Crisis at Chrysler 2

Worse, insiders at DaimlerChrysler say Chrysler is likely to post a loss in 2007 as well—an event that could seriously dent Daimler's share price and rekindle ire among institutional investors about the alliance, prompting calls for a spin-off. "If we don't see a visible improvement in 2007 at Chrysler, it's really bad news," says JP Morgan analyst Philippe Houchois.

Uebber and LaSorda, who also participated in the conference call, declined to forecast a recovery for Chrysler in 2007, noting that eight new models in the second half of 2006, and more in 2007 should help rekindle sales. By cutting production, LaSorda aims to bring unsold inventory down to around 500,000 vehicles by yearend. By the end of September, Chrysler's excess inventories were down to 534,000 from a 2006 peak of 580,000.
More Than Muddling

Beyond cutting inventory, management has launched a new initiative dubbed the "Chrysler Group Optimization Program" to study everything from product strategy and fixed costs to manufacturing capacity and quality. Seven corporate S.W.A.T. teams, which aim to slash $1,000 from the cost of building each Chrysler car, are headed by Chrysler executives but receive frequent visits from a group led by Mercedes Chief Operating Officer and restructuring ace Rainer Schmueckle.

"I don't want anyone to think we are sitting here and muddling through," said LaSorda. We are aggressively analyzing the business, including future break-even points if the market goes down."

Chrysler's third-quarter loss implies a loss of $2,600 per vehicle, Morgan Stanley analyst Adam Jonas calculated in a recent report—far greater than the per-unit loss posted at Chrysler in the depth of its crisis in 2000 and 2001. Jones now expects Chrysler to post a loss of more than $1 billion in 2007. "We cannot rule out the risk of even greater losses in 2007," Jonas says.
Guilty of Optimism

If market conditions in the U.S. remain unfavorable and Chrysler suffers another large loss in 2007, Zetsche could be forced to consider a spin-off as early as 2008, insiders say. Chrysler's double profit warning this year is an especially tough blow for Zetsche, who was hailed a year ago as the turnaround ace who fixed Chrysler when he returned from Auburn Hills to take charge of Mercedes Car Group.

A much chastened Zetsche admitted Sept. 19 to the major management blunder this year and took the blame for Chrysler's overly optimistic sales forecasts, which should have been corrected far sooner. Zetsche became CEO of the $190 billion-revenue DaimlerChrysler group on Jan. 1.

At the Paris Auto Show in September, Zetsche reiterated that the target for Chrysler's operating margin remains 5%. "When we can achieve that target is the right question," he said. "More than that, it has to be sustainable."
Back in Action

Zetsche gave the first hint of more radical solutions for Chrysler on Sept. 19 when he said he did not rule out long-term changes to DaimlerChrysler's structure. Uebber's comments on Oct. 25 seemed to confirm that a spin-off is one possible future option (see BusinessWeek.com, 9/19/06, "Turnaround Time at Chrysler—Again?").

As Chrysler veers off track, Mercedes is regaining traction. Zetsche has presided over a recovery at the $63 billion Mercedes Car Group following years of quality problems and a crisis at Smart that triggered large write-downs. Mercedes' operating profit rose 127% to $1.2 billion in the third quarter.

One-third of the profit gains came from increasing sales and higher-priced cars in the mix and two-thirds from cost-cutting. Mercedes is expected to achieve an operating profit of 7% in 2007—returning to its historic role as profit engine. Powerful profits at Mercedes could help Zetsche buy time in pondering Chrysler's future.

Edmondson is a senior correspondent in BusinessWeek's Frankfurt bureau. Welch is BusinessWeek's Detroit bureau chief.