Chrysler, R.I.P.

Chrysler, R.I.P.
http://www.newsweek.com/id/166659

Keith Naughton
Newsweek Web Exclusive
Oct 31, 2008 | Updated: 12:53 p.m. ET Oct 31, 2008

As Chrysler commemorated its first anniversary under the ownership of
private-equity player Cerberus Capital Management this summer, CEO Bob
Nardelli issued a five-page letter to rally the troops. After all,
things hadn't really worked out as Cerberus expected when it paid $7.4
billion to take Chrysler off Daimler's hands in 2007. Rather than
"restoring an American icon," as Cerberus chairman John Snow declared
back then, Chrysler sunk even further into the muck as gas prices soared
and showroom traffic came to a standstill. Chrysler's guzzler-heavy
lineup of SUVs and trucks did worse than most, with sales plummeting 25
percent and profits nowhere to be found. Still, Nardelli, once an
acolyte of GE's Jack Welch, oozed optimism when he closed his long
letter with these words of encouragement: "Chrysler may be down, but
we're a long way from out. It's time for us to prove the naysayers wrong
with another one of our patented comebacks!"

But it looks like Chrysler has run out of comebacks. Shortly after
Nardelli wrote those words, Cerberus entered talks with General Motors
to unload its Motown mistake. Despite reports of an impasse, a deal
still appears to be just around the corner—if GM and a growing chorus of
politicians can convince the federal government to put up $10 billion to
$15 billion to finance the two ailing automakers' marriage of
convenience. That means Chrysler, after defying death for decades, will
finally succumb. Analysts expect GM to slash 34,000 Chrysler jobs—half
its workforce—and shut down production of all but a handful of its
slow-selling models. "Chrysler as we know it will cease to exist very
soon," says auto consultant Kimberly Rodriguez of Grant Thornton, which
predicts half of Chrysler's 14 factories will close.

It's an ignominious end for the company of Lee Iacocca and once-hot
models like the Dodge Viper, PT Cruiser and the Hemi 300C. Daimler,
which paid $36 billion for Chrysler in 1998, put a fitting coda on its
investment last week. It valued its remaining 20 percent stake in
Chrysler at zero.

So why would GM want a worthless automaker? Well, it certainly isn't
about Chrysler's cars. It's about the cash. Chrysler said it had $11.7
billion in the till this summer, and GM desperately needs that money to
survive. It also wants to get rid of one of its crosstown rivals so it
doesn't have to match the outrageous rebates Chrysler puts on its models
any more. "The real reason GM is doing this is to get their hands on
that cash," says auto economist Sean McAlinden of the Center for
Automotive Research, "and to put their competitor down. It's called
'buying the business.' In that way, you save GM."

If this sounds ruthless, that's because it is. GM is backed into a
corner, running out of money, time and options. Its sales have tanked,
it has lost $18.8 billion so far this year, and bankers will no longer
lend it a penny. It's burning through more than $1 billion a month, and
Wall Street expects it to run out of money by the middle of next year.
To raise funds, GM is desperately trying to sell assets—the Hummer line,
its riverfront headquarters—but has found no takers. Chrysler's cash
stash might be its last hope. To put that money to work for its own
interests, though, GM has to hollow out Chrysler. "GM will be hard
pressed to clean out the Chrysler organization as quickly as possible,"
says University of Michigan business professor Gerald Meyers, who was
CEO of American Motors when Chrysler bought it in 1987. "It's a nasty job."

But GM won't just get quick cash from Chrysler. It will also acquire
substantial liabilities. That $11.7 billion came to Cerberus in the form
of loans from banks, which expects that debt to be paid, with interest.
There's also a new union fund that covers workers' health-care costs, to
which GM will be expected to contribute $11 billion. Then there are all
those workers and dealers who will have to be culled with billions in
buyouts. Combined, the two companies will employ 205,000 workers in
North America and have 22,000 dealers—half the total number of showrooms
in the America.

To service these staggering obligations, GM is counting on taxpayer
funding and might have to sell off bits of Chrysler to the highest
bidder. Jeep, Chrysler's most precious possession, might fetch $2
billion, says McAlinden. (That's down from $5 billion a few years ago,
when SUVs were still hip.) Nissan might be interested in buying the
Dodge pickup-truck business. GM might want to hang onto Chrysler's
profitable minivans, unless someone makes them a good offer. Chrysler's
slow-selling cars aren't expected to attract much interest, but the
automaker is already trying to sell its Viper sports-car line. "We'll
see who is around to pick over the bones," says Meyers.

Why would the government want anything to do with this car carnage? The
alternative is automotive Armageddon. Without the GM-Chrysler combo, its
advocates argue, all of Detroit will tumble into bankruptcy. And that
will take down thousands of parts suppliers, dealers and other
businesses that depend on the American automakers. Even the Toyota,
Honda and Nissan auto factories in America could shut down because their
U.S. suppliers would go belly up. Total job loss: 2 million Americans,
according to a study by the Center for Automotive Research. "A graceful
exit for Chrysler is highly preferable to a catastrophe," says Cole.
That's why the governors of six states just asked Treasury Secretary
Henry Paulson and Fed chairman Ben Bernanke to take "immediate action"
to bail out Detroit. The White House says it is talking to the
automakers, but Paulson is reportedly reluctant to dip into the $700
billion in bailout money at his disposal. Rather, the administration is
working to speed delivery of the $25 billion authorized by Congress last
month to help automakers retool to make fuel-efficient cars.

In order for Detroit to live, by this reasoning, then Chrysler must die.
Before it goes, though, it is worth having its illustrious, tempestuous,
life flash before our eyes. It burst on the scene at the 1924 New York
Auto Show, where former railroad mechanic Walter P. Chrysler wowed the
crowds by introducing the Chrysler Six, a mechanical marvel with a
powerful six-cylinder engine. After adding Dodge, Plymouth and De Soto
to his empire, Chrysler overtook Henry Ford in the 1930s to become
America's No. 2 automaker. During World War II, Chrysler cranked out
18,000 Sherman tanks, the main combat vehicle of the Allied forces. In
1952, Chrysler produced the Jupiter missile that carried two monkeys
into space. In the muscle-car era, Chrysler produced memorable models
like Plymouth Road Runner and the Dodge Challenger (which just came back
to life). And finally, there was Iacocca, who engineered his K-car
driven turnaround in the 1980s, paying off his government loans seven
years early and with a $400 million profit to taxpayers.

I tried to reach Iacocca to hear his epitaph for the company he once
saved. But his secretary says he doesn't want to talk about it. Friends,
though, say he's saddened by this turn of events. Meyers, who once sold
his company to Iacocca, sees no irony or even much similarity in
Chrysler's fate today. "Back then you had a very successful company,
Chrysler, buying into an unsuccessful company, AMC," says Meyers. "Now
you have one unsuccessful company buying another unsuccessful company."

In the end, Chrysler lost its way. It survived wars, recessions and a
depression. But after nine years of German ownership and one year in
private equity's grip, Chrysler had become a shadow of the feisty
company that did its best work when its back was against the wall.
Instead, insiders say, the new product pipeline has run dry and now
workers just fear for their future. There is neither the will, nor the
wherewithal to mount that final comeback Nardelli asked for. "There's no
economic reason for Chrysler to exist anymore," says Meyers. "This time,
it's done for."

 

Are there no GM-centric usenet groups?

I would have wanted to post this reply to one of them...

---------------------

The profits are to be found in Chrysler's Canadian sales figures.

Sounds to me that GM is worthless, not Chrysler.

I'm selling a $5k car with $3k cash sitting in the glove box. You
desperately need $3k cash. Where is the logic in you raising $8k to buy
my car just to get your hands on the $3k cash in the glove box?

Worse still, that $3k cash in the glove box isin't even free-and-clear.
It's actually a debt that must be paid back.

It's not cash - it's debt. It's not an asset, it's a liability.

So why doesn't GM cut it's own workforce in half, ->right now<- ???

Why doesn't GM cut it's costs to stop the bleeding?

Why must it acquire Chrysler *and then* cut Chrysler jobs?

So Chrysler has to die just so that GM can get it's hands on $3b of MORE
debt, which will enable it to operate FOR ONLY AN ADDITIONAL 90 DAYS
???!!!

By all accounts, GM is far sicker and weaker than Chrysler. So why must
Chrysler die? Why not GM?

Why doesn't Cerebus take Chrysler's money and buy GM instead, and then
hack away at GM's jobs?

Or, why doesn't Cerebus hang on to Chrysler long enough to see GM die?
The reward would be that a huge share of the pie would become available
to those that remain.

 

I am concerned about what GM will do with Chrysler owners. Will they
starve us on parts, or price them too high, in hopes that we will
abandon our Mopars, and buy a GM product? If this happens, I will move
to an import.

-KM

 

Absolutely true, and not often mentioned in these discussions. Chrysler
isn't setting any sales records lately, and has slowed introduction of
new vehicles... BUT... its got $11B of CASH on hand, and is actually
doing OK money-wise. ITs got the Challenger coming out, Jeep is selling
like crazy as always, and the new Ram pickup is in a completely
different league than Ford, GM, and Toyota's trucks, much like it left
Ford and GM in the dust in 1992 with the introduction of the re-designed
Ram.

The difference is that Chrysler's owner doesn't want to fight to keep
the company alive and want to get on to other businesses, whereas GM has
NO CHOICE but to try to live, even if it only means sucking another 9-10
months of life out of Chrysler's cash stockpile.

Normally I'm a very small-government non-interventionist free-market
kind of guy, but THIS is a case of where I think the regulatory bodies
need to step in and tell GM that its not OK to summarily kill off 1/3 of
the American car companies just to prop up another one for a few months,
leading to a strategy that would probably leave only Ford within a few
years. It has too much of a negative impact on the economy as a whole.
If it were a true MERGER and there was a viable argument that the
combined companies could exceed the market share of the two companies as
independents, then it would be a good deal. That's not the plan.

 

WHo cares? The aftermarket supports everything we need once we're out of
warranty.

I'll move to Ford for my next new car even if GM keeps selling
Chrysler-branded vehicles with GM mechanicals. If they keep
Chrysler-designed mechanicals, I might consider it. Maybe.

 

You are correct in that the aftermarket provides a lot of parts.

I recently had to replace a broken sunvisor clip. A new one from
the dealer was cheaper than a salvage yard part.

I could not find an aftermarket supplier for these.

Salvage yards usually don't want to bother with small parts, so they
have a high minimum fee. Also, how long do salvage yards keep the
vehicles to sell for parts before selling the car to a steel recycler?

-KM

 

You mean that you'd buy, e.g., a US-built Toyota? Our Chrysler 300M was
actually built in Canada.

Perce

 

Import or not depends on the country of corporate ownership. A Mexico
built Dodge is American. A Kentucky built Toyota is Japanese. Its all
about where the money winds up. End of story.

 

You got a problem with that?

 

No. I simply meant that buying an "American" (i.e., US "Big 3") vehicle
may not be helping US workers, whereas buying a "foreign"/"import" car
may in fact be putting money in US workers' pockets.

Our Canadian-built 300M has been far more reliable than our US-built
Stratus was.

Perce

 

In almost 40 years of driving and owning cars, my Canadian built Monte
Carlo and Mexican built PT Cruiser are two of the most reliable, trouble
free cars I've ever owned.

And as far as it being considered foreign or domestic, I thought depended
on the percentage amount of foreign or domestic parts that went into the
car? Not where the money wound up. Am I wrong there?

 

I think the legal definition is along the lines of what you say.

But I could care less about that- I care where a) the ENGINEERING is
done (I don't want to see the US be the world's unskilled labor supply)
and b) where the money goes.

 

I remember reading several years ago in one of the car magazines about
this subject. The Crown Victoria and Merc Marquis had so much foreign
content it was something like 5% content away from being considered a
foreign car.

Wish there was a list of current cars like this, domestic and foreign.

 

always makes it fun to get parts...or no parts as the case may be. such as
the Renault built trannys in the Eagle Premier back in the early 90s, or the
French built trannys they were using in the Ford Exploders a while back.

Just like Audi and Volkswagen now, take your trans out and put in another.
no parts available. their excuse is the consistency of quality rebuilds
between different shops.

 

Exactly my main concern.
As for GM's current products they have nothing I desire,
nor does Chrysler.
Their Volt may interest me, but only at least 3 years after it's first
delivery.

 

That's beyond the limited vision of bean counters.