Is the worst over for DaimlerChrysler? The recent surge in the stock, to about $51, suggests it is. Investors are cheered by a spate of cost-cutting lately and by expectations that on Feb. 26 Daimler will unveil details of a $2.5 billion restructuring for its ailing Chrysler Group unit and a new management structure for its parent (page 54).
Certainly Chrysler will emerge as a leaner company, with streamlined operations and fewer employees. But cutting costs will carry Chrysler only so far. The company is still saddled with a product-development strategy that can't be fixed overnight.
The problem isn't that Chrysler's products are bad: It's that they come with far too many expensive options that make the vehicles more costly to consumers. That's what clobbered the launch of Chrysler's new $2.8 billion minivan last fall. Analysts estimate, for example, that some of the new minivans cost $1,000 more to build than the models they replaced.
Why? Chrysler spent heavily to build in improvements that made its minivans drive more smoothly and quietly. It also added new electronics and a system that allows the heat and air conditioning to be controlled independently from each seat.
VANISHING. Chrysler admits its costs are too high. A company document obtained by BusinessWeek starkly illustrates the rise in product costs--and the resulting shrinking profit margins. Product-development costs have been on the rise since 1993, the documents shows. But starting in about 1997, those costs kept rising while manufacturing, advertising, and other costs were stable or slightly lower. By early 1999, the rising product costs strangled profit margins and gave Chrysler a $2 billion second-half loss in 2000.
The company is scrambling to get costs under control--but the fixes are mostly short-term. It's too late to make big changes because the products are already being built. Chrysler execs say it will take two years to find cheaper ways to engineer things.
In the meantime, the company is trying to lower minivan prices, for example, by removing options. And it's eliminating other models altogether. After promising to offer the industry's most powerful minivan, Chrysler recently dropped plans for a version with a souped-up engine because President Dieter Zetsche didn't think consumers would pay the $40,000 price. "We're looking at every nut and every bolt to make sure we get costs out," says one insider.
Still, Chrysler could face similar difficulties this year with two crucial launches: the replacement for the Dodge Ram pickup and the all-new Jeep Liberty sport-utility vehicle. Chrysler hasn't announced prices yet, but analysts expect the Liberty to hit summer showrooms for $23,000, vs. $18,000 for its chief rival, the Ford Escape.
BRAND NEW. The reason? Overengineering and faulty cost assumptions plague the Liberty. "This is a brand-new platform that is overall more expensive to build than the last model," says Michael Robinet, an analyst at CSM Forecasting. The Ram also has improvements in its engine and suspension and features a laptop storage console between the front seats.
Chrysler executives are trying to trim the Liberty's price by eliminating options such as traction control on vehicles with all-wheel-drive. But the company says the Ram pickup doesn't suffer from the overengineering that the Liberty does because trucks are designed more frugally.
Of course, not all the spending was wasted. Some high-tech options are proving popular. Chrysler had expected about 30% of its minivan buyers to opt for a new $400 automatic lift gate feature, but 65% have taken it so far. Such bright spots, however, are few and far between. While a big restructuring this year will give Chrysler some breathing room, an end to the design and cost problems that have dragged it down is still several years away.
By Jeff Green
Green covers the auto industry from Detroit.