Can Chrysler Cut Their Way To Profit?
Cerberus 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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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.
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.
The "only" thing they need is : Good looking cars people want to buy.
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.