The Issue: Chrysler Looks for Missing Parts

As underlined by its recent deal with Nissan, the Detroit giant is not yet a standalone automaker

When Chrysler announced on Apr. 15 that the company had forged an agreement with Nissan Motor (NSANY) to build vehicles for each other, the deal underscored a real truth about the Detroit car company: Chrysler is a few elements shy of being a standalone carmaker.

That sums up the big challenge facing Chief Executive Officer Robert Nardelli, the former General Electric (GE) and Home Depot (HD) man hired by Cerberus Capital Management to lead Chrysler out of the mire. Without a parent like Daimler (DCX) or some other major automaker, Chrysler doesn't have the financial muscle, global reach, or technological capabilities of most of its rivals. The company lacks the resources to compete in any market and with any type of vehicle.

The solution? Forge partnerships with companies around the globe to get new vehicles, technology, and reach into other markets. That strategy is one reason Nardelli remains undaunted. "Chrysler has had some highs and lows," he says. "But we've always managed to come back."

How Much Money Is Enough?

Most analysts agree that coming back this time will be tougher and will require either a merger with a well-heeled player like Renault-Nissan, or a creative set of partnerships with other car companies that can give Chrysler the products and technology it can't produce quickly in-house. "The biggest single challenge is to make and market products, and for that they need money," says James Hall, principal of 2953 Analytics, a Detroit consulting firm. "There's an open question as to whether they have enough cash."

Nardelli said in a recent interview that Cerberus has given Chrysler enough money—though he declined to say how much—and that the company will continue to spend the same amount on new products, which is estimated to be about $3 billion a year. The problem is Chrysler isn't spending much more on new vehicles than it did when Daimler owned it. But spending at that rate allowed Chrysler to fall behind in the U.S. market and never expand overseas.

Nardelli and the two presidents on his management team, former Toyota Motor (TM) North America boss James Press and longtime Chrysler executive Tom LaSorda, think deals like the Nissan venture are the solution. Under terms of the deal, Chrysler will build a Nissan version of its Ram pickup truck. That gives Nissan a new truck in a key market that has been a near disaster for the Japanese automaker. In return, Nissan will build a compact for Chrysler, which hasn't had a real winner in the small-car market since the Neon was launched in the '90s.

The deal saves both companies hundreds of millions in up-front developments costs on the vehicles. And it helps them run their factories more profitably. LaSorda says Chrysler is shopping the globe to find other automakers who have excess factory capacity (there are many) and use that production to get new models for the U.S. and emerging markets.

Needs Stronger Overseas Sales

Cutting such deals essentially amounts to outsourcing key parts of the business. Chrysler is also in a joint venture with General Motors (GM) to get the auto giant's hybrid system. This year, Chrysler started selling the hybrid version of its Dodge Durango SUV with GM hardware.

To turn the company around, Chrysler will have to do quite a few more deals. The company lacks competitive passenger cars and is too reliant on GM for hybrid technology. Plus, the company gets less than 5% of its sales from overseas. With its U.S. sales down 18% this year, the company will need growth from somewhere else to buoy its fortunes.

Deals like the one with Renault-Nissan could work. "The stuff they have announced helps both companies," Hall says. "So you look at deals like the one with Nissan and wonder, what else could happen?"

If that deal works, it could lead to something much larger. Renault-Nissan CEO Carlos Ghosn has said for several years that he wants a third partner—specifically one from North America—in his alliance. And Cerberus isn't likely to remain in the car business forever. A closer, more substantial tieup with the French-Japanese alliance could be Nardelli's best choice for saving Chrysler.

But they may not be enough to buffer Chrysler against the twin blows of a weakened economy and ever-rising fuel prices

Chrysler may be losing market share, oozing red ink, and wrestling with quality issues, but the company has come storming back when it comes to productivity.

Thanks to heavy restructuring and a large number of production cuts, Chrysler has become one of the auto industry's most productive carmakers, according to the Harbour Report, a manufacturing study published by consulting firm Oliver Wyman. Chrysler now ranks third among major automakers, and four of its plants were in the top 10 in North America for productivity. The company's plants improved productivity by 9% last year.

The hard part, says Ron Harbour, who heads up the study, will be keeping those productivity gains as a slumping car market forces Chrysler to slow its assembly lines and close plants. Chrysler sales fell 36% in June and are down 22% for the year. "It will be tough," Harbour says. "Sales are down so much this year that it will offset some of the other gains Chrysler is making." If the new Ram pickup doesn't hit sales targets, Chrysler could even be forced to close the St. Louis pickup plant, Harbour says.

Productivity Means Lower Costs

Chrysler's surge in productivity is in part a result of new Chairman and CEO Robert Nardelli's cuts. But a lot of the work was done before he arrived, Harbour says. Chrysler already started cutting before the former General Electric (GE) and Home Depot (HD) executive took over in August 2007. Before Nardelli arrived, Chrysler also had a push to design and engineer its vehicles for easier assembly.

Regardless of who deserves credit for the productivity gains, they are a good sign for several reasons. Productivity means lower costs. But it also shows that the company has managed to get production closer to sales by closing plants and buying out factory workers. With Nardelli at the helm, the company launched a second restructuring last fall, cutting 10,000 jobs after taking out 13,000 in February 2007 when former parent Daimler still owned the company.

Chrysler still has a lot of work to do. The Harbour study measures productivity for 2007. Since the end of the year, fuel prices have skyrocketed and decimated the SUV market, while the housing slump has hammered pickup sales. Chrysler is cutting production and closing more factories to try to keep production in line with plummeting sales.

A Deal with Volkswagen

It's no easy task. The company has tried to emphasize fuel economy with its smaller SUVs and passenger cars, but pickups and bigger SUVs still make up 42% of sales, James Press, the company's vice-chairman and co-president, told reporters on June 30. Minivans represent another 20%, and that business, traditionally a stronghold for Chrysler, is off 18% through June.

Harbour says the company's big challenge going forward will be boosting profits and cash flow to fund new models and technology. Already, Chrysler must rely on partners to develop some of the hardware for passenger cars.

The company struck a deal with Nissan Motor (NSANY) to build compact cars. In return, Chrysler will build a Nissan-branded version of its Ram pickup. Chrysler also will build a minivan for Volkswagen (VOW) at the Chrysler minivan factory in Ontario. Given its limited cash and red ink, deals like that will have to work, Harbour says.

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