Chrysler May Actually Be Turning The Corner

Breaking even is hardly a chief executive's idea of dreamland. But on Feb. 6, when Chrysler Corp. is expected to announce that it just about broke even in 1991's fourth quarter, Lee A. Iacocca may be excused if he sleeps a little easier than his crosstown rivals. While he has cut Chrysler's losses nearly to zero during the worst auto sales drought in a decade, rivals Ford Motor Co. and General Motors Corp. are expected to announce combined losses of about $1 billion for the quarter.

Surprised that Chrysler's doing so well? You're not alone. For years, competitors have contended that the No.3 U.S. auto maker is too small to survive on its own. They could still be right. But lately, a few contrarians have come to believe that Chrysler may be on the verge of a comeback like the one it made after its 1979 government bailout. Wall Street has bid up Chrysler shares by 50%, to about $15, since mid-December. And Iacocca predicts that with even a modest uptick in U.S. auto sales, Chrysler "will become a money machine."

Much of the optimism is based on the raft of nifty new Chrysler models coming out this year. Dealers and analysts expect strong sales for the speedy Dodge Viper, the Jeep Grand Cherokee, and the sleek new LH line of family sedans due out this fall. Plus, the new models are all in higher-margin niches.

But Chrysler's biggest edge may be the effectiveness of its cost-cutting. The company has chopped $3 billion out of costs over three years, Iacocca says. Along the way, Chrysler axed 15,800 employees, more than a third of them bearing white collars, which it claims saves $660 million annually. Yet it has often managed to speed up operations. For example, its parts-distribution operation has cut inventories by 50%. That saves cash and cuts the time it takes to deliver parts to dealers to just three days, down from seven.

Some of the biggest savings are from innovations borrowed from such Japanese companies as Honda Motor Co. and Chrysler partner Mitsubishi Motors Corp. For instance, Chrysler engineers no longer belong to groups focused on a single function, such as designing engines. Now they're assigned to teams that design a single model and report to one manager instead of several. That shift, Chrysler says, saves $475 million a year, partly because better communication among engineers means fewer costly design changes. It also has helped trim the product development cycle by a year, to 3 1/2 years--close to the three years typical for Japanese rivals.

Another Japanese-style innovation: cooperating more with suppliers. Chrysler says its annual spending on parts and raw materials is down $900 million, partly because it increasingly lets suppliers engineer their own components.

PINCHED ARM. The question now: Does Chrysler have the financial oomph to make it if the auto slump persists? Just launching new models this year will cost $3.5 billion. Iacocca says he can finance that out of cash flow and another $750 million in cost-cutting. One area ripe for savings: the time it takes to ship cars to dealers, which Chrysler aims to cut to 20 days from a Detroit average of 70 now.

But Iacocca may hit trouble if auto sales don't pick up soon. Last year, Chrysler spent $2.7 billion on incentives to move the iron during the slump--and it probably can't reduce such spending much unless the market firms. "I can control my costs, [but] I can't control what the public will pay me for my cars," Iacocca notes.

Chrysler Financial Corp., the company's finance arm, is already being pinched by its parent's downgraded credit ratings. That vise will tighten by mid-1993, when up to $11.5 billion in CFC's short-term debt comes due. Iacocca is negotiating with his banks to refinance the debt. Meanwhile, says Scott Sprinzen, vice-president for corporate finance at Standard & Poor's Corp.: "Everything depends on the success of those new products and the state of the marketplace. It's a high-risk situation."

In the near term, Chrysler is flush. It has more than $2 billion on hand, partly from a stock offering at $10 a share that raised $350 million last fall, and an untapped $1.75 billion credit line. If that's not enough, Iacocca says he's negotiating to sell Mitsubishi back the 11% stake Chrysler owns in the company--which should fetch up to $500 million. He also may sell more stock.

There's a fair chance Chrysler won't need to go to that extreme. Many analysts predict that lower interest rates and new moves by Washington to pump up the economy will yield an upturn in car sales this summer--just as Iacocca's new cars hit the showrooms. No one is saying Chrysler's a sure winner. But Iacocca plans to retire at yearend, and he's counting on going out to an upbeat tune.

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