Chrysler Suicide Watch 17: Party 'Til They Drop

by Frank Williams

July 5th, 2007 12:30 PM

chrysler suicide watch 17 party til they drop

Earlier this week, the European Union rubber-stamped the DaimlerChrysler divorce. So that's it. Later this financial quarter, prefix and suffix will go their separate ways and Cerberus Capital Management will marry the battered bride. Overlooking the fact that Chryslerberus will soon be importing Chinese-built cars for their U.S. customers, the automaker plans a nationwide dealer party for the born-again "all-American company." With all that has– and hasn't– happened to Chrysler of late you have to wonder exactly what and why they're celebrating.

Other than Chrysler's liberation from spousal abuse, there's not a lot to commemorate in Auburn Hills. Despite Cerberus' deep pockets, Standard & Poor's and Moody's Investors Service have just dropped the American automaker's debt rating to "junk" status. Whether this will affect Chrysler management's ability to float loans to stay afloat remains to be seen, but it's not what you'd call a good omen.

And loans are the order of the day. Even as Chyslerberus' debt rating's tanked, Chrysler's new management's been busy looking for someone to loan them $12b for the automotive side AND $8b for Chrysler Financial. If going $20b deeper in debt isn't risky enough, the automaker is reportedly borrowing the big bucks at around 8.5 percent. The interest payments alone could keep Chrysler from profit for many years to come.

S&P analyst Gregg Lemos-Stein goes further. Lemos-Stein says if the U.S. car market remains on its current downward trajectory, Chrysler could be in default by 2010. In an interview with BusinessWeek, he said "One of our big concerns is that it doesn't take a dramatic reduction in sales to put Chrysler at risk." In plain terms, one good recession and Chrysler would join AMC and Studebaker at that big car lot in the sky.

Cerberus' top dog realizes his new acquisition's precarious position. After the House passed stringent new fuel economy rules, Stephen Feinberg made a rare personal appearance to schmooze senators into relaxing the standards. Chrysler's taskmaster's pegged the cost of meeting those standards at $7K per vehicle. The extra expense would, Feinberg argued, put Chrysler out of business.

Well, he would say that, wouldn't he? Gas-guzzling trucks and SUV's still account for some 70 percent of Chrysler's U.S. sales. And North American sales account for 92 percent of Chrysler's total turnover. Not to put too fine a point on it, the automaker is at the mercy of the U.S. economy. And, by extension, gas prices.

As American gas prices climb and large vehicle sales plummet, Chrysler has nothing in their automotive arsenal to staunch the arterial spray. Their last two "Hail Mary passes," the Sebring and Avenger, are so bad that even CEO Tom LaSorda was reportedly "quite upset" with what his employees had wrought. Chrysler's smallest cars, the ancient PT Cruiser and the only slightly more technologically advanced Caliber clones, hardly have Toyota, Honda or even Chevy scurrying for cover.

Next up: the refreshed minivan twins, out this fall. While Chrysler has been the minivan sales leader since inventing the genre, and the new models' rear facing captain's chairs are a way cool unique selling point, it's unclear whether or not the minivans can reinvigorate a moribund market. And if they don't, what profit is there being King of a shrinking kingdom?

Even Chrysler's much-ballyhooed partnership with China's Chery carmaker offers no immediate prospect of financial relief. By the time the partnership designs a car to U.S. safety and environmental specs, ramps up the supply chain and assembly line, works out any production and quality problems, passes all EPA and NHTSA tests and puts the first cars on the boat, the entire market may have shifted, leaving the Sino-American venture flatfooted.

None of this bodes well for the future of Chrysler as we know it. As we've pointed out time and time again, Cerberus is in the business of dissecting sick businesses. They rend asunder what the founders hath put together, make as much as they can from the salvageable parts, and then dump the rest.

The more time that passes before Cerberus takes control of Chrysler, the worse their immediate prospects and the higher the likelihood they'll do what they swore they would never, ever do: strip and flip.

The Detroit News estimates that once the ink is dry and the dust settles on the financial dealings, DCX will have paid $673m to get rid of Chrysler. Given the problems facing Chrysler, and the way DCX stock has gone up since they started dropping hints they were selling it, it looks like money well spent.

No matter what Cerberus does or doesn't do to/with Chrysler, the forthcoming party in Auburn Hills will be nothing compared to the celebrating that will be break out in Stuttgart.

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2 of 46 comments

Ex-dtw on Jul 09, 2007
Chrysler has got it ALL WRONG. Their product line sucks, their advertising sucks, and their dealer network sucks. I will just reiterate what has already been said in earlier articles, "marketing, marketing marketing". I do not mean finding a new way to apply porcine lipstick. I mean figuring out what customers will pay for and building it. Classic example - crappy interiors. There are only a couple of reasons people still buy VW's and it ain't durability. Lastly, as for the "I wouldn't buy it" or "I think it is ugly", you are a sample of one. Not meaningless, but definitely ont definitive. Because if that weren't the case, Honda would be stuck with about a years worth of Civic's and CRV's. Please let the MCP know he can have his car back.

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on Jul 09, 2007

I've said it before, for my money, Chrysler has the worst lineup of vehicles out there. While I don't like GM's offerings as a whole, they do have one very bright star to build upon, Corvette. When was the last time you saw an add that included Chrysler's halo car, the Viper? I certainly can't remember one since D-B bought them. Sure, there aren't many people out there who are going to buy a Viper, but what's the purpose of a mass market retailer building a car like the Viper if you aren't going to use it to promote your brand? Ford used the Ford GT in it's commercials even though it was even more unattainable than a Viper. That was a car to lust after,a nd even if you couldn't afford it you went to the Ford dealer to stare and drool over one. Then the salesman would steer you towards a Mustang GT. As far as advertising, I'll cast a vote for the moronic Nitro commercials. From the car falling through the earth to the other car getting blown up when it gets a jump start from a Nitro, they assaulted and insulted my intelligence in the extreme. These commercials were enough to make me not even consider a Chrysler product.

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