By on March 25, 2008

just-wait.jpgIt’s getting close to the first anniversary of Chrysler going to the dog. While there’ve been job cuts and “market adjustments,” the shoes are still hanging. Chrysler is still a long way from being profitable. But it appears to be an equally long way from breakup. What exactly is planned? The truth may be that Cerberus isn't “planning” so much as “waiting.”

For Cerberus, buying Chrysler was a gamble. As you’d expect from New York money men, they did several things to “stack the deck.” First, they got the company for a song (under seven and a half billion) with some working capital included. More importantly, they took the automaker private. With no shareholders to whine about dividends, no “captain Kirks” to try to swing a takeover, Cerberus can afford to take the long view. And the long view says… go public. Or strip and flip. Either way, now’s not the time.

Cerberus’ holding pattern has less to do with ChryCo’s declining fortunes than OTHER carmakers’ declining fortunes. In other words, you can’t flip a company without a flipee. The current U.S. automotive market leaves very few players flush with cash, looking for an American dance partner. And those that are, aren’t. Splitting-up Chrysler’s assets is the only realistic alternative, and that idea poses involves many of the same issues.

At the moment, Jeep is only spinnable hunk of Chrysler. (No surprise there; Jeep’s had more “partners” than the widow next door.) Jeep is the only part of Cerberus’ entire car making operations with a positive cash-flow. While the profits aren’t enormous, the brand’s “trail-ratings” carry enough cachet to allow big mark-ups on simple vehicles. 

There are several problems with Cerberus selling Jeep sooner rather than later. First, while Jeep’s hard-core fan base is less (more?) affected by fashion than most, SUVs are not the flavor of the month. The new U.S. federal corporate average fuel economy (CAFE) regulations are in flux, awaiting clarification and California-compliance (or not). In any case, whatever Cerberus could get for Jeep now pales is comparison to what Jeep would be worth in a hot, relatively settled market. 

Next and again, who’d buy Jeep? With credit in short supply, a US-market outsider would have trouble stumping-up the dough to snag it. And those foreign firms that could afford Jeep (BMW, Toyota, Honda, etc.) either already have off-road products or don’t want them. VW is busy. Daimler is sitting in the corner, grinning.

Renault/Nissan is the only like foreign suitor— only they aren’t. Carlos Ghosn may make noises about mergers, but there ARE limits. And lest we forget, NONE of the imports are brave/stupid enough to buy a unionized company, bringing the (free!) Trojan horse through the gates. Domestically, Ford just sold Land Rover. And although GM has decades of experience cannibalizing itself, even RenCen knows it doesn’t need Hummer AND Jeep.

Besides, what would Cerberus do with the rest of the company after they stripped-out the only part anyone wants? China is often named as a potential buyer, but even for pennies on the dollar for U.S. production capacity and access to thousands of dealers, they’d see Chrysler as the financial sinkhole that it is.

No matter how much— or more likely little— Cerberus made from a larger Chrysler breakup, it could be the volte face that launches a thousand lawsuits. Shuttering Oldsmobile cost GM billions; the General’s terminal brand wasn’t a fraction the size of Chrysler, Dodge or Jeep (never mind the three brands combined). Filing for bankruptcy and THEN selling off the bits would mitigate Cerberus’ legal risk, but it’s hardly a profitable exit strategy. If nothing else, Chapter 11 would decimate the brands’ street value.

As I stated at the beginning, any fool knows that Chrysler is a long, long way from profitability. But who said anything about profitability (other than me)? Cerberus doesn’t have to “build equity;” they don’t have to justify their decisions to institutional shareholders. Think of Chrysler as a slum landlord who bought a building on the cheap awaiting a buyout offer and you begin to get the picture.

Watch as Chrysler reins-in R&D while “consolidating” dealers (i.e. watching them die). This viewpoint explains “quicker than quick” Chrysler’s strange reluctance to cut vehicle lines that everybody (but their few remaining buyers) know are dead in the water. The superabundance of product forces dealers to go tits up, and leave their proverbial apartments.

Remember: Cerberus is in this to make money, not to “save Chrysler.” They need to get their $8b back, plus a little extra (Daimler holds 19.9 percent). To do that, all they have to do is run the business into the ground. When the time comes to “sell Jeep, liquidate the rest,” Chrysler’s corporate coffers will be conveniently bare (or pretty close). The lawyers can fight over the bones. And the “dog” will have had its day.

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28 Comments on “Chrysler Suicide Watch 32: Slumlords...”


  • avatar

    Interesting development, just minutes after this went up, from Automotive News [sub]:

    DETROIT — Barely two months after being named to a key Chrysler product development post, one of Chrysler’s top vehicle engineers has left the company.

    On Tuesday, Mike Donoughe resigned his position heading Chrysler’s top secret Project D, which was developing a new global mid-size car platform to replace the Chrysler Sebring and Dodge Avenger. He had just been named to the post in January. Citing unnamed sources, The Wall Street Journal reported Donoughe left the company after clashing with senior management.

  • avatar

    Sometimes its is better to sell at a loss than to wait and take a bigger loss. In my opinion, I don’t think Cerberus will wait too long.

  • avatar

    Sherman Lin : Sometimes its is better to sell at a loss than to wait and take a bigger loss. In my opinion, I don’t think Cerberus will wait too long. Sell at a loss to whom? I agree with Andrew: it's either C11 and walk, or spend bupkis and… wait.

  • avatar
    Pch101

    A solid analysis. I have also not been in the strip-and-flip camp, as there is nothing much to strip.

    I suspect that the goal is to outsource as much design and production as possible, so that Chrysler Group is effectively converted into a branded sales channel with minimal overhead, with the goal of defending its US market share and expanding the business into high-growth markets such as Eastern Europe.

    Still, I don’t think that their plan is going to work. This kind of operation works with cheap manufactured goods, but it hasn’t been tried with cars. There are good reasons why it hasn’t been done before — it effectively requires the company to hand most of its brand equity to someone else who doesn’t care as much about it.

    This is one of those sorts of business plans that sounds great in a business school case competition, because it hits all the sweet spots and sounds really clever, but that will fail when put to the test in the real world. Ultimately, the whole deal will be a strip-and-flip, but only because the plan will have failed and selling the parts will be the only way to cut their losses.

  • avatar

    Since the “anniversary” is approaching as stated in the opener I guess we can forgive the reiteration of the obvious and plucking of the low hanging fruit. I cannot over look the comment about the three-headed dog’s reluctance to cut vehicle lines….did you forget about PT cruiser ragtop, magnum, etc?

    If you think the cuts weren’t deep enough I would be inclined to agree…

    Other alarming developments include the “mandatory” vacation planned for this summer, the closing of the Pacifica Design Studio, lay-off of the second shift at Sterling Heights Assmebly Plant (SHAP) and as Mr Farago pointed out, Mike Donoughue resignation. Automotive News is reporting that his departure was not due to clashes of will…or so the prepared statement read.

    Heaven help Detroit!

  • avatar
    rtz

    I was surprised as hell Cerberus didn’t sell everything off and get the hell out of Dodge.

    Since they are going to keep it for a bit, they should have a lot of fun with it. Treat it like a rich mans toy. Take all sorts of risks and do wild and crazy things. Any old whim.

    Go for broke. You’ll still be able to sell off all the assets for the same you can now.

    Yeah, go public and sell penny stocks. Shit can everything and just be Jeep?

    Cerberus should do something devilish and insane. Ramp up production to 100%. Bring back those insane overflow lots of the past. Square miles of unsold inventory. That will bankrupt their asses quick. Build themselves out of business.

    Their going to let that jack pipe home depot jerk take all the blame for whatever happens. Hell Depot and Blowes are two terrible places to work or shop. I loath going to either of those places. Places people don’t enjoy going. Big box stores and car dealerships. I don’t shop at walmart/target anymore. I don’t know what they sell, but I sure get by without it. Ever read those articles about televisions lost generation(males)? “Young men, moreover, are the least likely to watch network television.” TV’s not the only thing on the list of things a certain age range of males don’t participate in anymore. I don’t know why, but it just is.

  • avatar
    guyincognito

    I imagine these guys at Cerberus must be pretty smart, but I can’t begin to figure out why they bought Chrysler. I’m sure they will let the company crumble and then sell off whats left, afterall what choice do they have, but how much is that gonna cost? And who would want the scraps of Chrysler? What would that even be? Dilapidated and outdated assembly plants? Brand names rendered unspeakable? Offices in Auburn Hills?

  • avatar
    wjo

    So, the short version of this article is that Cerebus believes it bought Jeep on the cheap in a bad market, and is waiting to flip it (while purifying the product by letting the rest of Chrysler die)? The problem with this is that it is unclear to me that the Jeep line will go up in value — they are a niche product that will likely become less valuable over time given gas prices. To increase the value, Cerebus would have to invest in Jeep to make the products better and more appealing worldwide — and I haven’t seen any evidence of that.

  • avatar
    becurb

    Pch101 :

    I suspect that the goal is to outsource as much design and production as possible, so that Chrysler Group is effectively converted into a branded sales channel with minimal overhead, with the goal of defending its US market share and expanding the business into high-growth markets such as Eastern Europe.

    Still, I don’t think that their plan is going to work. This kind of operation works with cheap manufactured goods, but it hasn’t been tried with cars. There are good reasons why it hasn’t been done before — it effectively requires the company to hand most of its brand equity to someone else who doesn’t care as much about it.

    Can you name a better “car” company to try this with than Cry-sler? CCC has been turning out so-so designs for so long that, what have they got to lose by outsourcing their development and production?

    Sure, I would prefer that they find a way to heal thyselves, but I don’t see it happening. Chrysler was one mis-step away from C-11 when Daimler showed up with that disasterous [cough] “merger of equals” [cough], and now having gone to the dog, with aging designs, what have they to lose, really?

    Bruce

  • avatar
    RayH

    Robert or Andrew (or anyone),

    What do you think the current value of the Jeep division is, with a factory or two thrown in? High profit trucks (ignoring Compass, at the very least) with a Wrangler cash cow. I’m just curious because Jeep now is almost always part of a Chry/Dodge Dealership, and of those normally in the same showroom, so if it was sold separately, wouldn’t the (very vast) dealer network be lost? It seems to me you’d have to sell Chyr/Dodge with Jeep, otherwise Jeep loses a lot of value when losing the dealer network.

  • avatar
    Orian

    It almost sounds like they are doing an “Isuzu” to their dealers to get them to either sell out of the brands or just close completely. I’m sure Isuzu would have pulled out of the US far earlier if it were not for the dealer/franchise laws. Get the dealers to voluntarily drop the brands and they save a ton of money by virtue of no lawsuits from that angle.

  • avatar
    Pch101

    Can you name a better “car” company to try this with than Cry-sler? CCC has been turning out so-so designs for so long that, what have they got to lose by outsourcing their development and production?

    Sure, I would prefer that they find a way to heal thyselves, but I don’t see it happening. Chrysler was one mis-step away from C-11 when Daimler showed up with that disasterous [cough] “merger of equals” [cough], and now having gone to the dog, with aging designs, what have they to lose, really?

    Your points are well taken, and I don’t disagree that if anyone deserves a bit of experimentation, it’s Chrysler

    But doesn’t mean that it’s going to succeed. To make this work, the participants have to cooperate. That means that whoever builds the cars has to build them well, and on time.

    We’ve seen from the growth of successful companies such as Toyota that engineering, quality control, inventory management and supplier coordination are critical. If Cerberus does what I think that they’re trying to do, then they are going to put most of this responsibility into the hands of other companies, which means that they are totally exposing themselves to the mistakes of their partners.

    That’s a recipe for failure, because the party whose brand gets killed and who gets stuck with the service and warranty costs in this scenario is Chrysler. They think that they are offloading the risk to someone else…which is just what the banks were thinking when they were making those subprime loans that they sold off to Wall Street.

  • avatar
    ffdr4

    Lets not forget Magna. They where interested before to make an offer and they still seem interested in parts of Chrysler. Frank Stronach, CEO/Owner of Magna has said many times before he wants to get into the engineering and design side of the auto business and not exclusively stick too parts and assembly. They could be a suitor down the road.

  • avatar
    ScottGSO

    As far as I can tell, Chrysler is D. E. A. D. dead. According to Auto Observer, YTY March sales for the first 2 weeks:

    • GM’s retail sales were down 14.5 percent and total sales, including fleet sales, were off 8.5 percent
    • Ford’s retail sales were 14.5 percent lower with total sales down 5.5 percent
    • Chrysler’s retail sales fell 21.2 percent; with total sales down 11.9 percent
    • Toyota’s retail sales dipped 5.3 percent with total sales down 4.6 percent
    • Honda’s retail sales were off 1.2 percent, yet the firm predicts Honda sales will end March 2.4 percent higher
    • BMW sales were higher in early March by 1.3 percent.

    21.2% decline in retail sales is pretty impressive stuff . . . at some point the cash will run out.

  • avatar
    bluecon

    I can’t see it is possible for them to survive a downturn in the economy. The Sebring, Compas, and other poor efforts combined with a new 4 cylinder of dubiuos performance has probably sunk them. Even the new minivan is selling poorly which means another plant needs to close. The downward spiral appears almost impossible to recover from.

  • avatar
    mykeliam

    How much money will be there if a new health care plan is rolled out?? Won’t the big car makers save a bundle because the taxpayers will now shoulder the burden of that?? Then the brand will be worth more money because the economy is starting to recover. I’m basing that on the past, usually the Democrat who follows a Republican actually reaps the benefits of that last ditch, desperation, Hail Mary economic stimulus passed by the sitting President. Look at what happened with Bill Clinton.

  • avatar
    Bancho

    I like the “go for broke” idea.

    In that vein, why don’t they take the Dodge Hornet concept and make it a reality. With fuel costs as they currently are and no end in sight there is a market for small cars and the Hornet was actually a cool looking (and semi-practcal) little vehicle.

  • avatar
    jolo

    Health care plans have been bantied about for decades. Don’t expect that to save any of Dom2.8. It’ll take them years to come up with a potentially viable execution of some kind of health care plan and it will come too late for one, if not all three, of the domestic car makers. If and when it does come, it will greatly help those car manufacturers in this country who are making money at the time. If history is any indication, the transplants will benefit the most.

  • avatar
    GS650G

    NONE of the imports are brave/stupid enough to buy a unionized company, bringing the (free!) Trojan horse through the gates.

    Truer words could not have been said. Daimler found out the hard way and was able to extricate themselves from it. When you sell high priced cars you can pass ridiculous labor costs on but you can’t sell cheap cars and provide cradle to grave benefits to the troops.

  • avatar
    menno

    Mercedes (and in fact, all of Europe) is finding it impossible to provide cradle to grave benefits to the workforce.

    I just read something this morning stating that Medicare will be broke in a few years and that Social Security will go bust in 2041. That’s not great, since I may still be alive and retired then. Not to mention millions of other Americans.

    And unlike a lot of other folks, I AM saving up money as fast as I can for that very eventuality. I’m also aware of being lucky enough to be able to do so.

    My bosses brother, living in Detroit, just got laid off of another job (two in two years) and he doesn’t even work in automotive.

  • avatar
    menno

    But yes, ScottGSO, I would have to concur that Chrysler is a stumbling zombie. One “stiff” breeze and it’ll fall over dead and gone (sorry, I couldn’t resist).

    A colleague tried talking his parents out of a new Chrysler minivan, but they insisted on leasing one.

    The Studebaker syndrome is going to start kicking in with not only Chrysler but GM and Ford. But, Chrysler first.

    (When Studebaker was in trouble in the mid to late 1950’s, a lot of competitive dealers took advantage of the situation and talked Studebaker down – “you won’t be able to get parts” “they’re going to go bust” “your resale value will evaporate” “they’re going to be an orphan”). The Studebaker Lark, introduced in the fall of 1958, rescued the company and South Bend workforce – for awhile. But, by 1963, the rumors and competitor bad-mouthing were swirling around again, and like self-fulfilling prophesy, Studebaker was doomed.

    Nor should GM or Ford stockholders or executives gloat when Chrysler buys the farm.

    Because the 2nd part of the Studebaker syndrome was that as soon as Studebaker quit the automotive business in early 1966, the viability of American Motors (which had out-sold 3rd place Plymouth in 1961) was in question and sales literally evaporated away, placing them in dire risk of going out of biz, too.

    It’s easy to see people’s confidence in Detroit Inc evaporating once Chrysler goes tits up, isn’t it?

  • avatar
    Geotpf

    The three headed dog didn’t “buy” Chrysler any more than JP Morgan “bought” Bear Stearns. That is, these weren’t really sales-they were like leaving an old appliance out on the curb with a piece of paper taped to it that said “Free!”. Cerberus put up almost no money for the transaction, especially considering the theoretical size of Chrysler. Hard to fuck up free. Provided they don’t have to add additional funds to keep the hulk alive (and they won’t), they can’t lose, really. The value of the machinery and tooling, land the plants sit on, intellectual property such as patents and car designs, and the brand names themselves is easily more than what Cerberus paid for it. Might as well attempt to try to keep it alive for as long as possible, though-the company might turn around enough for a successful IPO and big profits. In the more likely scenerio that this fails, they can just shut down the company and sell everything. Win-win. I’m sure they can structure the deal in such a way that any lawsuits or debts will fall to a empty, bankrupt corporate shell and any profits will end up in their bank accounts.

    menno :

    Social Security and Medicare are always going to go bankrupt in a few decades, according to the projections-but the year they are supposed to go bankrupt keeps getting pushed back. The deal is, said projections are based on extremely cautious accounting that consistantly understates the long term growth of the economy, and therefore consistantly understates the amount of money the system will take in. These projections are bullshit, designed to scare people into thinking there is a problem when there really isn’t. Also, even if social security started paying out more money than it took in, so fucking what? The government would just make up the difference from the general fund. It’s not like grandma would ever stop getting her check.

  • avatar
    bfg9k

    menno :
    I just read something this morning stating that Medicare will be broke in a few years and that Social Security will go bust in 2041. That’s not great, since I may still be alive and retired then. Not to mention millions of other Americans.

    33 years is a long way out. Show me one prediction of the state of the 2008 economy made in 1975 (33 years ago) that was accurate.

  • avatar
    Detroit-Iron

    How about a spin-off of Viper ala the Euro ‘Vette. Have Jeep make Jeeps, aka primitive but effective off-roaders, and Viper (brought to you by the guardian of hell) make primitive but effective (if dangerous) sports cars. Imagine a mini-Viper powered by a decent 6 that would stomp a turbo Solstice, a medium-Viper with an 8 that could keep up with a C6 ‘Vette, Viper with a 10, and mega-Viper with a turbo 10. For that matter at each level they could do it AMG style with a base and kompressor. Weld up some tube frames with fiberglass bodies and no sound deadening, crash enough of them to get approved, and viola. Between a Viper spin-off and Jeep I bet they could make their money.

  • avatar
    Axel

    Pch101: I suspect that the goal is to outsource as much design and production as possible, so that Chrysler Group is effectively converted into a branded sales channel with minimal overhead, with the goal of defending its US market share and expanding the business into high-growth markets such as Eastern Europe.

    Still, I don’t think that their plan is going to work. This kind of operation works with cheap manufactured goods, but it hasn’t been tried with cars.

    I dunno… would people buy LG or Samsung cars (with a Chrysler/Dodge badge)? What if they were sold at 60% the price of their competitors, and were sold through Wal-Mart with no dealer overhead? Just walk onto the car lot in back, pick the one you want, swipe your credit card, and off you drive!

    I may be on to something here…

  • avatar
    Geotpf

    Samsung actually sells cars in South Korea. Well, they tried, but their timing sucked, and they got into the business at just the wrong time (right when everything collapsed in South Korea), and Renault swooped in and bought a large chunk of the venture.

  • avatar
    Steven Lang

    At the risk of making this a geo-political discussion, I’ll hold back on the last few interesting comments although there’s a part of me that would love to have talk about em’ over lunch.

    I’ll say this about Chrysler. It WILL go bankrupt and it WILL happen within the next two years. After that it’s pretty much anyone’s guess. As an aside, anyone who spends serious time at the dealer auctions has seen the fantastic degradation of their product. From 2004 onward they have been on such a terrible decline that nothing within the realm of reality could have saved them.

    I still blame Daimler… chances are they would have been the healthiest one of the 2.8 if the morons at Mercedes didn’t drastically cut their R&D budget and neglect to share any of the platforms or parts bin materials that were sorely needed.

  • avatar
    law stud

    Basically Cerebus was paid by MB to take Chrysler off their hands so they would take it through Bankruptcy and kill the Unions. Remember they hired Neutron Bomb (kills people and leave buildings) Nardelli to come in to do what present management could not.

    Jim Press is to make it appear like they are trying.

    Nardelli already stated they are going to sell off Real Estate that Chrysler owns. Approximately $1.4 billion worth. Goodbye proving grounds!

    Remember the Carlsbad design facility was shut down.

    If Cerebus can’t wrestle this beast as its mythical name suggests they will sell it to an Indian company. Tata and Mahindra are very capable of buying it. Tons of companies in India are awash in prive equity.

    Tata is shopping; they bought a Dutch steel company for 12.2 billion and now land rover and Jaguar for a a mere 2.3 billion, while saying they will invest $1.5-3 billion in capital investments (expanding production for one).

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