Chrysler: After the Cuts, What Next?

Chrysler trims 10,000. Hopefully, they kept a few designers because what they really need is new cars

As part of a restructuring plan meant to put Chrysler Group on a profitable course, the company is preparing to cut some 10,000 jobs and close at least two U.S. plants. Those two steps, expected to be announced Feb. 14, are part of a longer-term plan, say Chrysler insiders, to make the company smaller and more profitable, with closer manufacturing and engineering ties to DaimlerChrysler in Stuttgart, Germany.

The number of job cuts expected was reported Feb. 5 in The Detroit News. But the number has been circulating since December, though it was denied last month by company spokesman Jason Vines.

No matter the number of cuts—Chrysler has cut 42,000 jobs since 2001—the American arm of DaimlerChrysler (DCX) had better become smarter and more judicious about the car designs it green-lights and the categories in which it chooses to compete. The company's brands, except for Jeep, are so weak in consumers' minds that Chrysler and Dodge simply do not support full lines of vehicles cost-effectively.

How Far? How Fast?

Chrysler is in the difficult position of having the highest sales incentives in the industry, according to J.D. Power and Associates (like, part of The McGraw-Hill Companies (MHP)), as well as the slowest vehicle turnover on dealer lots. Incentives have averaged around $3,500 per vehicle, while Ford (F) and General Motors (GM) have been averaging below $3,000. And it has been taking the company about four months on average to move its cars off dealer lots, the worst among major automakers. Among Chrysler's goals is cutting costs by $1,000 per vehicle.

The company lost about $1.5 billion in the third quarter of last year. And restructuring costs and losses, especially in 2003 and 2006, have wiped out all the profit Chrysler has been able to post from 2001 through 2006. It's expected to report a loss of more than $1 billion for 2006, as well as a net loss for 2007 to pay for further restructuring.

The question is how far and how fast Chrysler is willing to go to downsize. The Detroit News says one of the plants to be shuttered is the Newark (Del.) unit, which makes the Dodge Durango and Chrysler Aspen SUVs, two vehicles that have among the highest unsold inventories and which most analysts believe the company could do without at a time when the truck-based SUV market is contracting. The paper also cited a Detroit engine plant for likely closure. And some analysts point to the St. Louis North truck plant, which has about 2,200 workers making Dodge Ram pickups, as a candidate. Those trucks are also made at two other plants, in Warren, Mich., and Saltillo, Mexico. Chrysler employs about 80,000 people—19% of whom are non-union, and 62,300 of whom are in the U.S.

Gone with the Wind

Two other new models, and brand franchises, introduced in the last four years—the Chrysler Pacifica and Jeep Commander—are not being redesigned, according to published reports. The plants that make those models aren't destined for closure, but Chrysler will be under pressure to introduce new models that appeal to consumers without hefty incentives while maintaining efficient plant operation.

Chrysler must become more efficient at getting product designs and planning right if they hope to return to profitability, say analysts. "The Pacifica, Commander, Durango, Stratus are all model names that have soaked up both marketing and engineering investment that are just going to the wind," says marketing consultant Dennis Keene. "One of Honda's (HMC) secret weapons is how efficient they are in marketing…do you know how much money they save by not willy-nilly introducing and killing products and model names?" says Keene.

Part of the answer for Chrysler, to be laid out at the Feb. 14 restructuring meeting, is greater and closer cooperation with Mercedes-Benz. One of Chrysler's great successes has been the Chrysler 300, which uses many Mercedes parts and components. Conversely, one failure resulting from the merger has been the Chrysler Crossfire coupe, which is built on the last-generation Mercedes SLK platform. Chrysler dealers didn't know how to sell the vehicle, and the company didn't know how to market it. Whether this closer cooperation means shared manufacturing at some plants remains to be seen. It might be cost efficient, for example, to build a Chrysler crossover vehicle at Mercedes' Alabama plant.

Star Attraction

Chrysler is currently engaged in a new product assault to try to stabilize market share and boost profits. It has recently introduced the Dodge Nitro crossover SUV, Chrysler Sebring sedan, Jeep Compass crossover, and Dodge Caliber crossover. It will be a huge challenge for Chrysler to succeed with all these new models, since it has turned over most of its marketing staff in the past year. And Chrysler Chief Executive Officer Tom Lasorda is having to take the additional job of running North American sales and marketing after ousting the executive who held that position in December.

Lasorda figures to be a star attraction at the Feb. 14 meeting, presenting a plan to make Chrysler profitable again. He may well need one of Jeep's famous four-wheel-drive vehicles to tackle that uphill journey. DaimlerChrysler shares closed down 54 cents, to $62.44, Feb. 5 on the New York Stock Exchange.

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