By on May 5, 2009

Proponents of Chrysler’s current reinvention often refer to the exercise as a “surgical” bankruptcy. OK, who’s the surgeon? As far as I can tell, the people in charge of deciding how to cut-up Chrysler are Chrysler. “Physician heal thyself” is a nice sentiment, but it doesn’t normally involve a scalpel. Second, speed. When a patient is bleeding to death, time is of the essence. Chrysler is hemorrhaging red ink. It’s one thing to stop the bleeding (as Uncle Sam adds multi-billion dollar cash infusions). It’s another to attempt to cure the patient with a knife. And after the health care recipient leaves the theater, well, who expects an amputee to run a marathon? In other words, the operation may be a success, but the patient will still die.

The counterpoint: synergy. Or, to call it by its rightful name, “wishful thinking.” In the course of human history there must have been two huge companies working in a hideously complicated manufacturing enterprise who were able to integrate with each other and prove that the whole is greater than the sum of the parts. A partnership that delivered cost reductions though combined “back office” functions. More efficient and creative product development. Better sales and marketing. Streamlined management. A more productive workforce. It’s just that I can’t think of any.

[Renault – Nissan? The fact that this partnership works at all—and the jury’s still out—is down to the fact that the two companies tend to stay out of their each other’s way.]

It’s ironic that the American carmaker that forged a company-killing merger with a German automobile manufacturer almost eleven years ago to the day now wants US taxpayers, suppliers, creditors, workers, the media, etc. to accept the idea that Chrysler’s future is best served by merging with an Italian automobile manufacturer. To borrow an adjective from the non-TARPies court filing, that’s “incomprehensible.” Unless you try really hard to believe that someone isn’t stripping assets from someone else. To wit: The New York Times.

Fiat and Chrysler have much to offer each other. Chrysler desperately needs Fiat’s small cars and fuel-efficient engines to balance an aging lineup of S.U.V.’s.

For Fiat, Chrysler offers an instant dealership network for its return to the United States. They can also benefit from savings on the $46 billion worth of parts and materials they would buy as a combined entity.

The whole “ChryCo needs small cars” meme flies in the face of any realistic appraisal of commercial reality. Stateside, small cars a small part of a shrinking market; Chrysler needs small cars like a man dying of thirst desperately needs a shot glass of low-alcohol beer. Chrysler needs a mainstream model that generates enough profits to sustain their credibility the next time they call on the public purse. I mean, to repay their “loans.” Something like the Chrysler 300. Only a lot better.

The merger’s small car justification violates a pseudo-military maxim: go where they ain’t. Trying to sell small cars in a mature marketplace against highly-developed, well-entrenched competition is a Sisyphusian endeavor. GM’s failure to recapture its automotive mojo in its North American and European home markets—even while it succeeded outside of North America and Europe—proves the wisdom of the advice.

Besides, Chrysler already has small cars. Yes, they’re crap. But fixing ChryCo’s crap cars would be a lot less expensive and time consuming than hitting reset. Again. And that’s without adding Fiat’s cultural dissonance to the mix.

Clearly, there’s a political subtext to this supposed “desperation.” ChyrCo’s political overlords and their camp (not in the Batman TV series sense of the word) followers have a hard-on for American-built small cars/hybrids. To use an Obama-ism, they believe it’s “the right thing to do.” But even The Gray Lady understands that it’s probably not the most profitable thing to do; hence the SUV “balancing” remark.

As for the joint savings on parts, somebody somewhere’s smoking one. Three years after assuming control of Ford, CEO Alan Mulally still hasn’t fully realized his plan for parts worldwide parts commonality. Similarly, GM’s “world car” program has been a spectacular failure, delivering unto the world a seemingly endless stream of badge-engineered failures (e.g., Cadillac BLS), non-starters (e.g.,Pontiac G8) and nichemobiles (e.g., Chevrolet Camaro).

Just for S&G, figure Fiatsler will save ten percent on its $46 billion parts and materials tab. Split it two ways. That’s a $2.3 billion cost reduction. Which is not even half of Chrysler’s current cash burn. Or the United States government’s outstanding “loans” to the Auburn Hills zombie. This theoretical saving might pay for the bureaucracy needed to organize the two automakers’ parts integration. It might not. if history is any guide, any such attempt would end up costing money and delaying production.

So where’s the beef? Nowhere. The Chrysler – Fiat deal is one of those veggie burgers that only looks good—and then only to vegetarians. It sounds crazy, and it just won’t work.

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18 Comments on “Chrysler Zombie Watch 3: Zombie Strippers!...”

  • avatar

    Robert, great editorial, as always. I’d like to know what you see in your crystal ball regarding the future of Chrysler.

  • avatar

    The only thing Fiat brings to this table is to make Chrysler LOOK like a going concern to justify it’s being in C11 instead of C7.

    But Chrysler ISN’T a going concern. Note that Fiat doesn’t want CHRYSLER. In fact, Nobody want’s Chrysler, as shown by the news that it shopped itself to virtually every carmaker in the world with no takers. And by the fact that 2 different owners have walked away from their investments in the company in 3 years. Fiat only wants PART of Chrysler (properly identified as selected assets). But Fiat has not money to buy the parts of Chrysler that it wants. So, Problem 1, how do we get those parts of Chrysler to Fiat for no money? Can’t do it in Chapter 7, has to be an 11.

    Fiat has a powerful champion here in the US Government. Without Fiat, there is nothing to reorganize. This becomes a straight liquidation. We have no idea what these assets (particularly the intellectual property) might bring. But we know that the secured creditors get paid first, and that the feds with some sort of junior lien get paid second. This leaves the union’s unsecured claims with nada. This is a huge political problem for the current administration. It could waive its security so that the union gets something, but this would not play well with all those moderate voters who expect the government to be responsible with our money.

    So, we strip the company but do it in an 11.

  • avatar

    Chrysler needs cars that can compete with the Fit/Civic/Accord, Corolla/Camry, Jetta/Passat, Accent/Elantra/Sonata. I don’t see that happening anytime soon, unless Barry allows Fiat models to come to the US without being Federalized. Chrysler is dead, so move along. Nothing to see here except maybe some half price Sebrings/Avengers in the next couple of months.

  • avatar

    “fixing ChryCo’s crap cars would be a lot less expensive and time consuming than hitting reset. Again.”

    I keep throwing money at my Rabbit stripper because it is actually saving me money in the long run. That and, well, the stripper just gets so interesting when I throw (small amounts of) money at it.

    Sometimes it is better to “nice up” what you have rather than constantly starting over.

  • avatar

    I still absolutely believe in the “world car” theory. Though markets differ, if an automaker can focus on making an excellent small car, and then an excellent midsize, and then an excellent full-size, and then an excellent SUV, etc., etc., it should be doable. World cars aren’t the problem, failure of world models is a result of weak effort. For example, the Honda Fit is basically a world car that is sold with little variation from market to market and it is highly regarded no matter where it sells. It’s a car that works for the Japanese, the British, and the Americans equally well because of it’s ingenious packaging and engaging driving experience.

    Focusing on worldwide-selling models should allow for a concentration of engineering skill and incredible economy of scale in parts & manufacturing. If done competently, a world car business model should work quite well.

  • avatar

    just ordered zombie strippers.

  • avatar

    The thing is, the government, Chrysler, etc is telling the non-TARP bondholders that Chrysler is only worth about $2 billion. If that is the case, then why are the feds pouring $6 + billion into it? Unemployment benefits and medicaid/medicare wouldn’t be that high, considering that Chrysler doesn’t have that many employees?

    They just should have had Chrysler go straight to CH7. Then Fiat could actually pay for what they want, instead of my tax dollars paying for it.

  • avatar

    It’s a payoff to the UAW.

    Nothing about saving the company. The UAW provided millions to Obama’s campaign and now he pays it back with billions of other peoples money.

  • avatar

    The thing is, the government, Chrysler, etc is telling the non-TARP bondholders that Chrysler is only worth about $2 billion. If that is the case, then why are the feds pouring $6 + billion into it?

    That is the essence this BS. We shouldn’t feel upset about transferring ownership of the company to the UAW because the stock is ‘worthless’. Why bail Chrysler out if they’re ‘worthless’? Why, to save the ‘investment’ we made in the previous Bail Out!

    It’s a circular argument, essentially a con to get us in so deep that we become psychologically committed to the quarterly payouts.

  • avatar
    Rod Panhard

    Does this mean that George Romero will soon produce “Nightmare of the Living Chryslers,” and “Dodge of the Dead,” and “Noon of the PT Cruisers,” and “Afternoon of the Durangos?”

  • avatar

    I still maintain that the feds are trying to merge Chrysler with Fiat precisely because Fiat is a horrible, crappy, troubled car company.

    If Chrysler’s assets were simply auctioned off to the highest bidder, like a Chapter 7 should work, then the Chinese would get all the valuable assets.

    The Chinese firm(s) would get dealerships, US market approved vehicle designs, and, most importantly, well known entry level US brands.

    That would be horrible for Ford, GM and the Japanese transplants, and for the jobs that Ford, GM and the Japanese transplants create.

    The government would rather let Chrysler’s brands, dealerships and designs continue to rot at the hands of a crappy, corrupt Italian company than give the Chinese immediate access to 12% of the US market.

  • avatar

    Chrysler needs a mainstream model that generates enough profits to sustain their credibility the next time they call on the public purse. I mean, to repay their “loans.” Something like the Chrysler 300. Only a lot better.

    I think the 300 is a bit big for the mainstream. If mainstream is the target, that’s Camcordaltinatabu territory. The biggest hole in the Chrysler lineup is no competitive midsize sedan. I actually think that Chrysler has a potentially viable lineup in terms of a showroom of competitive product (Wrangler, Ram, 300, Minivans, Grand Cherokee), but it needs a midsize sedan to replace the Sebring/Avenger failures, and a compact to get the CAFE numbers up.

    The irony is that Toyota and Honda cleaned Detroit’s clock by making a better version of what had long been Detroit’s bread and butter, the family sedan.

    Other than gasoline mileage, does a Camry or Accord do its job better than a 1978 Caprice? The “downsized” fullsize GM sedans of the late 1970s were great cars, the last time GM built good sedans. Next were the X cars and W cars and other assorted, undistinguished or worse, family cars. Detroit lost its mojo with exactly the vehicles that made Detroit great in the 50s and 60s. Meanwhile, Toyota & Honda proved they could build a better Chevy and that a Lexus or Acura was a better Buick.

  • avatar

    The whole “Chrysler needs small cars and fuel efficient engines” thing is what pisses me off about this whole thing.

    First of all, who are all these people clamoring for a small car from Chrysler? Sure, part of it goes back to their total ineptitude at building a decent compact, but I fell that part of it is that frankly, a small car isn’t what people want in a Chrysler. For one thing, Chrysler’s small car brand is gone (Plymouth). Dodge is supposed to be reasonably sporty/performance oriented, and Chrysler is supposed to be a solid, somewhat luxurious car. Now granted they’ve screwed that pooch with their latest run of absolute crap, but righting those wrongs would certainly make Chrysler viable again.

    As for the fuel efficient engines, what happened to the Hyundai/Chrysler engine program? Why does Chrysler need to borrow Fiat’s engine technology when they’ve co-developed some with Hyundai, who seems to be doing just fine. Chrysler just needs better cars to put them in, and people will buy them.

    This whole thing seems to be orchestrated by people that have no idea what they’re talking about when it comes to cars, and aren’t looking at the big picture. Why does it escape the “geniuses” of the PTFOA that it’s going to take time and good products to get Chrysler over the hump. Bringing over a bunch of rebadged compact Fiats isn’t going to magiacally fix this piece of garbage car company. Chrysler’s best years were when they built cars that were innovative and well constructed. Follow that formula and any car company can survive.

  • avatar

    Chrysler’s equity is worth squat — Diamler and Cerberus just wrote it down to zero. Chrysler’s assets (factories, IP, dealer network, etc.) might or might not be worth all that much if sold part by part. Chrysler as a going concern may have some value in some hypothetical universe, but is not worth much at all under present circumstances, given its cash-burn rate and the present state of the market.

    But Chrysler is still a major economic force in this country. Even if it doesn’t turn a profit, it keeps tens of thousands of employees at work, and probably hundreds of thousands of people at work with suppliers, dealers and the like. It pays pensions and retireee benefits.

    All of which is not to say it should be kept on zombie life-support forever. The whole point of our system is that successful companies displace the bad ones. If / when Chrysler goes bust and closes up shop, there are still enough car companies out there to ramp up production, meet our motoring needs, and in so doing increase employment and compensate for the lost Chrysler jobs.

    The big problem, though, is that the transition is not seamless. In the interim, the unemployed suffer unemployment, for what could be extended periods of time. Supplier and dealer relationships, established with much investment of time and effort, will essentially be lost and will have to be re-built, with duplicated effort and cost — which is a waste. The chaos may see some classes of claimants wiped and turned into wards of the state — mainly retirees, who’d have to turn to the government pension guarantee system and medicare when the private benefits stop coming. Business confidence may suffer, which would depress the economy further.

    Advanced economies have been struggling with these transition issues since at least the time of Otto von Bismarck, especially transition issues related to workers.

    If the government throws away $5 billion on the Chrysler reorganization (i.e. loans that never get repaid), the real question is whether we, as a nation, bought ourselves at least $5bn worth of social benefits. Slowing down this train-wreck and giving people more time to organize a smooth transition to something else, and giving management time to maximize the potential value of the business assets to be sold, almost certainly has very substantial value. Putting a price-tag on it would require a lot of close study, but it is at least a plausible case.

    A broader concern, though, is the procedure under which the government gave support to the auto companies — and the banks too, for that matter. Many people have criticized the government’s efforts over the past year as “bailout by deal” (or “bailout by backroom-deal”), highlighting the fact that the efforts are ad-hoc and unsystematic. Who gets bailed out? Under what terms and conditions? For how much? The criteria are unclear and not set out in advance. (On the political side, let me point out that Bush started this practice, but Obama has done nothing to change the course so far.) I have to join in this criticism.

    What we needed, and what we still need in some form, is a transparent process with actual, pre-determined standards to manage the economic stabilization efforts. From what I’ve seen, the Federal Reserve has done the most to conform with this ideal — they announce a liquidity program of some sort or another, and then any bank or financial institution can participate under the uniform and set-out rules.

    Any sort of public transition assistance, for workers, suppliers, or anyone else, is (let’s admit it) a form of “socialism.” Basic government-run unemployment insurance is socialistic transition assitance, as is government-sponsored job re-training. In a purely capitalist economy, workers would save up on their own, or demand that employers set up a private trust to provide such benefits, contributions to this trust being part of the usual wages-and-benefits package. But for a number of reasons, we have socialized this function, and most Americans are okay with that. The question then becomes, what is the best way to help the intended beneficiaries? Is it to give them cash payments and tuition vouchers to retraining programs? Is it to pump that money directly into their employer to keep them at their posts for a while longer? These, like I’ve observed before, are fact questions — and we ought to have a better system and better criteria set up to decide them.

  • avatar

    Ronnie Schreiber: Other than gasoline mileage, does a Camry or Accord do its job better than a 1978 Caprice?

    The Accord and Camry are safer, offer better handling and braking, run cleaner and are faster, too. (Emissions controls had choked most of the performance out of Detroit’s engines at that time.)

    They are also far better built.

    Maybe the Caprice offers a better ride over smooth surfaces – but once the road turns bumpy, look out.

    My parents had a 1982 Oldsmobile Delta 88 Royale sedan in the early 1980s, and my 2003 Accord is a better car in virtually every way.

  • avatar

    “A partnership that delivered cost reductions though combined “back office” functions. More efficient and creative product development. Better sales and marketing. Streamlined management. A more productive workforce.”

    Robert, you just described Chrysler in the 90s, before Daimler raped and pillaged.

  • avatar

    … Chrysler’s future is best served by merging with an Italian automobile manufacturer. To borrow an adjective from the non-TARPies court filing, that’s “incomprehensible.”

    Better yet – cue Wallace Shawn from “The Princess Bride”:


    Strange daze indeed…

  • avatar

    NBK-Boston :
    The question then becomes, what is the best way to help the intended beneficiaries?”

    I’m glad you can see the forest for the trees…it has been obvious for a while that this is the administration’s intention and seen as a social transistion cost.

    To your question, I argue that the way this is being handled is EXACTLY the wrong way to go about it if for no other reason than the culture of the automotive industry workforce.

    While my own company and potentially job security would be affected by a liquidated Chrysler, creating a Chrysler-hand-puppet that looks like a company but makes no money only serves to reinforce the mentality for those workers to continue to believe that they will somehow continue to be ‘saved’ and do not have to find some other vocation, seek more education, or change their lifestyle.

    The Chrysler employees who did figure out that the transistion yo reference is inevitable took buyouts and are already headed down that path.

    The $6B-$8B of taxpayer money would be better spent helping to educate the unemployed on their situation and options and help them to figure out ‘what’s next?’.

    In addition, that money could be used to create a business environment that limits market barriers to entry and promotes entrprenuership. That’s how an economy grows. We have all forgotten that “Necessity is the mother of invention”. When in history has every country and company been all focused on the next big thing (green energy) and had that actually be it? Some guy in his garage will find the next big thing just like Henry Ford, Steve Jobs, and Bill Gates – green energy will struggle along for the next 10-20 years with little to no profit viability and intense competition.

    As a society we will still bear these costs at some point in the future because as close of a call as this is to total liquidation, many, many workers are still not using this as an opportunity to re-evaluate their life’s plan or follow a passion that creates a new industry.

    We are now paying at least double, if not triple for the social costs of transistion instead of paying once to promote innovation and entreprenuership.

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