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Chrysler's New Reality: How Real Is It?

The struggling automaker is talking up a rebound. But even if it partners with Fiat, a high debt load and brutal cuts could leave it flat

Can Chrysler return to profitability? It depends on whom you ask. At meetings with dealers in late February, Chrysler sales boss Steven Landry said the company—considered to be on deathwatch by many—could break even with just a modest rebound in the car market.

The company has cut so much that if Americans buy a little over 11 million cars next year, compared with forecasts of 10.5 million for this year, Chrysler could make as much as $500 million, Landry said. The company lost $8 billion last year and forecasts a $1 billion loss this year.

But such talk of a rebound is tough to fathom, given the deep cuts the carmaker has made, along with its debt load, the lack of fresh products in the pipeline, and its continuing struggle to move metal out of the showrooms. Chrysler's restructuring plan, submitted last month to the Treasury Dept., reports the company took out $3.8 billion in costs. But insiders say that after the round of buyouts that occurred in December, some departments were seriously depleted. Chrysler has even brought back as contractors people who were cut just to get basic work done. In product development, Chrysler has lost a lot of talent in some key areas—including some powertrain engineers—assuring that the company must rely on Italian automaker Fiat (FIA.MI) or some other future partner for cars and engines. "They have cut below the threshold," says Michael Robinet, vice-president of consulting and research firm CSM Worldwide. "It may be a better use of tax dollars to save two of the Big Three."

Will Creditors and Workers Cooperate?

That makes Chrysler an even riskier bet than some people might think. Even though Chrysler is cutting toward breakeven, the company's own projections say it could end up with anywhere from $15 billion to $20 billion in debt by 2014. To cover that, a company with diminished engineering capabilities will need to develop models with fewer resources and will have to sell cars engineered by Fiat in Europe to find growth in the U.S. This amounts to a massive outsourcing project in which the company relies on others for many of the basics. "Big chunks have been hollowed out," says James Hall, principal at 2953 Analytics, an auto industry consulting firm. "They can get through this if the Fiat deal happens and if the market turns fast enough."

Those aren't the only "ifs." Just to get the Fiat deal done, Chrysler needs to get its creditors to restructure debt, now in stalemated negotiation. The United Auto Workers also must accept less cash to seed a health-care trust covering union health-care benefits starting next year. Without that, Fiat may not take a 35% stake and give Chrysler the passenger cars it needs.

There's one more big assumption: Chrysler's plan says it will hold market share of around 10.7% for the next five years. That's coming from a company whose U.S. market share fell from 13% to 11% last year, and which has cut spending on new products and the capabilities to engineer them. Chrysler's market share is down so far this year to 10.9%, a number achieved only with massive discounts.

Capital Expenditures Keep Dropping

The stakes are high. Chrysler needs $9.6 billion in loans from the Treasury Dept. The company also has applied for another $6 billion from the Energy Dept. in order to make fuel economy improvements to its lineup.

Chrysler also has slashed product spending. Its recovery plan says the company is spending $2.3 billion a year on capital expenditures. That's down from more than $3 billion when private equity player Cerberus Capital Management took over in 2007 and a farther cry from the $5 billion annually spent under former owner Daimler (DAI).

One problem is that when Chrysler took out 5,000 workers from headquarters staff in December—cutting down to today's 12,900—it slashed indiscriminately. The reductions amounted to about 25% of staff. But since the company offered the deal to anyone who qualified, some departments lost more people than others. Sources say auditing shed roughly three-quarters of its staff. Purchasing was also hit hard. So was finance: Chrysler has been scouring other departments for workers with CPAs so they can be moved into accounting. For its part, the company says "this plan will ensure that there are no significant work flow disruptions as the Company resizes its work force to projected market conditions."

Executives with "Monster" Workloads

In finance, Chrysler even had to bring some of those who took buyouts back on a contract basis to close the books for 2008, according to two company executives who asked not to be named. The full-timers who remained are working hard. "This time it was dramatic," says one manager in the finance department. "We are working longer hours right now."

Chrysler's sales and marketing operations are stressed, too. Even top executives are wearing many hats. Landry's work was once handled by three executives. In addition to the top sales post, he took over marketing duties from former Chief Marketing Officer Deborah Wahl Meyer and assumed the responsibilities once managed by Simon Boag, erstwhile president of the company's Mopar service and parts business. (Both left in December.) Now, Landry has 19 executives directly reporting to him; the top sales job used to have eight, says a Chrysler source. Landry even brought back one bought-out manager to help Chrysler gets its dealers to consolidate. Landry said in February that the job is manageable. "I'm pretty disciplined," he said, adding that the job "is a monster."

Chrysler executives defend the cuts. Company sales fell 35% last year and are off by more than 40% every month this year. It's only logical, says Vice-Chairman James Press, that the company would cut its white-collar staff by 25%. Chrysler must shrink to fit a new reality. "We have enough people to get the work done," Press said in a January interview. "But we make sure we do just the jobs that need to be done."

Partnering for Smaller Vehicles

That's especially true in product development. When General Motors (GM) was in talks to cut a deal with Chrysler last fall, GM executives who did due diligence said downsizing had taken out a lot of Chrysler's capabilities in terms of engineering new platforms and engines, according to executives familiar with GM's efforts. Says one senior GM executive: "The company is pretty much gutted."

Chrysler acknowledges that it has cut deeply but says the remnants are manageable. Frank Klegon, Chrysler's executive vice-president for product development, said in a January interview that his department lost 1,500 people just in December's round of buyouts and has about 5,500 remaining. But he insists the company has enough to design the models it needs, especially since Chrysler isn't looking to develop a car for every segment. It will rely on partners for smaller vehicles; if Chrysler can't sell enough of a model to make a profit, it will take a pass. "Capital is constrained, whether it's money or people," Klegon said. "I'd always like the resources to do the landscape. But it's not the company that we are or will be."

Can Fiat Save the Day?

So Chrysler will simply focus on areas where it is strongest, such as trucks, minivans, and big sedans such as the new 300C, which comes out next year. If Fiat can handle the smaller vehicles, Klegon can move engineers who used to work in those departments to do the rest.

That's why the Fiat deal has to close. Landry told dealers the company could be making Fiat small and midsize cars in two U.S. Chrysler plants in 20 months. In its plan, Chrysler identified the Fiat 500 subcompact—a Mini Cooper fighter—as well as the Fiat Punto and Alfa Romeo Mito passenger cars as possible opportunities. In all, Chrysler says it can save $6.9 billion in cash from now to 2016 by sharing vehicle development, engines, transmissions, and purchasing.

Some of the cuts were necessary. Detroit companies are famed for huge bureaucracies. And Chrysler doesn't sell enough to justify all the engines and vehicle lines it once had. The Obama Administration may help Chrysler to limit further damage to the economy. But a lot of things need to go right for the company's plan to work.

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