chrysler and owner Cerberus Capital Management are simply readying the struggling carmaker for a sale. But Chairman and Chief Executive Officer Robert L. Nardelli insists that isn't the case.
Far from it, in fact. Nardelli swears that the company is working toward a restructuring plan that will get it another $3 billion in government loans (the Treasury Department gave the company $4 billion on Jan. 2). Furthermore, he says Chrysler is working on new models stretching ahead until 2013.
Nardelli's statement at the Detroit auto show comes amid speculation that Chrysler won't be able to survive long if the market remains weak and its sales keep dropping faster than those of its competitors. Some analysts have even wondered if Cerberus would sell off parts of the company, such as its minivan franchise or Jeep brand, to make a return on its investment.
"Maybe the best way to get value out of Chrysler is to sell Jeep," says John Casesa, managing partner of consulting firm Casesa Shapiro Group.
The cash cupboard: a bare minimum
But Nardelli says Chrysler is not aggressively seeking a buyer. "Absolutely not," Nardelli said. "No one should read that we're trying to position ourselves for a sale."
Still, bringing Chrysler back from the brink won't be easy. Chief Finance Officer Ronald E. Kolka said the company started the year with between $2 billion and $2.5 billion—the bare minimal amount the company needs to keep funding day-to-day operations. Only the government's check for $4 billion is allowing Chrysler to pay its bills. The company said it had $11 billion in cash in July, so it burned through as much as $9 billion in the past six months.
Chrysler already has $7 billion in debt, Kolka says. That makes for almost $500 million a year in interest payments. The government loans demand lower interest—about 5%—but that debt could still add an additional $350 million in annual interest payments.
There may be some relief. Chrysler has to submit its restructuring plan to the government next month. That will include concessions from the United Auto Workers and a restructuring of its preexisting debt. Nardelli says he doesn't know how much debt Chrysler will end up with, but creditors could end up taking equity stakes in the company.
For Now, New Products are Scarce
Even as Chrysler moves to cut costs, sales continue to suffer. Chrysler expects Americans to buy 11.1 million cars this year. That's a 16% drop from a dismal 2008 and even that forecast could prove optimistic. Last year, Chrysler's sales fell 30%—in a market that was down 18% overall—knocking the company's share of U.S. sales from 13% to 11%. And December was especially bad as Chrysler's sales plummeted 53%.
Why is Chrysler faring worse than even its troubled rivals, General Motors (GM) and Ford Motor (F)? Bankruptcy speculation has likely hurt sales, says Jeremy Anwyl, CEO of Edmunds.com, which tracks vehicle pricing and sales data. Plus the company has a dearth of new products. The Dodge Ram pickup was launched in 2008, but there is little else coming until a new Jeep Grand Cherokee arrives later this year. Chrysler also has a new 300 sedan and Dodge Charger coming in 2010, as well as a Dodge Hornet subcompact built jointly with Nissan.
Nardelli blamed former parent Daimler AG for not investing enough in new products several years ago. "It's a hole left by our former owners," he says.
So the company is racing to fill the pipeline. Chrysler President and Vice Chairman James E. Press says that the company has 24 new vehicles coming to market in the next four years. But most will come toward the end of that period because the company's cash crunch has forced delays. Chrysler's product budget has been about $3 billion dollars a year, but the company has scaled back. Says Nardelli: "Have we cut back on some of our capital expenditures? Yes."
Some in-house development in question
Chrysler's challenge is to develop new cars to spur growth even as it pulls back. Frank Klegon, Chrysler's executive vice-president of product development, says that of the 5,000 white collar workers who took buyouts at the end of 2008, about 1,500 were from his staff. That leaves less than 6,000 people to develop new cars.
Klegon says the company has the resources to develop new models. But it's a challenge to develop low-margin cars such as compacts and subcompacts in-house. Besides the Hornet it is building with Nissan, the company hasn't decided whether to build a replacement for its Dodge Avenger and Chrysler Sebring mid-sized cars in-house or with a partner.
Even finding a partner hasn't been easy. Nardelli says Chrysler has talked to many companies, including Ford and GM, about sharing parts, engines, and other hardware. But so far the company hasn't come up with new alliances. "There's no question I'm disappointed that we haven't been able to forge more partnerships," Nardelli says.
Chrysler has also throttled back its efforts to expand overseas, where the company gets less than 5% of its sales. In December, Phil Murtaugh—the CEO of Chrysler's Asia operations who had built GM's business in China—left the company as it pulled back on growth initiatives to conserve cash and survive the current crisis.
"We've had to make some tough decisions relative to our presence in China," Nardelli said. "When you're facing this level of adversity, you have to pull back."
The question is whether Chrysler can keep retreating and still survive the crisis.