Dr. Z's Painful Cure for Chrysler

Daimler's CEO will slash 13,000 jobs, and may even spin Chrysler off. Either way, the U.S. carmaker faces a smaller, bleaker future

It used to be that Chrysler could make it at least a decade before going through another major restructuring. But these days, DaimlerChrysler's (DCX) struggling U.S. carmaker lasted just five years before another overhaul was deemed necessary.

Daimler Chairman Dieter Zetsche and Chrysler Group Chief Executive Thomas LaSorda unveiled their restructuring plan on Feb. 14, announcing they will cut 13,000 jobs in the U.S. and Canada while eventually closing one plant and cutting shifts at two others. The move comes after Chrysler lost $1.4 billion last year, as sales fell 5.5% in the U.S.

"The status quo is clearly unacceptable," LaSorda says. "This is a three-year plan geared to return us to profitability in 2008." (For earlier coverage, see BusinessWeek.com, 2/6/07, "Chrysler: After the Cuts, What Next?")

Who Wants It?

While LaSorda at least gave a timetable for bringing Chrysler back into the black, there are still plenty of unanswered questions. The biggest one is whether Daimler will eventually divest Chrysler through a sale or a spin-off. When asked about spinning off Chrysler, Zetsche said, "all options are on the table."

What it boils down to is whether the restructuring plan, which is LaSorda's to carry out, returns Chrysler to health fast enough to satisfy increasingly annoyed German shareholders. Zetsche already started considering all options because of pressure from shareholders. Says Thomas Stallkamp, former Chrysler president and a partner with private equity firm Ripplewood Holdings, "If Chrysler doesn't show an operating profit by the third quarter there will be a shareholder revolt."

But if Daimler wanted to cut Chrysler loose, who would want it? Selling a company like Chrysler, which sold 2.6 million cars and trucks last year, would yield just a small handful of suitors. The company has expensive union wages and benefits, and relies too heavily on the competitive North American market for sales.

Synergy Matters

Even worse, Chrysler is largely a North American company that sells mostly pickup trucks, sport-utility vehicles, and minivans in a market where rising fuel prices have hurt sales of all three. LaSorda says rising gasoline prices were one factor hammering Chrysler's financial results. The company's lack of hybrid technology and dearth of popular passenger cars have hurt sales as gasoline prices have risen.

There are a few possible buyers. Renault-Nissan (NSANY) is one, says John Casesa, a Wall Street veteran and partner in investment fund Casesa Shapiro. The company's hard-charging CEO, Carlos Ghosn, has said he would like a North American partner in his alliance (see BusinessWeek.com, 10/31/06, "Could Ghosn Save Chrysler?").

There are some natural synergies. Nissan has struggled to gain a strong foothold in the large-pickup, SUV, and minivan markets, where Chrysler is strong. And Chrysler lacks the global volume and scale to compete in compacts and mid-sized cars, says Michael Robinet, vice-president of Northville (Mich.) research firm CSM Worldwide. Says Robinet: "Chrysler is a regional car company, like Fiat (FIA) or Peugeot."

Chinese Exchange

Casesa says PSA, the corporate parent of French carmakers Peugeot and Citroen, would be another possible partner for Chrysler. It mostly does business in Europe and could use North American sales volume. PSA could give Chrysler help with its passenger-car lines, Casesa says. But PSA has stated no intention of any kind of tie up.

Another possible source of relief for Daimler is China. Chrysler already has a deal in place to source a small car for international sales from Chinese automaker Chery Automobile. Malcolm Bricklin, founder of Visionary Vehicles, which is trying to bring Chinese-built cars to the U.S., says he believes SAIC Motor, the Chinese partners of both General Motors (GM) and Volkswagen, as well as Chinese automaker FAW, would be interested in buying all or parts of Chrysler. The question would be how such a deal would square with Chrysler's unions or with deals the Chinese have already struck in their home market with Chrysler's competitors (see BusinessWeek.com. 9/26/06, "Chrysler's China Patterns").

"With any of the big Chinese car companies it would be a huge clash of cultures, but it would be interesting to see," says Bricklin, who co-founded Subaru of America. "The Chinese automakers have big eyes when it comes to the U.S. auto market," he adds.

Not Far Enough

Daimler executives say they don't necessarily need to sell. They could forge alliances for car programs such as the one they once had with Mitsubishi, which Chrysler worked with to engineer the new Chrysler Sebring and Dodge Avenger midsize cars.

Right now, Daimler has every intention of fixing the American company it has owned for nine years. One source close to the German management board says there are a growing number of insiders questioning Chrysler's value, but Zetsche wants to try to fix it before resorting to other options (see BusinessWeek.com, 1/29/07, "Dr. Z's Waning Credibility").

Some are already questioning if the Chrysler fix-it plan goes far enough. It will cut production by 400,000 vehicles from about 2.7 million. But is that enough to get Chrysler's output in line with real retail demand?

That's tough to see. Through much of last year, the group had more than 100,000 unsold cars sitting in storage, not even counting what was in dealer inventory. Then consider that about one-third of its sales—about 700,000 vehicles—consist of lower-priced models sold to rental agencies and other fleet customers. Chrysler also leads major carmakers in incentives, currently about $4,000 per vehicle.

No Sharing

It's a stretch to say that Chrysler's cuts will thin its production enough so that it will be building only for consumers who want to buy its cars, instead of relying on companies like Hertz (HTZ), Avis (CAR), and a bevy of bargain hunters to boost sales. "This plan sounds like every other restructuring plan in Detroit," Casesa says. "It depends on what they do with revenue."

If Chrysler can't boost sales, profits will be hard to come by. LaSorda conceded that Chrysler will lose money this year. And even by 2009, Chrysler's target is just a 2.5% return on sales. That's pretty lean considering that Daimler's commercial truck group and Mercedes-Benz both make more than 7% returns.

There was one more interesting comment made by Zetsche. He strongly indicated that Chrysler and Mercedes won't be jointly developing cars or sharing plants. "We do not see shared platforms as a future level of cooperation between Chrysler and Mercedes," he said.

Simpler Split

Chrysler and Mercedes shared a platform for the unsuccessful Chrysler Crossfire roadster and used Mercedes parts for the 300 sedan. They could share platforms to make Mercedes and Jeep SUVs. But truly sharing a platform seems unlikely.

Zetsche did say that the two companies will share more engineering and parts. And LaSorda laid out a plan to drop the number of Chrysler platforms from 12 to seven as part of a plan to save $4.5 billion over the next few years. Says Stallkamp: "They do a lot of redundant engineering."

But if Daimler won't integrate the two companies, why own Chrysler at all? Come to think of it, if Chrysler and Mercedes don't jointly share vehicles or factories, the two companies would be easier to split up.

Even if Chrysler's restructuring works, the company will be hard pressed to fetch the returns of its German counterparts. That alone could ramp up pressure on Zetsche to execute a more radical strategy.

Click here to see a slide show of Chrysler's most and least popular models.

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