By on November 9, 2007

collapse.jpgCerberus may have deep pockets, but BusinessWeek notes the company is "loathe to invest more cash" into its automotive acquisition. It makes financial sense: the less they put into Chrysler, the more profit they make when they sell it. Oh, that's right… they're in it for "the long run," not to strip and flip. Sorry. Anyway, Chrysler is looking for any way they can cut costs or save money. Frank Klegon, Chrysler's VP for product development says they're looking for low-cost providers for "components only a mechanic would touch," with the savings paying for the stuff you can see. What building a car with the cheapest brakes, steering, drivetrain and electronic controls made will do for their warranty claim costs (and product liability insurance) remains to be seen. In the meantime, the Wall Street Journal reports they'll be offering a new round of incentives next month to try and clear out slow-selling 2007 models. So while they're cutting quality under the skin to save money, they're paying consumers to buy their products. That's one helluva recovery plan there Bobby boy.

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25 Comments on “Can Chrysler Cut Their Way To Profit?...”


  • avatar
    AKM

    Funnily enough, a supplier to Chrysler to whom my company sells product contacted us to ask for a price lock-in for 3 years. No less….
    Given that our costs (fuel, raw materials…) are going up 20% this year, the answer is going to be a resounding “NO”.
    Seems quite easy to “cut” your way to profit by asking others to bear the brunt of it. Oh wait, Cerberus did just that by firing 10,000 people.

  • avatar
    Joseph

    Hmm…what would you rather have: cheap interior or cheap mechanical parts…? Nevermind, I think I’ll just stick to cars that have good parts all around…..

  • avatar

    The point at which a company’s cost-cutting measures begin to measurably impact product quality and employee morale comes much sooner than the cost-cutters like to admit. This attitude will get Cerberus nowhere, but I will be happy if it devalues the brand enough that when they try and flip the company all the soulless billionaires lose their asses.

    Won’t happen, though. Never happens. The only people who have to bear actual risk when investing are the poor, the government bails out the billionaires. Rather than building quality cars that the employees and owners can be proud to build and drive, they’re going to realize huge reliability decreases and lose yet more customers.

  • avatar

    Is there any meat left on this particular bone?

    Example: For so many years and so many models, Chrysler’s overdrive transmissions were famous for fatal component failures once they crest 70,000 mile mark. Replacement parts were just as bad (Ultradrive in particular), ditto the rebuilds.

    Since most folks don’t keep cars that long (Lifetime Warranty for original owners only, right?) I guess this is Boot ’em Bob’s template for success.

    This stinks.

  • avatar
    jazbo123

    Cerberus obviously doesn’t have a clue about the car biz.

    Exhibit A:

    Trying to cut corners on already cheap commodity parts like headlight components and electronics? Newsflash! Automotive electronics are by their nature already cost-reduced during the design process (that is, by any company still in the business). And I guess these imaginary savings will put into imaginary improvements in the interiors.

    Exhibit B:

    Jumping into bed with Chery. Their vehicles are at least 5 years away from being North America market-ready. Cerberus and other liquidators companies don’t wait 5 years for anything.

    If I was at Chrysler I’d be rather nervous.

  • avatar
    bleach

    Auto suppliers have already been squeezed for the last penny and it shows in the final product. Nothing but animosity/defection and bankruptcy comes from it. If you don’t believe it just ask a guest at the Marriott on Big Beaver Road. Chances are he’ll be a bankruptcy attorney/consultant steering the supplier to the the less contentious import manufacturers. The problem is they are not alone.

  • avatar
    glenn126

    The whole thing is “code-speak” for “buying cheap Chinese crap” mechanical parts.

    And we know how well Chinese stuff is put together, right?

    Thanks, I’ll stick to Toyota and Hyundai, and maybe Honda in the future.

  • avatar
    jazbo123

    “components only a mechanic would touch,…”

    LOL, sounds like the mechanics will be “touching them” a whole lot more.

  • avatar
    Landcrusher

    This is all according to the private equity playbook. They strip anything they can to make the company look more efficient on the books. The buyers of the company never properly figure the cost of those things – building back functions necessary for long term success, employee retention and fatigue from being stretched to hard for too long, lack of any new prodcuct in the pipeline, etc.

    In this case, they will cheapen the parts, and value the warranty claims liability based on the rate using the older parts. The new buyer will later find that the liability on the books was a vast understatement, but too late. (I’m not an accountant, so this may not be exactly correct, but this is the general concept).

  • avatar
    raast

    So the reliability of their products will head which way, and the resale value will go where?
    Makes me want to rush out of the office to the showroom right now, wouldn’t you say?
    Final question, these North American vehicle manufacturer executive types have learned what again?

  • avatar
    NickR

    A guy goes down to the Chrysler dealer to get one of his new Chinese built Mopars. He picks out the model, the colour and the other options he wants. As he’s about to sign the purchase agreement, the salesmen stops him and says ‘One more thing…do you want that in regular or unleaded?’

  • avatar
    speedlaw

    So, does this mean I wait for a firesale and buy a Magnum Hemi (just before $4/gal gas becomes permanent?) or is the car too decontented and assembled by unhappy workers to be worth the risk ?

  • avatar
    Gardiner Westbound

    Short of manufacturing components from reconstituted dung and having monkeys assemble them I don’t know how Chryslers can get much cheaper to produce.

  • avatar
    oboylepr

    What building a car with the cheapest brakes, steering, drivetrain and electronic controls made will do for their warranty claim costs (and product liability insurance) remains to be seen

    Huh! The big 2.8 have been doing this for eons. They are so good at it, they have actually forced suppliers into bankruptcy with constant demands to lower prices AND increase quality. The result is a part that meets specification in appearance but does not last peeing time. Take a look at some of the OEM parts fitted on cars such as a water pump for say a Chevy Astro. Absolute crap! You just know it will barely get to 100K kms before it quits.

  • avatar
    LLC

    Speaking of being assembled by unhappy workers, don’t buy any product assembled in October at GM or November at Chrysler and Ford ……..

  • avatar
    levi

    …says they’re looking for low-cost providers for “components only a mechanic would touch,” with the savings paying for the stuff you can see…

    Seems to me that Bobby is going to dangle the carrot to Chery (and others) for $1 brake rotors with a rent to own option.

  • avatar
    OverheadCam9000

    Hold on folks, I am about to be brilliant.

    Let’s go back in time, way back, to WWII.
    Who was a big, big supplier of tanks, trucks, bombers, bombs and missiles? That’s right, CHRYSLER!

    If memory serves, Army contracts floated Chrysler’s boat (not to be confused with the Chrysler Boat Corp) until Jimmy Carter killed that goose in the late 70s. Was not the dearth of military procurement one of the key factors that drove the Dodge Bros. into bankruptcy 1979/1980?

    Today, we’ve got Dick “Endless War” Cheney chewing up war material at a fervered pace in SW Asia. And there, people, is Chrysler’s salvation. Forward to the Past.

    What “Boot’em” Bob Nardelli has to do is go see Dick “Endless War” Cheney, sign a new tank/truck/missile, etc. contract with the Army, then have Ben “B-52” Bernanke carpet bomb Auburn Hills daily with billions of freshly printed dollars.

    The PentaStar has to get back into bed with the Pentagon. Kiss and make up, all is forgiven. We’re an American company again (and the Germans are key NATO allies).

    Who needs commercial cars? Sell that unit to the Chinese!

    That, friends, is the only way Chrysler will survive.

    (On a side note, could you imagine an up-armored Grand Caravan? Machine gun mounts in the side slider doors, like a Huey? Target display on the drop-down LCD screen? Sweet!)

  • avatar
    casper00

    “Frank Klegon, Chrysler’s VP for product development says they’re looking for low-cost providers for “components only a mechanic would touch,” with the savings paying for the stuff you can see” So let me get this straight, instead of sourcing for better suppliers and better quality parts, Chrysler’s going the other direction….way to go, just another blow to itself……

  • avatar
    Qwerty

    (On a side note, could you imagine an up-armored Grand Caravan? Machine gun mounts in the side slider doors, like a Huey? Target display on the drop-down LCD screen? Sweet!)

    I don’t how sweet it would be. Would you want to drive a Chrysler in a place crawling with insurgents and facing almost certain death if your vehicle breaks down? I think not.

  • avatar

    OverheadCam9000 :
    (On a side note, could you imagine an up-armored Grand Caravan? Machine gun mounts in the side slider doors, like a Huey? Target display on the drop-down LCD screen? Sweet!)

    And don’t forget Swivel ‘n Go seating for the tail gunner….

  • avatar
    autoacct628

    Landcrusher:

    I am an accountant, and you are actually correct….any accountant worth his salt could create warranty expense numbers which would pass an audit, based on the fuzzy concept of “reasonability” and maybe get a footnote disclosure about a change in estimate method.

  • avatar
    SherbornSean

    I don’t know what is scarier — that Chrysler’s strategy is to cheapen “components only a mechanic would touch” or that they are publicly announcing this to consumers.

    I am now beginning to understand Daimler’s logic for ridding itself of this mess.

    The best case scenario for Cerberus is that they separate Jeep and find a buyer who will cherish and build the brand (Porsche? Harley-Davidson? BMW?) and then hand over the keys to what remains to the UAW.

  • avatar
    Redbarchetta

    Don’t they use cheap mechanicals already? We are talking about Chrysler here and not Honda right.

    So what they are saying is “we spend too much on mechanical parts under the hood and not enough on making the interior appealing to customers. So instead of working hard to deliver both interiors and mechanicals people want we are just going to take even more reliability out of the mechanicals so the interior looks nice while you wait for a tow truck!”

    They can only cut so much until the car starts to look like its build from aluminum foil.

  • avatar

    The “only” thing they need is :
    Good looking cars people want to buy.

  • avatar
    Pch101

    I believe that the better question here is, “Can Chrysler outsource and offshore its way to profit?” Because that’s Cerberus’ plan, for better or for worse.

    It’s an interesting approach, but I think that Cerberus’ plan will probably fail. However, it won’t cost much for Cerberus to find out, so it may as well give it a shot.

    I continue to contend that the “strip and flip” accusations are inaccurate. Cerberus’ goal is to form partnerships and joint ventures in order to bring product to market without investing too much of its own cash, using Chrysler Group’s brands to bring these products to market both in the US and elsewhere.

    It will rely on the partners to provide the plant and equipment, and much of whatever else is needed to bring the products to market. Chrysler will provide the brand and, in North America, access to a large distribution network.

    I agree with the critics cited in the Business Week article. Forming effective partnerships would take a long time, and the JV’s may never bear fruit. And if the products are bad, the brands will be harmed further still, which would be an issue being that the brands are primarily what Cerberus bought from Daimler.

    However, although the risk of failure is high, the cost of failure is low enough to Cerberus that the risk is worth it for Cerberus to take. If the partners suffer most of the downside, the risk is cheap, which makes it an easy decision. At this point, it’s the investors’ money at risk, not Cerberus’ own capital, so this cheap partnership strategy would logically be the most appealing option to Cerberus’ senior management, by far.

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