Chrysler: A Smoother Ride, But Bumps Ahead

Can it keep turning out hot sellers -- and keep Mitsubishi from dragging it down?

As the past year has shown, declaring "mission accomplished" too soon can be a bad idea. Yet DaimlerChrysler (DCX ) Chief Financial Officer Manfred Gentz may have done just that on July 29 when he presented second-quarter results for its long-struggling Chrysler (DCX ) unit. Citing operating profits of $614 million, a sharp swing from the $1.1 billion loss a year earlier, Gentz proudly declared: "The turnaround plan has been completed."

Not so fast, Herr Gentz. While Chrysler has cut costs and nudged up market share thanks to such hit models as its stylish new 300 sedan, the company still faces plenty of challenges. Not all of the new models are wowing drivers like the 300. DaimlerChrysler's broken alliance with Mitsubishi Motors Corp. could imperil future models and its cost-cutting program. And once again, incentives are inching up, putting pressure on profits. All of which may explain why Chrysler Group CEO Dieter Zetsche was far more circumspect than Gentz. "We can't claim victory after a few months of very satisfying demand," he told the analysts.

There's little doubt that Chrysler's performance is much improved. Unlike Ford Motor Co. (F ) and General Motors Corp., it makes most of its money selling cars and trucks these days, while its rivals rely mostly on their financing arms for profits. Chrysler has managed this feat by slashing annual capital outlays from $7 billion to $5 billion and by selling a lot of cars with fat margins. Fully half of Dodge Rams, 300s, and Magnums sold feature the powerful new Hemi engine, released last year. The engine boosts profits $1,000 to $3,000 per vehicle.

Still, a couple of good quarters don't a turnaround make. Popular models have a nasty tendency to fade fast. The retro PT Cruiser sold a heady 145,000 units in 2001 only to slump to a heavily rebated 107,000 last year; sales are flat this year despite a new convertible. "No longer can new vehicles go without incentives for a year or two," says

Adam Collins, senior auto analyst at Commerzbank in London.

And it's not as if Chrysler can count on more hits like the 300. The Dodge Magnum looks like a station wagon on steroids, but Americans have shown scant love for wagons since Richard M. Nixon occupied the White House. A conservatively redesigned Jeep Grand Cherokee will arrive this fall. But it will face a crowded, rebate-heavy sport-utility segment. Already, other new models Zetsche had hoped would sell without hefty rebates need them to move. Only nine months after the launch of the feature-packed Durango SUV, Chrysler has had to slather it with $4,500 in incentives; the Dodge Caravan and Chrysler Town & Country minivans that Chrysler spent $400 million redesigning require some $4,000, including dealer cash.


Longer term, Chrysler may also face trouble sustaining its turnaround because of the deteriorating condition of partner Mitsubishi, which on Aug. 4 announced a fiscal first-quarter loss of $494 million on sales of $5 billion. When DaimlerChrysler announced that it would cease shoring up the Japanese carmaker in April, many feared that it would stop working on jointly developing models with Chrysler. The Neon, Stratus, and Sebring, based on the next Mitsubishi Lancer platform, will appear next year, as expected. But a Mitsubishi minivan and SUV based on the

Dodge Caravan and Durango have been scuttled, as have two other concepts on Chrysler's wish list. All of that, say insiders, means less long-term sharing of buying and engineering costs, which will limit the savings Chrysler was banking on.

For now, Chrysler has more immediate problems: Even as it is once more pouring on the incentives to clear dealer lots of 2004 models, analysts are predicting flat U.S. auto sales next year. That one-two punch could hurt Chrysler's profits again. The bottom line: Chrysler isn't the clunker it was when Zetsche took over four years ago. That may be worth honking its horn about, just not too loudly.

By David Kiley in New York, with Gail Edmondson in Frankfurt, and David Welch in Detroit

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