Chrysler's Conundrum

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.