Audi, Volvo, Acura...Chrysler?

The carmaker is committed to becoming a premium brand

Wolfgang Bernhard strode into the auditorium of Chrysler Group's (DCX ) headquarters in mid-November ready to read the riot act. Facing him were 150 executives from Chrysler's interior-component suppliers. Chief Operating Officer Bernhard was frustrated that they still weren't turning out the same meticulously finished components for Chrysler that they routinely delivered to upscale rivals such as Audi. He waved a 10-inch-thick binder full of photos of glitches in Chrysler car seats, such as slightly wrinkled seat covers, that suppliers expected Chrysler to sign off on. Then, he held up a one-inch binder and said: "Here's the new book." The message: The high number of imperfections Chrysler once accepted would no longer do.

Smoother seats are just the beginning. From more precisely fitted interiors to longer-lasting transmissions, Chrysler is embarking on a truly bold quest: To leave the mass market behind and turn itself into an upscale auto maker. The logic is simple: Stylish, well-built, reliable cars retain their value longer, command higher prices, and are more profitable. Bernhard and CEO Dieter Zetsche, both Mercedes-Benz veterans, want Chrysler and Jeep to join the same league as Audi or Volvo, which sell premium-priced cars to buyers who typically disdain Big Three autos. "You can't turn a brand into the opposite of what it is, but you can make it evolve. It takes long-term, consistent execution," says Zetsche.

A transformation of the magnitude Chrysler envisions is rare. If Zetsche pulls it off, it's likely to take years -- and billions. Audi, for instance, took more than a decade to reinvent itself as a premium carmaker. Yet Chrysler is attempting that feat even as it stays tethered to the Dodge line, which it plans to leave as a mainstream brand to lure younger, first-time buyers.

It's no mystery why Chrysler wants to move into a higher-profit zone. Its U.S. market share has slipped to 13%, from 16% in 1998. Last year, revenues fell 5%, to $63.1 billion. Deep and painful cost-cutting put the company back into the black last year, when it earned $1.4 billion in operating profit, vs. a 2001 loss of $2.3 billion before restructuring costs.

Worst of all, Chrysler has gotten caught up in the cycle of brutal price wars that are hammering the bottom lines of U.S. carmakers. Repeated rounds of rebates and 0% loans slashed operating profits at Chrysler to less than $150 per vehicle in the fourth quarter from more than $900 at midyear. This year looks worse. In February, Chrysler Group jacked up its average incentive per vehicle by $800 from a year earlier, to $2,900 -- roughly what Ford Motor (F ) and General Motors (GM ) are doling out. Incentives were boosted again in April. Industry analysts now expect Zetsche to abandon his 2003 forecast of 45% higher profits.

Moving into the ranks of premium carmakers would allow Chrysler to leave those promotions behind, or at least offer fewer of them. To get there, it's counting on the engineering and financial muscle of German parent DaimlerChrysler. The U.S. auto maker will save hundreds of millions of dollars by combining its component purchases with other Daimler-group brands and by developing engines jointly with Hyundai Motor and Mitsubishi Motors. (Daimler has a stake in both companies.) Even Mercedes-Benz, Daimler's best-known brand, which shares parts reluctantly, is helping out. When Daimler execs decided that Chrysler needed a high-impact project to help kick-start its transformation, they put a Mercedes engine and transmission in the sporty new Crossfire. That not only added some cachet but also made it possible to develop the two-seater in a record two years.

The first new upscale Chrysler, the $30,000-plus Pacifica, has just gone on sale. It's a family car -- a blend of a sport utility and minivan -- that has garnered good reviews. Chrysler projects sales at 100,000 vehicles annually. The Crossfire, a two-seat sports car with pricier Art Deco touches, hits the market in July. Chrysler expects to sell at least 20,000 of the mid-$30,000 sports cars each year. Next up: In mid-April, Chrysler unveils its 300M sedan replacement, a rear-wheel-drive car due to go on sale in 2004.

Chrysler execs are the first to admit that selling pricier cars isn't easy right now. "Is that tough to do in a world where the only thing that sells cars is $3,000 off? Hell, yes," says Jim Schroer, executive vice-president for global sales and marketing. Sure, Chrysler has a spiffy new ad campaign (box). But it's also counting on Daimler. "The financial and technological capabilities of DaimlerChrysler will give them an edge," says automotive consultant John Wolkonowicz of Bulin Group.

Chrysler will share the cost of its upcoming small and midsize cars by developing a platform with Mitsubishi. Chrysler should be able to get many components at lower cost by pooling purchases with its sister brands. The Pacifica, for instance, has antilock brakes as a standard feature because the supplier also sells to Mercedes.

Chrysler has also adopted Mercedes' rigorous quality-control practices. According to J.D. Power & Associates Inc., the brand's overall quality and reliability have come up to the industry average. Efforts to improve its ranking show up in high ratings for newer vehicles, such as the 2002 PT Cruiser. A turbocharged convertible version of that popular car comes out next year.

That will be too early for Chrysler to declare its audacious plan a success. Analysts say the goal is to sell Chryslers without heavy incentives, the way Toyota Motor and Audi do. Chrysler says it would like its new models to bring in $500 to $2,000 more per vehicle, depending on the segment. That would move the company closer to swapping its blue-collar image for blue-blood panache. But as Zetsche says: "It's a long-term journey." And as the company has told its suppliers, there is little margin for error.

By Christine Tierney in Auburn Hills, Mich.

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