Chrysler - did Cerberus blow it?

Wall Street Journal - May 26, 2007

...From the standpoint of financial outcomes, there are two kinds of
auto makers: momentum companies and hit-driven companies. A momentum
auto maker enjoys strong consumer confidence, produces sound but
usually unflashy vehicles, and is very good at the blocking-and-
tackling aspects of the business, both technical and managerial. Toyota
and Honda are momentum auto makers; so are BMW and PSA, Volvo and
Subaru too, on a smaller scale. GM used to be one and so was Nissan,
but both committed a cascade of managerial and product gaffes that
erased their momentum and dropped them into auto-maker purgatory...

Chrysler has been the epitome of a hit-driven company for more than 50
years. At its ultimate perigee in the late 1970s, buffeted by an
extensive new-product losing streak and the unusual expenses of meeting
new fuel economy and safety standards, it was headed for bankruptcy. A
modest federal loan guarantee and some artificial respiration from the
UAW gave newly arrived CEO Lee Iacocca time for some inspired
improvisational first aid -- and ultimately the introduction of a real
home run product, the first front-wheel-drive, garageable, car-based
minivan.

Then the new product pipeline dried up, the numbers headed south and
Chrysler seemed perigee-bound again. Somehow Mr. Iacocca's team not
only managed a reprise of its earlier rabbit-from-the-hat trick but did
it with a trifecta of hit products: the muscular Ram pick-up, the
civilized Jeep Grand Cherokee SUV and the so-called "cab-forward" sleek
Dodge Intrepid midsize sedan. Chrysler became suddenly the most
profitable auto maker on the planet. Unfortunately the gush of profits
began to flow only after the Chrysler board, mistakenly convinced that
Mr. Iacocca had lost his fastball, handed him the proverbial gold watch
and replaced him with Robert Eaton, freshly imported from General
Motors.

Mr. Eaton encountered a paradox: Buyers were flooding the dealerships
for the spiffy new vehicles developed under Mr. Iacocca's leadership,
yet by any objective evaluation -- fit and finish, product durability
and reliability, or plant productivity -- Chrysler was a basket case.
He assumed that fixing these problems was of higher priority than new
hits. This was a big mistake but Mr. Eaton turned out to be the
luckiest man in Motown. At the 1998 Detroit Motor Show, Daimler-Benz
chairman Jurgen Schrempp button-holed him, apparently out of the blue,
to propose the great transnational auto maker that would be created by
exchanging Daimler shares for Chrysler shares.

Herr Schrempp's penance for undertaking the least diligent due
diligence in recent corporate history was spending $36 billion on an
acquisition which almost instantly plummeted deeply into the red. It
was making better quality vehicles more efficiently, thanks to Bob
Eaton's efforts, but hardly anyone wanted them. The magic had vanished
and despite heroic efforts by Dieter Zetsche, parachuted in from
Stuttgart in 2000 to turn things around, it has not returned.

Even mini-hits like the Chrysler 300 http://snipurl.com/Chrysler_300 -
the big gangsta-car with the narrow windows and powerful hemi engine,
is proving to have no legs in the market. Worst of all, Chrysler's most
recent new offerings have been panned by Consumer Reports, the great
auto market influencer, as both mechanically and cosmetically deficient.

Mr. Zetsche, rewarded in January 2006 with the top job at then
DaimlerChrysler, had already cleaned things up at Chrysler the way a
financially oriented new owner like Cerberus might do it. Perhaps Mr.
Feinberg and his colleagues can push even further, persuading the union
to accept give-ups, but it will have to overcome a natural suspicion at
Solidarity House, UAW headquarters, of financial hotshots with a Park
Avenue business address. To the UAW, Cerberus has deep pockets, a
situation much different from 1979-80, when Chrysler was a stand-alone
entity and could not survive without union help.

Cerberus may find some imaginative way of slashing Chrysler's inflated
dealer body, along with the market ineffectiveness and internal cost
burden it imposes on the company. But this is likely to be both
expensive and time-consuming. GM says it paid out $2 billion to close
down its Oldsmobile network. That may have been its out-of- pocket
cost, but if staff time for negotiating dealer payoffs were factored in
the real cost was undoubtedly much higher. And Chrysler dealers are
legitimately wary, no matter who owns the company. Late last year they
had considerable numbers of unordered and unwanted vehicles thrust down
their throats to get them off Chrysler's own books.

Yet cutting costs doesn't make an auto maker successful or profitable.
Chrysler demonstrated in its two recoveries under Mr. Iacocca that
costs can be high and quality modest, but attractive products can make
these into virtual non-issues.

There's the rub: What even Dieter Zetsche could not accomplish was the
mysterious feat of generating hit products. And hitmakers are hard to
find. Cerberus has brought aboard a well-known auto industry ronin,
Wolfgang Bernhard, as an advisor, but Mr. Bernhard, Chrysler COO from
2000 to 2004, was on the bridge with Mr. Zetsche not when the company
was generating hits, but rather when it wasn't.

Cerberus, too, is taking on serious downside risk. Chrysler's physical
assets are essentially worthless because no one else will want them,
and its marketplace equity is modest at best. The Dodge and Chrysler
brands have only slight cachet although Jeep remains relatively iconic.
How long it will remain iconic is questionable. The company has been
endeavoring to exploit the brand, flooding its product line with
dubious and slow-selling new variants.

Unloading 80% of Chrysler is almost certainly a good deal for Daimler.
Smart and resourceful as the Cerberus principals may be, this time they
could be significantly over their heads.

 

Interesting article but the history does not seem exactly accurate. Indeed
the new cars introduced in 93/94 had fit and finish problems, but they were
great looking and I see tons of them still around so owners certainly got
their money's worth. Just saw someone driving a 94 LHS identical to the one
I sold in 99. Too bad Chrysler didn't improve them and keep the basic
looks. But in 98/99 they introduced much higher quality cars.
Unfortunately except for the 300M, they were all pretty ugly. However
before the merger they were showing some great looking follow-up models.
Too bad Mercedes killed them and put Chyrsler products years behind
schedule.

 

An article obviously ahead of it's time! <

 

Exactly. It's pretty clear to me what Chrysler has to do - they have to
take square aim at the Mercedes market. Dieter Zetsche knew this well,
but he also knew his stockholders wouldn't tolerate their precious Mercedes
brand being attacked by Chrysler vehicles.

Give Chrysler 2-3 years and some intelligent designers who aren't trying to
make political compromises to keep stockholders happy, and they will
pull out of it.

Ted

 

But a basic principle of capitalism is that the the company's only
responsibility is to its owners/shareholders, and if all the latter want
is a quick buck now and never mind the long term, then that's what the
company bosses are supposed to do.

Perce

 

Yes the LH cars were and still are great.
I've never kept a car so long as my '95 Concord and was planning to sell
it when it was 10 yrs old, but Chrysler had nothing. Fortunately my
maintenance has been minor in nature and it still performs as new,
including the great handling; still with the original shocks.
My wife loves her '91 Sebring, but I'm just a bit squashed in the front
seats and most of us know of it's 2.7L engine. >
The 300M was lovely and I was considering buying a few years old one,
but it has too little ground clearance for me and I'm not into leather
seats.
Now with the fast increasing gas prices my next vehicle objectives have
changed significantly. Only smaller cars now have my interest.

Yesterday as I approached my Concord from the front in a parking lot
something I saw gave me a chuckle. Right beside it was a new 300C in a
nice light grey paint job. I had to chuckle because I never could stand
the 300C styling and seeing one beside my Concord really illustrated how
ugly I feel the 300 looks. Yes some like it, but no one I know. What a
massive truck like grill and squashed window depth!

I could then see how the 300 body was designed. The Chrysler SUV
designers did it up to the windows, then the car designers did it from
there up. However the car designers couldn't use a normal window depth
that would give good vision and balance the vertical look, because the
roof would have been too high, approaching an SUV in height. <
So we were blessed with the 300 line, which developed a love hate in
car buyers. Unfortunately for Chrysler the love 300 bunch are a bit
limited and their buying dropped off after a few years.

Unfortunately I had to leave quickly. I wanted to stay a while to see
what (little?) body drove that monster 300.

 

And how exactly are the shareholders going to make a quick buck by
breaking Chrysler up into pieces?

You can't take an entity worth negative 5 billion, and break it into 3
chunks each worth positive 4 billion. If DC could have done that, they
would have. Remember they said all options on the table.

The only way the shareholders will quickly get their money out of Chrysler
is
to manage it as a unified car company, and get it producing attractive
product that new car buyers want to buy, so that there is some hope for
a prospective purchaser that there will be a return on his investment.
With decent management there is a good chance of this happening for
Cerberus, that's why they bought it. DC on the other hand, was hobbled
by bad management and Dieter Zetsche knew that also, and knew there
wasn't much he could do about it due to the politics of the situation.

We also don't know if Mercedes is going to be helped. For all we know,
a year from now, Damlier will still be posting losses.

Ted

 

Exactly, and without the hamstrings tied to Stuttgart, the company
stands a decent chance of doing that. There's no question that Chrysler
has creative and competent engineers. They just need to be allowed to
put their ideas into production.

I'll go out on a real sturdy limb and say "BET on that." Well, Mercedes
at least if not all of Daimler-Benz (I assume they'll revert to that
corporate name). Mercedes is already being flogged worldwide for their
horrendous lack of reliability. If anything saves Daimler in the long
run, its going to be either Freightliner or their aerospace arm.

 

http://www.bizjournals.com/portland/stories/2007/05/14/daily14.html

http://news.bbc.co.uk/2/hi/business/6641493.stm

 

You may find that this has been overcome. My understanding is that the
problems are/were confined to certain models -- albeit popular ones -- and
these have now been addressed.

The only major issue in a new car I can remember in 20 years of driving
Mercs is the failure after 2000 miles of the engine in a W123 (the old
standard saloon/sedan). After fixing there was an electrical short which
turned out to originate from a loose screw in the distributor...

My 1993 190E needed some fairly big work once and 2001 CLK has had no issues
worth mentioning.

I have a feeling some contributors here like to 'enjoy' the woes of Merc
because it was Jonny Foreigner that took over a 'venerable' US brand...

Whilst all automobile manufacturers contribute to the progress in the motor
car people seem to forget that Merc has been/is at the forefront, whether it
is developing its own technology or supporting and introducing third-party
advances (such as ABS).

And BMW was nearly bought by Mercredes in the fifties and if it hadn't
developed its new range in the sixties who knows whether it would still be
with us today. And so?

Maybe Chrysler will survive, maybe not. At the end of the day it is you,
the American customer, who will help decide. And not just the few of you
Chrysler fans that participate here.

DAS

For direct replies replace nospam with schmetterling

 

You need to find somebody that wants some of the pieces without some other
ones. You need 2 or 3 buyers that all have different opionions of what
piece is worth more. But really, whether they split the company up or not
isn't important. They could do the opposite, and buy something that they
can add to Chrysler that make the whole worht more than the parts. The
important thing is to put together some deal that pays you more than you
have invsted in it. The amounts that people pay for these companies doesn't
have all that much of a basis in reality, and one group may have a different
idea of its value than another. Due diligence is a body of opinions. I
mean, look at Mercedes. They paid 37 Billion, but they were happy to sell
for effectively zero dollars. They gave Chrysler away. Did Chrysler really
change that much in a few years? Think about it.

There are a number of other ways to turn a quick buck. One way is to have
an IPO. Some companies won't IPO for as much as you paid, but sometimes
that's what they do. Another way is to have Chrysler Corp borrow a ton of
money, secured, and then the private share holders just pocket it. If the
company can't handle the load, the bank gets it. You can even do both.

Here's an example of doing both. Celanese Corp was purchased by private
Blackstone group buying all the stock. They took out a big loan and kept the
money, followed by an IPO. Do some research on it.

 

Which will depend on whether Chrysler can build what the consumers want.
Under DC Chrysler didn't.

 

And at other times. It's not as if Chrysler has had an unbroken run of
black numbers before Mercedes.

That's been stated in this forum quite a few times. (And one doesn't need
this NG to know that.)

DAS

For direct replies replace nospam with schmetterling

 

Another example of flimsly WSJ "reporting." Eaton was brought on
board LONG before this time by Iacocca to impose a system of financial
controls on what was basically an uncontrolled enterprise wasting
money on decisions made by incompetent middle and upper management. It
was Eaton's job to seek out "finance guys" to implement the new
system, which is exactly what he did at Woodward Avenue for GM. He
was/is NOT a "car guy;" he's a beancounter of the same ilk whose
decisions at GM tanked the company. Iacocca lists naming Eaton as his
successor as "the biggest mistake of my life." Iacocca DID have a car
guy, Bob Lutz, now mired at a collapsing GM.

Didn't happen that way. Eaton took over and immediately cut off all
but "skeleton" funding for the Belvidere Design Center, opining that
Chrysler Group's product line was "good enough" to compete. Remember,
Eaton was NOT a "car guy." At the same time, he slashed operating
costs at the plants through attrition-driven downsizing, cut quality
engineering staff and made other obvious gaffes, and then started
looking for a buyer. THAT's where Schrempp fit into this...he was the
proverbial sucker to Eaton's polished pitch. Eaton took the money and
ran like hell, knowing that hoary K-car based products and a
much-troubled LH platform were ticking time bombs.

That's because they're shitty vehicles. The 300 is exactly what the
WSJ writer implies...a "gangta car," only now purchased by blacks in
ghettos, who immediately deck them out with 22" baby buggy wheels and
thumper car stereos, only to have them repossessed a few months later.
The 300 is dead. One only has to look at the depreciation of these
toadmobiles to know. Another zero..the "Charger", as well as the
panned Caliber, which is not selling well at all due to bad design and
quality gaffes.

The UAW will have to tell Snow to shove it. There will be no major
"give-ups." Those days are over, and Labor is tired of fat cat
private equities like Cerberus crying poor mouth when they sit on
billions of cash in some very right wing pockets. When Iacocca
negotiated cuts from UAW in the '80s, he did it from a position of
poverty, and UAW's Doug Fraser knew it. Iacocca told the bargaining
committee that he had "lots of jobs at $17, but I haven't got any at
$20." Fraser knew Iacocca was honest and reliable, and decided to
join in Chrysler's rehabilitation. This isn't the case now. Right
wing fruitcakes like Snow will look at that '80s episode as a sign of
weakness and will try to pin all of Chrysler Group's troubles on
labor, just as GM and Ford have tried to do. Ain't gonna work this
time.

Bernhardt (correct spelling; again, the WSJ couldn't report the
temperature correctly) is a major mistake. He's responsible for the
ghettomobile 300 and the now-failing Caliber and "Charger" as well as
other screw-ups. Snow got him on board mainly because Snow doesn't
know crap about the car biz, and Dr. Z probably sold Bernardt to him
to get rid of him from D-B.

If the "Dodge Nitro" is any example, they will fail at this. My local
(D)C dealer cannot sell "Nitros" even with $3000 spiffs.

ROFLMAO!!! Snow?? Quayle? These are Republipedo Party silver
spooned dumbasses! Snow almost tanked CSX and Quayle...well, all
anyone has to do in research there is listen to some of his "speehes"
and read some of his Bush-like scribblings to know what's going on
there...another born-rich, dyslexic moron á la George Dubya Bush, with
no credentials at all except those bestowed upon him by other
Republipedoes and the WSJ.

The WSJ has no credibility writing about Chrysler at all. All you
have to do is dig up all those anti-loan-guarantee articles they wrote
back in '79, '80 and '81 to see that these Wall St. shills are just
that...shills. A perfect takeover target for a right wing whack job
like Rupert Murdoch, sure, but any business/financial sagacity?
Fahgetddaboutit. Remember, it was the WSJ's editorial statements that
said over and over that Chrysler under Iacocca would fail and the
cadaver should have been divied up among all the banks holding
Chrysler Corporation's debt. WSJ also was guilty of false reporting
even then, repeatedly writing that the Federal loan guarantees were a
"giveaway." Nothing could've been further from the truth. They
pulled the same stunt during the Conrail reorganization, and cheered
when Snow made a severely undervalued bid, championed by "Newt The
Galoot" Gingrich in the House, to get CR's assets for pennies on the
taxpayer's dollar.

 

Its going to take a lot more than that. The only way Chysler is going
to be able to buy time and stay in bussiness to try to tuen around is
through some serious cost cutting starting with labor. If they do not,
it will not be too long before they are on the auction/chopping block
because Cerberus has neither the money or desire to bankroll them in
current state of operations. Whether Chrysler survives now is more up
to the workforce than the owner because without a big reduction in
operating cost there will be no time or money for R&D for new model to
sell.

 

Nope, eventually a fine car. My '95 still runs as new.

Not quite, but they made too many.
Doesn't sell here, many new 2006s for 30% off.

Styling for kids. Good functional design though.

UGH! Honda Fit competition?

 

Based on what Cerberus did with their involvement with the Air Canada
recovery, they will tighten up everything and will try higher prices for
a slightly premium product. Less volume higher prices.
This could mean the dumping of some vehicle lines, just as A/C gave up
some less profitable routes.
http://www.cerberuscapital.com/profiles/ace_aviation.html

 

Because everybody who's tried this has been so successful, right? GM
with Cadillac, Ford with Volvo, Nissan with Infiniti...

Good think you're not being paid for advice.

Oh BS. Chrysler has never competed in the Mercedes market, and nobody
in the market for a Mercedes or BMW would even consider Chrysler.

 

The losses at DC were due to the Chrysler group; Mercedes and truck
groups are profitable.

Appparently investors and advisors like it:

"The stock of DaimlerChrysler may continue the rise that began last
year, freed from the burden of Chrysler, Barron's reported in its May
21 edition.

The shares of the new Daimler, whichis likely to trade under that name
soon, change hands at around $86 but could hit $100 or more in a year,
the magazine said."

"Citigroup's John Lawson maintained his "Buy" rating and boosted his
price target for the company to $98 from $84.80, predicting that the
company's shares will continue to rise.

"We believe the time is right to move to a post-Chrysler valuation of
DaimlerChrysler as the sale of the unit progresses to completion in
third quarter 2007," Lawson wrote in a note to investors.

"DaimlerChrysler excluding Chrysler appears to us to be a much higher
quality asset, which should command higher multiples," he added.

 

And Chrysler's not?

"With just its Mercedes-Benz luxury brand, it will go from being the
third- or fourth-largest car seller in the USA - it's been seesawing
with Toyota, depending on the month - to the 12th. But it also likely
will make more money: On Tuesday, the automaker said Mercedes posted
$1 billion in earnings for the first quarter, while Chrysler lost
nearly $2 billion"