Commentary: Chrysler's Scary Leap of Faith

If any employer is in a position to ask for concessions from the United Auto Workers this summer, it's Chrysler. Not only does DaimlerChrysler's U.S. auto maker expect to lose $1.2 billion in the second quarter, but its plants are the least productive. Given its lackluster sales, the company has up to 17,000 more workers than it needs -- nearly a fifth of its hourly workforce.

But so far, management isn't planning to ask for any big restructuring as part of its bargaining for a new labor contract. Instead, Chrysler Chief Executive Dieter Zetsche is betting that a slew of new cars in the pipeline will be so hot that demand, not job cuts, will bring back profits. Indeed, so far only Ford Motor Co. has signaled that it wants plant closings, says UAW President Ronald A. Gettelfinger.

Passing up the opportunity to permanently lower costs in the upcoming labor talks could be a mistake. Zetsche's risky labor strategy flows out of a larger game plan that's looking increasingly dubious. His decision to hold on to excess capacity is based on the assumption that Chrysler can pump up its U.S. sales by as much as a fifth. That would add some 500,000 new vehicles a year to Chrysler's current 2.7 million annual sales in North America.

Problem is, such ambitious goals no longer look feasible without a major turnaround in the U.S. car market. After the surprise second-quarter loss, analysts now say Chrysler could lose up to $1 billion this year. Already, its U.S. sales are down 4% through June. "I don't know where they're going to get that much growth," says Rebecca Lindland, senior analyst at Global Insight Inc. in Boston, which expects Chrysler to sell just 65,000 more vehicles a year by 2008.

If Zetsche sticks to his plans anyway, he could be setting the company up for a long stretch of excess capacity. It's not clear that his bosses in Germany will go along with that approach. Under mounting pressure from investors, the DaimlerChrysler board was due to take a hard look at Chrysler's struggle at a meeting on July 2-3 in Auburn Hills, Mich. The directors may conclude that Chrysler needs to undergo a major restructuring, perhaps as extensive as the $4 billion one Zetsche imposed in 2001. It may need to shutter factories or even dispense altogether with some of its poorly selling small cars so it can focus on Dodge's successful truck line. So far, though, Zetsche stands by his sales goals, although the company declined to be quoted on its labor strategy.

The auto maker's problem is clear when you look at some of its plants that don't have enough to do. Its Belvidere (Ill.) factory, which cranks out the slow-selling Dodge Neon, is running at less than half its capacity, as is a Jeep Wrangler plant in Toledo. Overall, Chrysler has the same level of excess workers as Ford, about 20% of payroll. But its rival intends to ask the UAW for permission to close factories. If Chrysler won the right to consolidate assembly, it could cut low-capacity units, too.

What's more, Chrysler's labor surplus comes on top of its lagging productivity. If management moves to raise efficiency and doesn't sell more cars, it will end up with even more unneeded workers.

Zetsche does intend to demand some concessions in the new labor pact that will replace the one expiring on Sept. 14. His main goal: to get the UAW's blessing to sell five parts plants targeted in the 2001 restructuring. Chrysler still pays union workers $22 an hour to make parts they could buy more cheaply. Its deal with the UAW could mirror a recent pact to sell its New Castle (Ind.) parts plant to supplier Metaldyne Corp., which allowed the UAW into the factory but only at its lower wage rates of about $16 an hour.

This strategy will help to slice Chrysler's bloated parts cost but does little to reduce its workforce. Instead, the auto maker will need to rely mostly on attrition if sales don't materialize. Chrysler loses 2,000 workers a year through retirement, so a three-year labor deal without the flexibility to close plants could leave up to 11,000 extra workers.

How realistic is Zetsche's goal of selling an extra half-million vehicles a year? It's more than Toyota has drummed up since 1998, when a booming economy and new sport-utility vehicles lifted the Japanese auto maker's annual U.S. sales by 400,000 vehicles. If Chrysler's sales gains come in a lot lower, it could be forced to rely on continued incentives -- currently $4,000 a vehicle -- to move the metal. Coupled with low productivity, that would further squeeze earnings. What's more, "the dollars they're spending on incentives delay the product offensive," says Michael Robinet, vice-president of CSM Forecasting Inc.

So far, though Chrysler hasn't slowed its new product plans. It recently launched an attractive crossover minivan, the Pacifica, and was due to follow on July 4 with the sporty Crossfire two-seater. Next year, the company will roll out nine new and replacement models, including a sleek, rear-wheel-drive sedan.

If Americans snap up all the new cars, the company will need all its workers. But if Zetsche is overreaching, Chrysler could pay a steep price. "If the cars don't sell, they'll have to close plants," says Sean McAlinden, labor economist at the Center for Automotive Research in Ann Arbor. That would mean today's labor strategy will have just delayed an inevitable restructuring -- dragging Chrysler down in the process.

By David Welch and Christine Tierney

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