Chrysler's Profit Crash

A $1 billion loss will wipe out five quarters of earnings

Not so long ago, Chrysler (DCX ) Corp. Chief Executive Dieter Zetsche seemed to have succeeded in putting Chrysler back on track. The company had racked up five solid quarters in the black, and it's rolling out the first new models developed since the bumpy 1998 merger of Daimler Benz and Chrysler Corp. -- the sleek Pacifica minivan and a sporty Crossfire two-seater featuring a powerful Mercedes engine. But on June 3, the turnaround abruptly turned around. Stuttgart-based DaimlerChrysler (DCX ) warned investors that its Auburn Hills (Mich.) unit was expected to lose more than $1 billion for the second quarter. The loss will wipe out most of the previous five quarters' combined earnings.

How could Chrysler run up such a gigantic loss? In part, the company is suffering from what plagues all of Detroit: It is being forced to offer ever higher incentives to juice sales, yet it is losing market share to the Japanese. But Chrysler has struggled more than General Motors (GM ) and Ford (F ) Motor. Its line is aging, its costs are high, and its marketing hasn't ignited buzz.

The result: Chrysler's market share has taken a major hit. It now holds just 13.4% of the U.S. market, down 17% since its merger with Daimler in 1998. And in May, Chrysler posted the worst sales of the Big Three -- a 3% contraction, vs. Ford's 0.7% drop and GM's 4% jump. Says Darren S. Kimball, auto analyst at Lehman Brothers (LEH ): "The incentives and weak sales environment are catching up with the Big Three. Chrysler is a leading indicator."

It's quite a setback for CEO Zetsche. Dispatched to fix Chrysler in late 2000, he was supposed to restrain spiraling costs and expand a product line that had focused too narrowly on pickups and minivans such as the upscale Town & Country, which no longer sells well. Over the next year or so, Zetsche shut factories, cut shifts, and squeezed suppliers. By sharing platforms and components with other DaimlerChrysler brands, including Mercedes and Mitsubishi, Zetsche banked on rolling out better models at less cost.

His strategy might have worked had it not been for a ruthless price war that broke out after September 11. In a successful effort to boost sales, GM launched 0% financing. Chrysler was ill-prepared to deal with the profit-eating incentives war, in part because its costs are higher than most rivals. UBS Warburg (UBS ) auto analyst Saul Rubin says Chrysler's variable costs, including labor, parts, and distribution, amount to 68% of revenues. Such costs equal 62% of GM's revenues.

Making matters worse, Chrysler's marketing drives have fallen flat. In an attempt to add zest to the lineup, the carmaker ran a series of risqué minivan ads, including one hinting at wife-swapping. An advertising partnership with Quebec chanteuse Celine Dion has also missed the mark with younger, upscale buyers, say analysts. On May 30, the architect of Chrysler's marketing strategy, James C. Schroer, resigned.

Zetsche vows that Chrysler will return to profit in the year's second half. He plans to cut costs further by demanding concessions from unions. Zetsche has already scrapped plans to build a factory in Canada. "This is not the time to add new capacity," he says.

Much will depend on the popularity of Chrysler's new products. Over the next few months, the auto maker hopes to reverse a slide in truck sales with the launch of the new Dodge Durango. Next year, it will introduce the 300C sedan in an effort to strengthen its car lineup. And by 2006, Chrysler will launch replacements for the Sebring, Dodge Stratus, and Neon -- all of which will share platforms with Mitsubishi models. "Chrysler has a tough row to hoe,"says Burnham Securities auto analyst David Healy. "[But] its problems aren't fatal." True enough. Yet with inventories piling up, incentives eating into profits, and Japanese rivals snatching market share, engineering another Chrysler turnaround won't be easy.

By Christine Tierney, with David Welch, in Detroit

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