Nardelli: Why Chrysler Needs a Bailout

CEO Bob Nardelli on bankruptcy and the "gut-wrenching decisions" required to turn the automaker around

Robert Nardelli, chief executive of Chrysler, has faced numerous challenges in the 15 months since he took the top job: declining demand for cars, a spike in gasoline prices, calls for more fuel-efficient vehicles, and a global economic crisis that has all but crippled consumer spending.

The result: cutbacks in staffing and production, rethinking strategy and top management, and asking Congress for bailout money. Nardelli recently spoke about his tenure at Chrysler and the possibility of a government bailout for the U.S. auto industry at the Ernst & Young Strategic Growth Forum, held in Palm Springs, Calif., on Nov. 13, when he was interviewed by Editor-in-Chief John Byrne. Excerpts of their conversation follow.

John Byrne: Bob, there's tremendous controversy over this issue of a bailout. You know, we all heard about Joe the Plumber during the election. There's also Larry, the accountant. This is Larry Sinclair. He lives in California and drives a Honda (HMC), and he doesn't want Detroit to have a bailout. Here's what he wrote to his congressman: "They have been asleep for 30 years and have made their own problems. So why should I help bail them out?"

Bob Nardelli: His comments, unfortunately, echo the sentiment of a lot of people in the country. Bankruptcy, in some cases, provides protection. But if we went into bankruptcy, we would no longer have to pay suppliers, and the suppliers will go down.

If the supplier network goes down, it not only affects Chrysler. It will also immediately affect General Motors (GM) and Ford Motor (F). Our studies show that consumers are very hesitant to buy a vehicle from a company that they aren't confident is going to be there.

Look, in February 2007, when Daimler (DAI) said all options were on the table, our volume fell off 37%. It wasn't until August, when Cerberus Capital Management and Steve Feinberg said, "we're in it for the long haul. We want to restore an iconic company to its rightful place in the auto industry," did sales start to come back up.

I also think one has to think about the fact that every [Toyota (TM)] Prius is imported. Every Lexus is imported. So the question becomes one of job impact—not only the direct employees within our auto industry, but the plethora of union-represented employees at a lot of our supplier base.

I understand his point. I would not be here today and try to justify that everything Detroit did, that Chrysler did, was right. Having been in a lot of businesses, I would suggest that people who do things make mistakes. But they don't make the biggest mistake of all and do nothing. So what we're trying to do is something. Very aggressively.

I can't apologize. All I can do is the very best we can do to restore Chrysler to a viable enterprise, to be able to compete in this very, very competitive auto industry, and fight our way through this economic trough. That's where we are.

How much government money do you want for Chrysler?That will be determined, I think, in Washington, based on an open review of where we are, what are the liquidity needs, and presenting a business plan that has a sustaining model for coming out the other side. (In Washington on Nov. 18, Chrysler said it is asking for $7 billion.)

So let's say you get the money. What do you do to ensure the future success of Chrysler?Well, I think two things. First, we should not take the money unless we have an equal commitment that the captive finance companies will either become bank holding companies, or they will get approval to provide competitive rates to the consumer, so that our dealers will have the same challenge we do of having a viable business.

You can't have one without the other. Then, what we'll do is continue to drive like heck to restructure. We will use this money in support of getting us through this economic trough until the economy comes back.

Now, if the economy doesn't come back, even if we have these other two, it is still a very fragile business model, John. It's just the dynamics. It's the nature of the industry we're in. It's heavy, intensive capital. We're cutting our capex. We're reprioritizing. We're resizing. We're changing our breakeven.

There are still a lot of people who are against a bailout, Bob.There's around a million people dependent on Chrysler's success. So you could say, well, let them go down. But I think the difference is—and I don't mean to belittle the loss of Lehman Brothers—but it's one thing to lose a company; what we're dealing with here is the loss of an industry because of the interdependence of the Big Three and our supplier network. I think you will see a ripple effect that will be unprecedented.

Can Chrysler go it alone without government support?I think it would be very difficult, John, to be able to make it through this unprecedented downturn.

Between now and the end of the year, we've announced yet another major restructuring. We will have to furlough another 5,000 salaried employees by yearend. We will probably permanently idle two more factories. And so again, gut-wrenching decisions, but decisions we have to make.

We cannot assume that we're going to get financial support. We cannot hope that the industry is going to turn around. We have to make these bold, daring decisions to be able to get through this. And that's what we're doing.

And you've already, to use your phrase, resized this company. You foresaw a slump in car sales and were proactive in reducing the size and scale of the company soon after you arrived at Chrysler in August of last year.Yeah. I don't like to see myself as a pessimist or an optimist. More of a realist. Certainly not an alarmist. But again, I had the advantage. In November of '07, based upon a realistic view of where we were, looking at many of the external indicators, I said I think the industry is probably going to be 15.5 million units, not 16.7 million. And that was one of those, "O.K., here's a noncar guy wrecking the business." And quite honestly, I thought I was being aggressively conservative. Boy, did I miss. I should have been much more conservative.

But it served us well. We went through and did a major restructuring in November of '07. And quite honestly, that positioned us well through the first half, John. We finished the first half at about $11.6 billion in cash. We were running well over a billion dollars in EBITDA. We had sized ourself.

But in the second half, the bottom just fell out from an economy standpoint. Last month, the industry closed at about 10.8 million units. So what that means is that the consumer is saying that fundamentally, two companies, one the size of Ford and Chrysler could go away, and there'd be no disruption relative to the consumer's intent to buy a vehicle.

So obviously you're cutting back again to adjust for this more troubled market reality.We're not sitting on our hands. Chrysler's strategy is to have a plan in place to go it alone. We have to make sure we're in a position to fight our way through this economic trough and come out the other side. So, so far this year, we have taken out 1.2 million equivalent units of capacity. We've had to take 12 shifts of production off. We have closed two manufacturing plants. We've taken $2.2 billion of fixed costs out of our business. We've had to furlough about 28,000 employees/families. It's not just an employee. It's not a number. Probably the most gut-wrenching part of this job, John, has been to affect the lives of good men and women, through no fault of their own, because of the economic recession that we're in, because of the disarray in the financial markets.

You know, we've had to really resize ourselves. And again, if you look at the current J.D. Power estimates, it looks like November or December won't be much different than September or October, which suggests that on a seasonally adjusted rate, we're about 11 million units.

So you already pretty much have 28,000 people gone since you arrived 15 months ago. You have 60,000 people left, right?Yes.

If you had to guess how many you're going to have left a year from now, what would it be?You know, it's a question we're asked all the time, John. And the truth of it is, all we can do is do our best estimate of where the economy is going to be and what the financial markets will allow.

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