Chrysler Zombie Watch 10: Might As Well Jump

Edward Niedermeyer
by Edward Niedermeyer

Chrysler has always held a special place in TTAC’s chronicling of Detroit’s decline, enjoying a bespoke “Suicide Watch” in contrast to our Ford and GM “Deathwatches.” In the first entry in that series Frank Williams wrote of a gutted firm, dependent on incentives and flagging truck sales, seemingly doomed to drag its foreign partner into bankruptcy. Four years and countless opportunities for death with (some) dignity later, Chrysler presents much the same picture. Sure, it’s been rinsed of debts and excess capacity in bankruptcy court, but the Pentastar’s brands are still fundamentally damaged from years of self-abuse and the firm is struggling (and failing) to improve on last year’s sales numbers, which were recorded en route to said bankruptcy. Inventory may be under control, but Frank’s four-year-old assessment of an investor warning by JP Morgan could have been written yesterday [with “DCX” replaced by “Fiat”]:

JP Morgan remains convinced that management patience towards Chrysler has “worn thin and increases the likelihood that DCX will reduce exposure to Chrysler.” It’s the investment community’s equivalent of yelling “jump!” to someone standing on a ledge.

In fact, analysts from London’s Bernstein Research wrote nearly the exact same line yesterday. Chrysler has officially shuffled back onto the ledge, and once again the analysts are shouting “Jump!”

The Bernstein report, portions of which are published without subscription at Tire Business, is actually remarkably optimistic about Chrysler’s financial performance in the first quarter of this year. According to the write-up by Crain News Service:

The report praised the CEO’s cost-cutting efforts: “Mr. Marchionne and team are reportedly ‘again and again’ finding fixed cost savings” in key areas. Those cost-cutting measures have helped the company come “surprisingly close to breakeven” in the first quarter, the report said.

But, as Detroit has proven again and again, you can’t simply cut your way to viability. Marchionne’s deep industry experience may make him a more effective, efficient cost-cutter than the Cerberus boys were, but the strategy hasn’t changed much: move what we have with incentives and hope consumers hang tough with the brand until new products arrive. And with that strategy, Chrysler’s losing sales faster than it can cut costs. Bernstein may be optimistic about Chrysler’s Q1 financial performance, but the automaker ends the quarter with only 234,215 sales, a five percent decline from Q1 2009, which at the time earned such adjectives as “ Medusa-class ugly,” “ Yikes,” and “ Bloodbath.”

This sales decline is the fundamental problem. Chrysler is burning cash on advertising, spending $170 per projected sale this year, and yet nothing will move the needle. Whether this is because the ads themselves have sucked, the product sucks or because consumers have simply decided to tune out the name “Chrysler” is a matter for debate, but ultimately the answer is academic. The important fact is that Chrysler must sell 95,000 vehicles for each of the remaining nine months of this year. Chrysler has achieved that level of volume once in the last 14 months, despite consistently offering some of the highest incentives in the market. Losing share in a weak market is a good way of showing that your turnaround needs a turnaround.

With this in mind, it’s not surprising that Bernstein concludes:

We remain unconvinced Chrysler will survive in its current form despite Marchionne’s blood, sweat and tears… A slimming down of Chrysler to be just Ram, Jeep and a U.S. production base for Fiat looks a realistic exit strategy to us

Worst of all, Bernstein is not simply recommending that Chrysler jump: it’s recommending that Fiat stockholders push. Fiat is unveiling its own five-year plan next week, and the Bernstein report was written as guidance for antsy investors. The Fiat brand, buoyed in the European market by recent scrappage schemes, is eyeing a 15 percent European sales decline this year according to Automotive News [sub]. Pressure is mounting on the Italian conglomerate to spin-off its car and truck businesses entirely, and to apportion its $11.4b in bonds. According to analysts, these transactions are “very much tied to how things go at Chrysler, which is still in the preliminary stages of the restructuring.” Scaling back the Chrysler turnaround as Bernstein suggests is likely to be seen as a popular strategy option among Fiat’s anxious stakeholders.

And ultimately, there’s little incentive for Fiat to not push parts of Chrysler over the edge. Fiat’s current 20 percent of Chrysler Group has cost it precisely nothing so far, having bought in to the bailed-out automaker with only its existing technology. Meanwhile, years two, three, four and five of Chrysler’s financial turnaround plan require the firm at least break even this year if it is to avoid a cash infusion from Fiat. We called the financial plan “leveraged assumptions” because, though it includes contingencies for market downturns, it doesn’t begin to contemplate the kind of market share declines the firm is currently facing. If Chrysler misses its 95k unit sales goal for several more months, Fiat will have no choice but to reassess its entire Chrysler turnaround plan, predicated as it is on continuous improvement in sales, market share and revenue.

Chrysler will spend untold millions over the next twelve months launching 14 “new or refreshed” products, most of them falling into the latter category. These products represent Chrysler’s last chance to survive in its current form, and to get its turnaround back on track. Having committed to keeping the Chrysler brand on life support by upgrading such sales duds as the Sebring with dual-clutch transmissions and re-worked suspension, Marchionne won’t scale back Chrysler’s five-year plans until he sees the asphalt rising to meet him, and he realizes that he missed his targets. At this point, Fiat’s shareholders and directors are the only ones capable of heeding Bernstein’s advice, calling the turnaround plan out as the pipe dream it is, and giving Chrysler (if only the brand) a tiny push.


Edward Niedermeyer
Edward Niedermeyer

More by Edward Niedermeyer

Comments
Join the conversation
3 of 39 comments
  • Msquare Msquare on Apr 16, 2010

    It's clear to me these analysts have no clue of what they're talking about. They think you can replace an entire car line in a matter of months on a whim. Yes, Chrysler is refreshing a lot of its existing not-so-appealing models. They have no choice, because even with all the money in the world and new whiz-bang replacements in the pipeline, they can't just retool overnight. Nobody can. So you clean up your product a bit and try to steal a couple of extra sales on price. It usually works just well enough to buy some time. What are you supposed to do? Not try? Of course you can say they'll make it if they do everything right. What exactly are they doing wrong going forward? Could the advertising be better? Maybe. But I think the product plan is sound. Jeep's entire brand equity is based on trail-rated SUV's. I would avoid any attempt to corrupt it. You want a crossover? Sell it as a Dodge.

  • StatisticalDolphin StatisticalDolphin on Apr 17, 2010

    Went to bed just after reading this editorial and comments. Had a dream... all the vehicles on the road were Chryslers or Dodges or Jeeps. All the cars at the mall and in the airport parking garages. Acres and acres of Chryslers as far as the eye could see. All the dealers were Chrysler dealers. And about half the vehicles had their grills replaced with the 'Obama as Joker' portrait.

    • Pgcooldad Pgcooldad on Apr 17, 2010

      Your dream is true in the northeastern suburbs of Detroit. Except for the Obama part! :)

  • MaintenanceCosts It's not a Benz or a Jag / it's a 5-0 with a rag /And I don't wanna brag / but I could never be stag
  • 3-On-The-Tree Son has a 2016 Mustang GT 5.0 and I have a 2009 C6 Corvette LS3 6spd. And on paper they are pretty close.
  • 3-On-The-Tree Same as the Land Cruiser, emissions. I have a 1985 FJ60 Land Cruiser and it’s a beast off-roading.
  • CanadaCraig I would like for this anniversary special to be a bare-bones Plain-Jane model offered in Dynasty Green and Vintage Burgundy.
  • ToolGuy Ford is good at drifting all right... 😉
Next