Marchionne Bond Gains Show Chrysler Plan Converts Critics

Less than three and a half years after Chrysler Group LLC’s bankrupt predecessor paid out 29 cents on the dollar to creditors, Chief Executive Officer Sergio Marchionne can point to the bond market for an endorsement.

Chrysler on Oct. 30 will update its 2014 business plan, a road map that elicited “patronizing looks” when its executive team presented it in November 2009, Marchionne said this month. As the Auburn Hills, Michigan-based automaker meets or exceeds its targets on measures including U.S. market share, revenue and profit, the bonds that it issued when it repaid government loans early in May 2011 have climbed.

“It tells you something about what happens when the capital markets start believing in what you do,” Marchionne, 60, said last month in an interview at the Paris Motor Show. Chrysler is earning credibility that is “visible in the way in which our bonds are trading in the market,” he said.

While many companies have long-range plans, Marchionne’s have been unusual in their detail and in his choice to make them public. Chrysler’s five-year plan built confidence among the company’s 64,200 employees because it reflected that Marchionne, who also manages Italian automaker Fiat SpA (F), saw what was possible at Chrysler, according to interviews with six of the CEO’s direct reports. The plan also has been a focusing mechanism: Employees still bring along their copy of the plan to meetings, executives said.

Photographer: Jason Alden/Bloomberg

Sergio Marchionne, chief executive officer of Fiat SpA and Chrysler Group LLC. Close

Sergio Marchionne, chief executive officer of Fiat SpA and Chrysler Group LLC.

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Photographer: Jason Alden/Bloomberg

Sergio Marchionne, chief executive officer of Fiat SpA and Chrysler Group LLC.

Great ‘Focuser’

“Generally, the more specific the goal, the more likely somebody is to go out and achieve it,” Reid Bigland, Chrysler’s U.S. sales chief, said last month in a telephone interview. “It’s a hell of a focuser. Everybody pulling in the same direction is critical in a big organization like Chrysler.”

The other side to the good-news story, however, is Fiat. The Italian company, which rescued Chrysler through a government-brokered alliance in June 2009, now relies on its U.S. partner as Europe’s debt crisis derails its own business plan. Fiat has suspended investments in Italy and delayed new models as the carmaker heads toward a 700 million-euro ($905 million) loss in the region this year.

On the same day Marchionne releases Chrysler’s updated plan, he has said he will revise a target he set two years ago for the combined company to sell 6 million cars annually by 2014. Researcher IHS Automotive is predicting sales of 4.4 million in 2014 for the group.

Even so, investors and analysts should be loath to doubt Marchionne’s latest turnaround strategy for Turin, Italy-based Fiat, said Steve Rattner, who headed the Obama administration’s automotive task force in 2009.

‘Enormous Credibility’

“Sergio has enormous credibility now,” Rattner said in a telephone interview. “A very significant part of why we felt comfortable that Chrysler could be saved was because of Sergio Marchionne’s involvement. He gave us enormous confidence.”

Chrysler has said it will raise its full-year profit forecast of $1.5 billion after reporting $909 million net income in 2012’s first half. Revenue in the first six months of the year climbed 24 percent to $33.15 billion, positioning the automaker to exceed the guidance for as much as $60 billion for the full year it gave in the business plan.

Chrysler’s $1.68 billion of 8.25 percent notes maturing in June 2021 have gained 11.4 cents to 107.625 cents on the dollar to yield 7.1 percent since the end of January, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The notes have rebounded traded as high as 109 cents.

Led by demand for Jeep Grand Cherokee sport-utility vehicles and Chrysler 200 and 300 sedans, Chrysler’s U.S. market share increased to 11.5 percent this year through September, according to researcher Autodata Corp. That puts Chrysler on track for the 13 percent market share forecast for 2014, from 8.9 percent in 2009.

Ford Substitute

Marchionne has benefited from a strong high-yield market as well as the broader U.S. auto market’s recovery, said Eric Selle, a fixed-income analyst at JPMorgan Chase & Co., who has covered Chrysler debt since 2003. High-yield bond investors replaced their Ford Motor Co. (F) holdings with Chrysler debt after Moody’s Investors Service and Fitch Ratings upgraded Ford to investment-grade credit ratings this year, he said.

The automotive sector can “gin cash” at depressed U.S. sales levels because of the restructuring the companies went through in 2009, said Selle, who is based in New York.

“Pristine balance sheets and a ton of liquidity can withstand a recession very well,” he said in a telephone interview. “You want exposure to that when Ford gets upgraded to high grade. Chrysler is the next-best higher-yielding name.”

‘Great CEO’

Chrysler forecast in its five-year plan that it would earn at least $3 billion in operating profit for 2012. The company reported $1.5 billion in the year’s first six months.

“The big part of being an effective CEO is to have a vision, to lay the vision out and to get everybody who’s a part of it focused on achieving the goals,” said Rattner, 60. “That is a shared strength between Alan Mulally and Sergio Marchionne. They both have that key aspect of being a great CEO.”

Mulally joined Dearborn, Michigan-based Ford in 2006 and instituted a plan he called One Ford that aimed to take advantage of global scale to build and sell the same cars all around the world. He gave executives laminated wallet cards that drove home his tenets of working together, accepting reality and developing new models that buyers wanted.

Spiral-Bound Plans

In Auburn Hills, Chrysler employees are more partial to their spiral-bound copies of the company’s business plan than laminated cards.

“I was on the elevator this morning and one of the guys turned up with it because he wanted to reference something,” Mike Manley, president of the Jeep Brand and Chrysler Group’s head of international operations, said in an Oct. 16 interview.

The five-year plan included “stretches in a number of areas” that required “very solid execution” by employees, Manley said.

Marchionne’s approach to managing Chrysler differs from how CEO Dan Akerson has led General Motors Co. (GM) following a government bailout of its own in mid-2009. Akerson, 64, has issued fewer targets and GM doesn’t provide forecasts for its earnings or sales.

Of the few goals for GM that Akerson has made public, he targeted 60,000 global sales of the Chevrolet Volt plug-in hybrid this year. In June, he said that 2012 Volt sales probably would finish as many as 25,000 deliveries short of that goal. He hasn’t publicly set a timetable for his plan to improve GM’s operating margins to match those of Hyundai Motor Co. (005380) and Volkswagen AG. (VOW)

Hitting Targets

In executing the turnaround plan that he laid out shortly after taking over Chrysler, Marchionne is repeating a tactic he used after becoming Fiat’s CEO in 2004. Fiat made good on many of the targets in the five-year plan that the Italian automaker announced that year until a global credit crunch derailed the company’s performance in 2008.

Marchionne in some respect “had the wind at his back” in both of those comebacks, said Maryann Keller, the principal of a self-named consulting firm in Stamford, Connecticut. The European auto market was “quite strong” in Marchionne’s first few years running Fiat, and he was able to use a $2 billion payment from General Motors Corp. that resolved a failed venture in 2005 to plug into the freshening of Fiat’s product line.

With Chrysler, Marchionne inherited a company that shed capacity, debt and an uncompetitive cost structure through the government-backed bankruptcy in 2009, when the U.S. auto market was bottoming, Keller said in a telephone interview.

“When you look at how any executive performs, you have to put it in the context of the environment in which they find themselves,” Keller said. Now, with Fiat, Marchionne “faces a challenge unlike any other.”

New Models

The glaring issue that Marchionne faced when Fiat took control of Chrysler was its lackluster product, Keller said. The automaker introduced 16 new or refreshed models in the 19 months after emerging from its U.S.-backed bankruptcy. Models that have undergone the most significant redesigns, such as the 300 and Grand Cherokee, have won praise by critics.

“I give him an A+ for what he’s been able to do,” Keller said. “Nobody thought -- I certainly didn’t -- that he could have so quickly redesigned so much of the old Chrysler product that was frankly pretty awful. He managed to turn it around.”

Chrysler’s daylong presentation of its business plan in November 2009 included 27 slides devoted to quality.

Building Credibility

“In the past, we were reluctant to even understand that we weren’t very good, and certainly even beyond that, reluctant to state it to the public that we’re really lousy and we’re going to get this much better,” Doug Betts, global quality chief for Chrysler and Fiat, said in an interview. “I don’t know how you can have any credibility to say you’re going to improve if you don’t own up to the fact that you’re lousy.”

Betts said models that Chrysler has redone “from scratch” have made “huge” improvements in testing by Consumer Reports, whose reviews are considered objective because it doesn’t accept advertising and buys every vehicle it tests.

The vehicles that Chrysler has “intervened” with, while not completely making over, still aren’t “completely competitive” in Consumer Reports testing, Betts said.

“That’s fair,” he said. “It gives me heart because I know we’re going to redo all of them eventually. It’s just going to take more time.”

To contact the reporters on this story: Craig Trudell in Southfield, Michigan, at ctrudell1@bloomberg.net

To contact the editors responsible for this story: Jamie Butters at jbutters@bloomberg.net

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