By on January 13, 2010

Chrysler’s sales fell 36 percent last year, as bankruptcy and some of the weakest products on the market conspired to keep sales and market share trending downwards. CEO Sergio Marchionne figures Chrysler’s slide has hit bottom, and indeed his turnaround hinges on considerable improvement over last year’s dismal numbers. How much improvement? Marchionne tells the Freep that ChryCo needs to sell 1.1m vehicles in the US next year, an 18 percent improvement on 2009’s number, in order to reach his break-even projections. Worldwide, Chrysler needs to sell 1.65m vehicles, or 27 percent more than last year. Given the downward sales and market share momentum, the overall uncertainty of the US market, and the lack of new products until the end of this year, reaching those volume numbers won’t be easy. Especially because Marchionne refuses to cut any corners.

Despite offering healthy incentives throughout 2009, Marchionne is hell-bent on curing Chrysler’s cash-on-the-hood addiction. Or, at least talking about curing the problem. In the past, Marchionne has stuck to platitudes when it comes to disclaiming against incentives. At the Detroit Auto Show however, he had a real-life anecdote. The WSJ explains:

Last July, for example, when the U.S. government offered as much as $4,500 in “cash for clunkers” rebates, Chrysler’s sales chief at the time, Peter Fong, drew up a plan to offer an additional discount of $4,500 from Chrysler, two people familiar with the matter said.

At the time, Chrysler’s bankruptcy had scared away customers, and its sales were in freefall. The plan was intended to pull shoppers back into Chrysler stores and spur sales.

But when Mr. Marchionne found out about it, he was furious, these people said. In an August meeting with Mr. Fong and his sales team, the CEO excoriated them, saying doubling discounts amounted to “giving away margin” at a time when Chrysler was scrambling for profits, one person familiar with the details of the meeting said. “Sergio was ballistic,” this person said.

Several weeks later, in September, Mr. Fong was summoned to the office of Nancy Rae, Chrysler’s head of human resources, and was told his services were no longer needed, these people said.

So that’s what they mean when they say “for personal reasons.”

Anyway, Chrysler’s incentives have been falling over the last several months, but so have sales. That Chrysler’s cars don’t sell themselves is well-established fact, so it’s hard to see how the firm plans on improving sales without some kind of draw for consumers. And the special editions planned for this year until new products hit aren’t going to do it on their own. Meanwhile, GM is showing no compunction about burning its government cash with a fat portfolio of incentives.

Ultimately, it seems that Chrysler has two sales strategy options for 2010 The first is to play business as usual, disrespecting outgoing models with heavy discounts to keep the metal moving, and only phasing them out when new (and heavily refreshed) products come out later this year. The other is to try to build a new incentive-light sales strategy around Chrysler’s current batch of dogs. This option, which is what Marchionne appears to have chosen, will show just how far an automaker’s sales can fall in a single year. By the time the new products arrive, Chrysler will be lucky if any consumers remember they still exist.

As badly addicted to incentives as Chrysler is, it may still be too soon to kick the habit.

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28 Comments on “Chrysler’s Conundrum...”


  • avatar
    CarPerson

    “Bumper-to-Bumper for 100k.”

    Enough said.

  • avatar
    tced2

    In the short term (for auto business less than 2 years) there are few tools.  Discounting.  Better warranties.  Blustering by the CEO won’t help.  New, good products take time to deliver.

  • avatar
    t8528sl

    Similar story I’m sure for Mike Accavetti.   He was always a decisive individual.   I could see him having a similar experience where he made a decision that was viewed poorly from above and then standing by his guns and being removed. 

    As far as Chrysler’s strategy for sales.  I think they’re current advertising is junk.  There is some sense in running one deal to get showroom traffic, but if you discount too highly across the board, you’re discounting units you would have sold anyway.   I support their current move.  What’s scary is that when they’re sales are not up 18% at the end of 2010, and they’re short roughly 100K units in the US, how long can they sustain that loss? 

    Looking at their Nov 5 deck (p316), they also have to double their international sales (100K to 200K) and increase their fleet sales by another 100K (from 200K to 300K).  Lots of if’s here.   They have the new Grand Cherokee coming out in Sept (was Feb, 2010 when I worked there in 08, then July, 2010, now Sept).   Coming along nicely I hear.   Otherwise it will be a long year.   They’ll avoid any negative news for fear of scaring off customers, so if anything happens, expect it to happen suddenly.

  • avatar
    jpcavanaugh

    CarPerson – – – +1.  Trouble is, with Chrysler’s current offerings, would such a warranty cost more than the incentives or the lost sales?  Although this plan would certainly require immediate quality improvements, Chrysler would sure be paying for a lot of transmissions in the mean time.

    • 0 avatar
      CarPerson

      Taking some of the money off the hood to pay for the additional warranty costs would seem to be a suitable trade given their situation and desire to slow price cutting. Longer term it would probably benefit Chrysler more than they realize or can admit.
       
      I am biased in favor of longer warranties. I believe it improves the product faster with greater certainty than anything else (product lawsuits next in line). Chrysler clearly needs a swift boot in the butt on this point.
       
      Instead of the automaker and dealer clinking glasses and getting bonuses for increased parts and labor sales, the automaker is forced to turn the engineers loose on problems to get the warranty costs down.  This has the twin effect of increasing reliability and lowering the vehicle ownership costs.

    • 0 avatar
      Wheeljack

      I’d be more afraid of a Honda automatic (especially if attached to an Odyssey) at this point than a Chrysler automatic.

  • avatar
    Gardiner Westbound

    Asian cars dominate Consumer Reports’ recommended list. Chrysler brands are dead last, more than a third of its models are much worse than average. I doubt a comprehensive 10-year warranty would improve purchaser comfort and sales, unless the government guarantees it. No cash on the hood means no Chrysler sales.

    Robert’s last Chrysler Death Watch was September 2006. Time to start it up again. Nothing elaborate, just a monthly Chrysler sales countdown to zero.

    • 0 avatar
      t8528sl

      100K warranty may make sense.  Since the value of the warranty is worthless if the company goes bankrupt, the costs may not borne anyway.  Most people assume that the lifetime warranty will be the car’s lifetime, not the company’s.  So they may see value in the warranty where there may be none.   Chrysler would then double down, hoping they’re profitable in the future so that this doesn’t come back to bite them.  

  • avatar
    lilpoindexter

    WAIT….Didn’t Chrysler just recently do Warranties for life? How about Gas at a predetermined price? I guess nothing helps with a crap brand like Chrysler.  I can’t wait to see this turd stop circling in the bowl and finally go down the hole.

    • 0 avatar
      jpcavanaugh

      The lifetime warranty was powertrain only (but with those transmissions . . . .) and was not transferrable beyond the original owner.  So, even the original owner has to pay for the a/c compressors, body electrical problems and everything else that will go wrong on the cars.  After the car is traded, second owner gets nada.  I think that the Cerberus boys put the actuaries to work and figured that the “lifetime” warranty would cost relatively little, even with no quality improvement.  Plus, I don’t believe they expected to be there for the long haul anyhow.

  • avatar
    mjz

    Chrysler is aggressively repackaging trims/content/pricing for a compelling value story. (See new Dodge trim levels, i.e. Avenger Express is under $20,000). I think a 10 year/100,000 mile warranty would really seal the deal for a lot of potential buyers, and would cost Chrysler more bucks down the road, but would be a relatively cheap shot in the arm in the short run, until serious new product is available

  • avatar
    Mark MacInnis

    Paraphrasing what Chris Farley’s character said in “Tommy Boy”….”I can take a dump in a box and put a guarantee label on it, and all you’ve got is a guaranteed piece of shyte.”

    A 10-year warranty on an existing  Chrysler product?  You might as well put an identical vehicle in storage for each one you sell, because no Chrysler’s current level of engineering and manufacturing quality will last 10 years….so maybe their plan should be “Buy 1. Drive it for 5 years.  Turn it in on the same car for 5 more years.  That’s our 10 year guarantee….” 

  • avatar
    Highway27

    Here’s a question about discounts and volume, I don’t really have the understanding to make the value judgment:
     
    Is there a difference in the auto sales industry as far as Chrysler is concerned between selling lower volume, but at break even per unit, or selling higher volume with incentives that take each unit below break even?  It would seem that discounting just to make volume would be a path to destruction (and truly, isn’t that partially what got them where they are now?), or are they trying to walk such a fine line on margin, or maybe they can’t even figure out what ‘break even is?
    It seems to me that even 1000 dollars of incentive per vehicle translates to a billion dollars at that volume.  Selling 1 million vehicles at break even gets you no net, but don’t give away even 1000 dollars on them, and sell 800-900k units and you’re looking at almost a billion dollars.  Will their sales tank that much with that kind of tinkering with the prices?
     

  • avatar
    Mr Carpenter

    This is much like Studebaker’s last days.  Or American Motors’ last days before Renault sold out part-interest and AMC sold out entirely to Crapster in 1987. 

    People are “not as dumb as they look” to paraphrase the old cynical jibe. 

    If it looks like a future ORPHAN it’s likely to become a self-fulfilling prophesy because people stay away in droves, in case the darned thing becomes an orphan. 

    Chrysler “might” be able to survive in some form if they were to rationalize production down two the number of plants that could turn out what (few) vehicles they can “naturally” sell (to apparent suckas / fools) without much incentive, and running said plants at 85 to 100% capacity on two shifts. 

    But this would have taken several things done in the past which Chrysler either lost or didn’t have; the intelligence to put factories up designed for flexible production of several platforms; fewer disparate engines (which is still in the pipeline with the Phoenix V6 or is it the Pentastar V6 now?  I’ve lost track) and modular engines (V8’s and V6’s using 80% of the same internal parts – such as seen in the soon to be discontinued 3.7 V6 and related 4.7 V8 Jeep/Truck engines).  

    The other intelligent thing to do would be to dump the bad and replace it with slightly better until the much better can be tooled up and built  (for example, simply dumping the Dodge Avenger and Chrysler Sebring sedan and temporarily contracting Mitsubishi to rebadge Galants built in Illinois as – perhaps – a Dodge Dart and Chrysler Valiant.   This would allow them to entirely shutter the Sterling Heights plant which is severely underutilized and which had been scheduled for closure anyway. 

    But the fact of the matter is, Chrysler’s line-up of vehicles is severely crippled with a case of typhoid fever, gout, hepatitis B and pneumonia. 

    Putting make-up and lipstick on the patient (i.e. decals to spruce stuff up) is only suitable for morticians.  Which is probably the case for Chrysler, within 6-8 months if not less. 

  • avatar
    dmrdano

    Carperson is correct.  Extending warranties gets attention.  Increasing the use of remanufactured parts in warranty fulfillment (if they are done right) helps offset some of that added cost.

    By the way, changing trim level titles and adding stickers is the definition of “cutting corners.”

  • avatar
    NulloModo

    Just extending the warranty might not be enough.  Hyundai is already known for the 10 year/100K warranty (although powertrain only there too) and (sadly for Chrysler) already has a better quality reputation.
     
    Making it 100K bumper to bumper would help, but I think the real kicker, and what would get me to actually consider buying a Chrysler product, would be throwing in all scheduled maintenance for 5 years/60K miles as well.  BMWs 4 years included maintenance draws a lot of people there vs Mercedes or Audi, and Chrysler could pass on some of the cost to the dealer network through controlling the amount they could charge for the scheduled service visits.

    Ensuring that Chrysler owners can get all of their maintenance free of charge will also probably greatly increase the number of people who follow the service schedule, which will cut down on warranty repair work as little problems won’t get big enough to cause things to break. It will also help increase the resale value of Chrysler products, as people will assume that the owners have taken advantage of the free maintenance service and kept their cars maintained, which will increase residuals and allow Chrysler to get back into leasing to bring in more customers. Then, with a lease customer you only have to worry about covering the maintenance for the two or three years of the lease, so greater profits will start to add up.

    • 0 avatar
      toxicroach

      See bumper to bumper means that every time the car develops a rattle, Chrysler is up the creek.  I have to believe that everyone of the domestics has looked at 10 year warranties, and decided it just wouldn’t be worth it.  I mean, it would so obviously be a good move for so many reasons that the cost of doing it has to be prohibitive, or at least one of them would have made the leap.

    • 0 avatar
      CarPerson

      Hummmmmm.

      I can see where adding free maintenance at an authorized dealership for 100k miles to a B2B warranty would be  quite appealing to the pool of car shoppers. Modern cars require little more than oil, filters, plugs, and anti-freeze, so the actual cost would be minimal.  And yes, it would increase the odds the car was properly maintained, which lowers warranty costs and increases resale value.

      Ten years is a bit strong for a company trying to walk with two broken legs; Better make that seven years/100k miles.

  • avatar
    MikeAR

    Take about $10k off the MSRP and then their vehicles will be priced more in line with what they are worth. No incentives just drop prices.

    • 0 avatar
      t8528sl

      Value pricing doesn’t work really.  When I was a Product Planner for DCX it was tried on the Durango when it was renewed in 2003.  Pulled incentives off and pricing off.  We even booked savings internally (i.e. it costs us less to drop 1000 of MSRP vs incentive) because financially incentive is paid at full value while the drop in MSRP was discounted by the % of the MSRP over wholesale (a $1000 drop in MSRP costs us $850, while a $1000 incentive costs us $1000).   The customers were looking for the deals and were more aware of the money on the hood as the “deal” than the value price.   Upcontenting is a better way of lowering the price while not devaluing your brand.  The other way, as mentioned by another user, is all inclusive service or a long warranty.  Chrysler needs a way to drive showroom traffic, that is the real issue.  

    • 0 avatar
      MikeAR

      I’m not talking about value pricing or anything like that, Chrysler’s cars are just not worth their sticker prices. Take the Challenger, the SRT is listed about $8-10k over the Mustang GT. It’s not the car a GT is and customers should reasonably expect it to be priced less. It’s the same throughout their lineup, compare with others companies offering and Chrysler always comes up short.

  • avatar
    guyincognito

    Chrysler’s deep discounting of its current crop of vehicles is pretty much the only option.  Of course, not producing cars and trucks that people don’t want would be a better solution, but I’m sure Sergio would hear it from Congress if he started to shut down too many factories.  Otherwise, in theory the whole lineup needs to be refreshed and there isn’t a reputation to damage anyway, so there’s nothing worse incentives can do.  Also, at least with incentives the costs are known and budgetable. I doubt they have a great handle on how huge a bag of worms they would open with a 10 year 100K bumper to bumper warranty.

  • avatar
    Runfromcheney

    That is just Sergio being Sergio. He has no patience for incompetence; he fired at least one employee a day when he first started running Fiat.

  • avatar
    Geo. Levecque

    I have to quote from the newest Lemon-Aid book on Cars by Phil Edmonston “Chrysler and Fiat? Two drunks staggering down the street”  Phil says for 2010 stay away from Chrysler, Jaguar, Land Rover, Saab,Saturn, and Volvo his books are aimed at Canadians but they apply to all living in NA imho!

  • avatar
    seanx37

    So what happens when none of this works? When sales are down 20 or 30 percent in 2010? I am sure that unless they basically give them away, that sales will be at least that bad. Remember, they have nothing. NOTHING. Not a single vehicle that someone else doesn’t do better. The only hope of moving the cars is to sell them at massive discounts. That is assuming that the economy gets somewhat better. And oil prices don’t soar. I assume that sometime after the mid-term elections…Chrysler will just go away.

  • avatar
    Robert Schwartz

    Hertz put me in a KIA Forte this morning at Tampa. It didn’t suck more than most rental cars. When I got to West Palm this evening, Alamo offered me the choice between a Dodge Caliber and a KIA Rondo. I didn’t hesitate. Chrysler is done. Stick a fork in it.

  • avatar
    jimboy

    As a the owner of a Dodge Magnum, I have to disagree about the desirability of Chrysler products. Here in Canada, Chrysler is either first or second in sales yearly. (This includes EVERY make, not just domestics), So obviously we think their product has value. Maybe Americans just love to hate their own products, I don’t know. I have yet to see any car that can match the Magnum/300 for style, quality and price point.  The Caravan is still the sales leader in minivans, the Journey is another success, and the Ram is truck of the year! Certainly the Caliber/Compass and Avenger/Sebring need work, but these issues are being addressed already. My real issue with Chrysler is Dealer Service; absolutely awful!!!! I believe this is what keeps people away from Chrysler products. After my experience with several Chrysler/Dodge/Jeep dealers in my area, and from talking with others; it appears very few of them are worth a damn. Until Chrysler kicks some dealer ass, seriously, they will continue to lose market share. I may buy another Chrysler product, but I will never allow another dealer near it. Members of my own family who grew up on Chryco won’t go near them, not even to look, and that’s based totally on negative dealership experience. So Sergio, if you’re listening, fix the dealer body, and you may just have a chance of survival, otherwise, Ciao Baby.

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