Crisis at Chrysler I

by Gail Edmondson and David Welch

The news is grim enough for Chrysler. A massive pileup of unsold vehicles this year prompted a $1.5 billion third-quarter loss—the third huge earnings bloodbath at Chrysler in six years (see BusinessWeek.com, 10/18/06, "Detroit's Oversupply Problem").

Once again German troubleshooters from parent company DaimlerChrysler's (DCX) headquarters in Stuttgart are shuttling to Auburn Hills, Mich., to analyze its ailing U.S. division. But, unlike in the past, this time there are no assurances by the Germans that Chrysler can be fixed.

Chrysler's swift decline has even raised the possibility that it could be spun off, an option top executives haven't publicly discussed but also did not dismiss. Asked at an Oct. 25 conference call with analysts and reporters whether a spin-off of Chrysler was among possible future options, chief financial officer Bodo Uebber replied, "We won't exclude anything. We are looking at structural changes. We are first doing our analysis. Then we will draw our conclusions."
Future Still Unclear

DaimlerChrysler's revenues for the third quarter declined 8% to $44 billion and its operating profit plunged 50% to $1.1 billion. Losses at Chrysler and aerospace unit EADS will outweigh gains this year at Mercedes and the truck division, forcing group profit down in 2006, Uebber said.

Nearly nine years since the merger of Daimler-Benz and Chrysler, Chrysler has become a chronic source of distress for the group's German top management. Despite billions spent to restructure Chrysler and some modest gains over the past two years, its future prospects remain murky.

The U.S. automaker continues to suffer from anemic sales—down 24% this quarter—an inability to anticipate major market trends such as the shift to fuel-efficient cars, production overcapacity, and erosion of market share. Only 16% of Chrysler's vehicles are fuel-efficient four-cylinder models, compared with an industry average of 37%.
The Cost of Conscience

Chrysler has a raft of passenger cars coming, for instance the just-released Jeep Compass crossover SUV, and soon, the new Chrysler Sebring and Dodge Avenger mid-sized sedans. But with more than 70% of its business in trucks, SUVs, and minivans, Chrysler will have to work hard to establish brand credibility among passenger car buyers, many of whom flock to Japanese and Korean models.

The company suffers from another common Detroit malady: retiree costs. Like rivals General Motors (GM) and Ford (F), Chrysler is paying for legions of retirees who rely on the corporation for their pension and medical benefits. Chrysler pays about $1,400 per vehicle in health-care costs, and the United Auto Workers union has frustrated Daimler CEO Dieter Zetsche and Chrysler chief Tom LaSorda by so far refusing to give them the same concessions on retiree benefits that saved GM $1 billion a year.

Chrysler also has a $22.3 billion pension plan that is underfunded by $1.7 billion. If Chrysler can't make up the shortfall by investing the pension fund's proceeds, it will have to spend more cash to get the plan flush.
"Really Bad News"

Auto industry analysts increasingly question whether Chrysler can escape a troubling pattern of swinging between modest profits in its best years and gushing losses in the worst ones. And that scenario makes it difficult to justify hanging on to Chrysler. "It's early to say the whole thing has to be unraveled, but they cannot keep throwing good money down the drain," says Garel Rhys, professor of automotive economics at the University of Cardiff in Wales.

Chrysler is now expected to lose $1.2 billion in 2006, dragging down group earnings and casting a shadow over a recovery under way at Mercedes Car Group.