Chrysler: On a Collision Course with Dealers

They're fuming over the carmaker's cuts in incentives and subsidies that'll make bargaining with buyers tougher

Executives at embattled DaimlerChrysler are doing a lot of explaining these days. Small wonder. The company lost $1.8 billion in the last half of 2000, even as industry sales hit historic highs. And the auto maker's management has launched a series of dramatic cost-cutting moves in an effort to restore the company's health.

Part of that recovery plan has the company's 4,400 dealers in an uproar. Dealers say Chrysler is demanding between $400 to $500 per car from them in various cuts that would save the auto maker $600 million a year. The cost-cutting measures include such thrifty actions as shipping cars to dealers without a full tank of gas, cutting funding for advertising and technology improvements at dealerships, and paying dealers less to get cars prepped at the showroom (see BW Online, 1/26/01, "Less Cash from Chrysler for Dealers").


  In response, hundreds of dealers turned out at the National Auto Dealers Assn. convention in Las Vegas for a scheduled meeting with Daimler executives. And they weren't in a happy mood, either. Fumed Marc Lee Treiber, president of Rallye Chrysler Dodge Jeep in Monroe, N.Y.: "They're sticking their hands in our pockets."

Chrysler execs could offer little comfort. If the dealers sell 100% of their sales target for the year, says John MacDonald, Daimler's senior vice-president for sales and field marketing, they'll make up for the shortfall. And if they sell 110% of their sales targets, "they would make more than what we're taking," MacDonald says.

But those hopeful projections seem doubtful. Auto sales are slowing. Even though vehicle sales rebounded nicely in January after a rough fourth quarter, no one is expecting 2001 sales to be near the 17.8 million vehicles sold in 2000. In fact, most prognosticators are looking for a market that sells, at best, between 16.5 million and 17 million vehicles.


  Worse, DaimlerChrysler may have the least momentum of the major carmakers going into the slowing market. Sales of Chrysler's vehicles fell 16% in January, far more than drops reported by rivals General Motors and Ford Motor.

And with these changes, dealers will be less able to cut deals with buyers. Car manufacturers frequently offer incentive plans that give dealers hundreds of dollars in cash for selling certain vehicle models. The dealer can either pocket the cash or pass it on to the consumer to lower the sticker price and make a sale. But with Daimler asking the dealers to hand back at least $400 per car, they'll be hard pressed to pass on more savings to buyers.

The upshot: In a car market that already sells on price and rebates, that could make it more difficult for Chrysler, Dodge, and Jeep dealers to lure more new customers. Says Treiber: "We're already working on thin margins."


  Daimler executives point out that dealers will be getting plenty of new vehicles to sell. Starting last year, the company will recast 83% of its product lineup within five years. That's not bad, dealers say, but they were hoping for even more new models. MacDonald concedes that the company cut its capital budget this year, in light of the financial woes. The capital budget "is not as big as it was at the beginning of the year, but it's O.K.," he says.

Given the prospects looking forward, Chrysler dealers might be happy with even an average year. But with sales expected to fall and profits getting squeezed, it could be a tough time for both the carmaker and its dealers.

By David Welch at the National Auto Dealers' convention in Las Vegas

Edited by Douglas Harbrecht

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