Video: Chrysler cuts the latest stall in auto industry

updated 10/24/2008 7:35:23 PM ET 2008-10-24T23:35:23

As talks over the potential sale of Chrysler LLC continued, the struggling automaker said Friday that it will slash 25 percent of its salaried work force and make further cuts to deal with a continued downward spiral in U.S. auto sales.

Negotiations for Chrysler’s sale or merger, which involve majority owner Cerberus Capital Management LP, General Motors Corp. and the combined Nissan Motor Co.-Renault SA, were to continue into the weekend. But they are snagged on items such as tax liabilities, tight credit and the slowing economy, according to a person briefed on the talks.

The person, who asked not to be identified because the discussions are private, said multiple parties remain involved in the complex talks, which include several possible configurations such as the sale of Chrysler in its entirety, or a partial sale of the company.

Under the job cuts announced Friday, Chrysler, which has about 18,500 white-collar workers, will get rid of about 5,000 salaried workers and contract employees — those who work for other companies under contract with the automaker.

Chief Executive Bob Nardelli, in a memo to employees obtained by The Associated Press, warned that more restructuring is coming at a pace faster than before.

“We recognize that in order to strengthen our competitive capability, and reduce the time and cost to achieve our objectives, we cannot operate as we have in the past,” he wrote. “In the near future, we will be making organizational announcements as a result of restructuring actions reflecting the need to find new ways to operate.”

Industry analysts said Nardelli’s comments likely mean further plant closures and layoffs as the company shrinks itself to be acquired or perhaps signs deals for other automakers to design and even produce its new vehicles.

The cuts are so dramatic that they likely spell the end for Chrysler as in independent company and indicate it is preparing to be sold, said Aaron Bragman, an auto analyst with the consulting company IHS Global Insight.

“Cutting fully one-quarter of your staff is not the way to develop future vehicles,” he said.

The prospect of further cuts has scared already-weary Chrysler employees who have been working under the shadow of sale talks.

Jerry Fogarty, who works at the company’s Trenton, Mich., engine plant, figures GM will consolidate even more if it takes over Chrysler.

“If GM takes us, man, we’re done,” said Fogarty, of Wyandotte. “I’ve got 16 years. I’ll lose my damn job. I already see it coming.”

GM and Chrysler have declined to comment on the sale talks except to say discussions between automakers are routine.

Cash-starved GM would benefit by gaining access to Chrysler’s roughly $11 billion stockpile, while Nissan-Renault may be interested in forming an alliance with Chrysler to give it a stronger North American presence, and it may even take an equity stake in the company.

GM, the nation’s largest automaker, is burning through more than $1 billion in cash per month and is trying to stay afloat until the U.S. auto market recovers. Industry analysts say that may not be until 2010, and without a recovery, GM could burn up so much cash that it could reach the minimum required to run the company sometime next year.

GM shares fell 15 cents, or 2.5 percent, to $5.95 Friday.

A GM acquisition may involve going to Congress for cash, perhaps to preserve jobs and protect Chrysler’s pension plan, which has about 125,000 people receiving benefits. Chrysler employs about 49,000 people in the U.S.

U.S. Sen. Debbie Stabenow, D-Mich., said Friday that Michigan legislators are looking into ways for the federal government to help the auto industry, including an injection of money into a Chrysler deal.

“We’re looking at a variety of things. I would say everything’s on the table. We don’t know exactly what they’ll need,” she said.

Lawmakers also are trying to pressure the Treasury and Federal Reserve to help thaw frozen credit for auto loans, and pushing to speed up the release of $25 billion in already-approved loans for the industry to develop new technology, she said.

Chrysler’s sales are down 25 percent through the first nine months of the year, the worst decline of any major automaker.

Although Chrysler is a private company and doesn’t report earnings, it had a $772.5 million operating loss in the second quarter, according to the balance sheet of Daimler AG, which still owns 19.9 percent. Chrysler issued a statement pegging the loss at $660 million. Its loss for the first half of this year totals about $1.28 billion, after losing $1.6 billion last year.

Nardelli’s memo said the company will reduce capital expenditures and cut discretionary spending while protecting “all major product programs.” But Bragman said the size of the cuts likely means new product expenditures will be cut.

The company already has signed an agreement with Nissan to build a subcompact car for Chrysler and may be discussing a new midsize product with the Japanese company, Bragman said. Chrysler also has a deal with Chinese automaker Chery Automobile Co. to build a small cars.

“You can eliminate a large group of people if you’re simply going to be buying it from someone else,” Bragman said.

David Cole, chairman of the Center for Automotive Research in Ann Arbor, said Chrysler has to take advantage of poor sales, tight credit and the weak economy to make more cuts in factory capacity and other areas — whether it is sold or not.

“They’ve got to be very active, decisive,” Cole said. “Anything they can do prior to coming together would be less that would be required afterward.”

In a statement, Nardelli said the auto industry is going through “truly unimaginable” times.

“We continue to be in the most difficult economic period most of us can remember. The combination of troubled financial markets, difficult credit, volatile commodity prices, the housing crisis and declining consumer confidence continues to weigh on the economy. Never before have auto industry sales contracted at such a fast rate,” he said.

The cuts come atop an announcement made Thursday that Chrysler announced it will shed 1,825 jobs by eliminating one shift at a Toledo, Ohio, Jeep plant and accelerating the closure of its sport utility vehicle factory in Newark, Del.

The Associated Press and Reuters contributed to this report.


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