When New York private equity firm Cerberus Capital Management agreed last May to buy a controlling interest in DaimlerChrylser’s struggling Chrysler Group for $7.4 billion there was a whiff of optimism about the deal.
Chrysler, which hadn’t thrived under the ownership of Germany’s Daimler-Benz, its owner since 1998, would return to American ownership. Cerberus, which specializes in restructuring troubled companies, installed a new management team committed to bringing the American automotive icon back to profitability and long-term success, including Bob Nardelli, the combative former chief executive of Home Depot, and former Toyota North American President Jim Press.
But just six months later the whiff of optimism has turned to a hint of crisis. A recent article in The Wall Street Journal said Chrysler is in a serious financial crunch, although the automaker has denied the report.
And Chrysler said in November it would cut 8,500 to 10,000 hourly jobs and 2,100 salaried jobs through this year, making up about 15 percent of its work force. The cuts come on top of 13,000 Chrysler layoffs announced in February 2006 and come amid falling demand for Chrysler’s vehicles in the U.S. market.
Now, as the world’s leading automakers prepare for the biggest car show of the year, which begins this Sunday in Detroit, Chrysler is in the limelight, according to Jack Nerad, executive market analyst for Kelley Blue Book, which tracks the automotive industry. Given the automaker’s perceived difficulties, including signs that its new minivans, which are crucial to Chrysler’s success, aren’t selling as well as hoped, it will be interesting to see how the automaker portrays itself in Detroit, he said.
“One of the most interesting things we’ll see at this year’s auto show is what Chrysler offers and how the company portrays itself,” Nerad said. “They’re under new management and there have been a lot of changes over there, so the corporate persona they portray in Detroit will be interesting to see. Will things be a little more subdued this year?”
A relaxed attitude is not an option for Chrysler, notes Aaron Bragman, an industry analyst at consultancy Global Insight. Chrysler will show three alternative-fuel concept vehicles in Detroit (one for each of its brands — Chrysler, Dodge and Jeep) that are designed to be totally electric, or enhanced by diesel motors or hydrogen fuel cells. But it is not yet clear whether the vehicles on display will be working models, Bragman said.
“It’s crucial that Chrysler gets on the ball for developing these sorts of technologies,” Bragman said. Chrysler is “behind the curve” on alternative fuels because of its long union with Daimler is now over and the automaker needs to move ahead quickly to comply with tougher new fuel-efficiency requirements recently passed into law by Congress, he added.
Chrysler would also benefit from a new global partner to capture growth in overseas markets, said Bragman, and Japan’s Nissan would be a good fit. Nissan has sought to partner with a U.S. automaker over the past year or so, testing the waters for deals with General Motors and Ford.
Some analysts speculate that Cerberus may be shaping up Chrysler to sell it to an overseas carmaker. An overseas automaker such as Nissan could take ownership of the U.S. automaker and profit from its U.S. market share, while Chrysler would benefit from Nissan’s global reach, observers say.
“A Nissan partnership would be interesting because Chrysler could draw on the Japanese automaker’s technology, global network and vehicle platforms — they’d have access to readymade vehicles, and that’s less costly than building new vehicles themselves,” Bragman said.
Chrysler is already in talks with Nissan about a manufacturing agreement and has announced a deal with China’s biggest independent car company, Chery Automobile, to jointly produce and export small cars to Europe and the United States.
However, perhaps the most pressing issue for Chrysler is sales of its minivans, which has been a bread-and-butter product for the automaker since their introduction in the early 1980s. In recent years the segment has been shrinking, and Honda is now vying for dominance. The Dodge Caravan barely clung to its lead in the segment in 2007, selling 176,000 units compared with the Honda Odyssey’s 173,000, according to Global Insight data.
“It’s a worrying situation because right now the minivan is a one-note song for Chrysler,” Bragman said. “They will not turn the company around on minivan sales alone; you need a whole line of strong-selling vehicles, and that’s especially going to be the case in 2008 because it’s going to be a challenging market, at least for the start of the year.”
Global Insight expects U.S. vehicle sales to total 15.5 million in 2008, down from 16.1 million in 2007, a decline of 3 percent that would make it the worst year in a decade.
Competition is also heating up in the pickup truck segment. Chrysler will show its new Dodge Ram truck at the Detroit show, while Ford will unveil the latest version of the F-150 pickup, long the nation’s best-selling vehicle. And last year Toyota started selling its redesigned Tundra truck, which is designed to compete squarely with the Ram, the F-150 and Chevrolet’s Silverado pickup.
The continuing impact of the housing slump means sales of these highly profitable vehicles are likely to slide. Pickup sales rely on steady sales among home builders, contractors and other small business owners to replace their existing work vehicles.
“Full-size pickups are very important for the Big Three,” said Kelley Blue Book’s Nerad. “Chrysler was the perennial No. 3 in pickup sales, but they came through with new styling [for the Dodge Ram] a few years ago and kick-started their sales, and I’m sure they’d like to repeat that performance,” he said. “So you can expect the new Ram to be bold — that’s what they’re all about.”
However, it’s not all doom and gloom at Chrysler. Its redesigned Jeep Wrangler saw sales almost double in 2007, even as sales of models like the Jeep Compass, the Dodge Caliber and Chrysler 300 slipped. Wrangler sales have soared without having to rely on sales incentives.
Another bright spot is the corporate structure at Chrysler, Bragman said. Under its new ownership the automaker has moved swiftly to cancel underperforming models, such as the Magnum, the Crossfire, the PT Cruiser convertible and the Pacifica, he said.
“From what we can tell they’re aware of their problems and they’re working hard to make changes in product lines,” he said. “And that’s the nice thing about private equity — the decision-making processes are quick, and you only need a handful of executives to change things and not a committee — that’s a new thing when it comes to how an automaker is run, and it’s an encouraging sign for Chrysler.”
The Associated Press contributed to this report.