Chrysler’s Poor Earnings: A Blip or a Portent?

2014 Chryslers on display at the 2013 New York International Auto Show Photograph by Jin Lee/Bloomberg

All three major U.S. automakers have had dramatic turnarounds since the financial crisis, but Chrysler’s was the most so: Only through government-sponsored bankruptcy, in addition to a government-brokered and subsidized merger with Fiat, did Chrysler avoid going out of business.

In the years since, though, the former runt of the American auto industry has surprised everyone by going on a tear, posting quarter after quarter of earnings gains. Last year net income at Chrysler was $1.67 billion—nine times what it was in 2011—and the company was the only American carmaker to gain market share.

All of which makes it notable that Chrysler this morning announced a steep drop in earnings: Net income fell 65 percent, from $473 million a year ago to $166 million in the first quarter of this year. The company blamed the decline on the costs of new product launches and the phasing out of its Jeep Liberty model—its successor, the Cherokee, has not yet hit lots. Fiat Chief Executive Officer Sergio Marchionne stood by the company’s 2013 financial forecasts. The first quarter, the company insisted, was just a blip.

It’s true that the Liberty was a solid seller, and there’s no reason to think the Cherokee won’t be at least as popular. And it makes sense to clear out old inventory before rolling out the new model, as the company did. That way Jeep dealers don’t have heavily discounted Libertys sitting on the lot competing with the new Cherokees.

But there’s also evidence that Chrysler’s results could be the first sign that the American auto market is losing altitude. Kevin Tynan, an auto analyst at Bloomberg Industries, sees some suggestion of weakening U.S. demand: Since late 2011, the amount of time vehicles sit on dealer lots waiting to be sold has been climbing steadily, and the size of the incentives dealers have had to offer buyers has begun to tick upward. Incentives are a sign of weak demand; they also bite into profits.

Analysts have been arguing that this year will be a telling one for the auto industry, as it will show whether American carmakers can thrive in a market that’s much different from the one they dominated decades ago. Ford Motor, General Motors, and Chrysler have made real improvements—introducing hot new models, cutting labor costs, and streamlining operations—but they’ve also benefited from factors including the struggles of Toyota Motor and the pent-up demand of American consumers who put off purchases during the recession.

It may be, Tynan suggests, that now that such demand has been exhausted, we’ll realize the American automobile market isn’t going to bounce back to its pre-recession size—longer-term effects such as urbanization and changing attitudes about car ownership among the young are at work, and shorter-term ones like a feeble economic recovery are, too. If that’s the case, Tynan says, “This is the kind of report you’ll see from more automakers throughout the earnings season.”

Before it's here, it's on the Bloomberg Terminal.