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Surprising Chrysler making most of second chance

Barely two years since it filed for bankruptcy, Chrysler still has to prove it can deliver on its “second chance.” The carmaker seems to be heading in the right direction.
Image: Chrysler logo
The Chrysler 200 sedan has generated significantly better sales traction since a commercial aired during the Super Bowl this year.AP

At a meeting with members of the media last month to mark the repayment of the automaker’s $7.5 billion in government bailout loans, Chrysler’s new CEO Sergio Marchionne remarked that it’s not often that you get a second chance in life.

Indeed, Chrysler almost didn’t have one. When the U.S. automaker was at the brink of bankruptcy in 2009 a number of then-new President Barack Obama’s top advisors had actually recommended against any effort to help the smallest of the Detroit manufacturers, fearing it had little likelihood of turning around.

In the end Obama took the risk, choosing to help both Chrysler and cross-own rival General Motors through their 2009 bankruptcies with cash infusions from the U.S. government. Even then, industry analysts offered generally dire forecasts for the smaller carmaker, noting that in the years leading up to its Chapter 11 filing it had experienced not only huge losses but also a sharp drop in market share.

Its prior owners, Germany’s Daimler AG and then the private equity giant Cerberus Capital Management, had largely stripped Chrysler of its key assets, leaving it with a relatively bare product cupboard and few resources to re-fill the pipeline.

Yet for those who anticipated a quick collapse of the company, things haven’t worked out quite as anticipated. Early last month Chrysler reversed years of hemorrhaging losses, reporting a $116 million net profit for the first quarter.

Even more impressive, according to some analysts, Chrysler was the only one of Detroit’s so-called “Big Three” automakers to post a sales gain in an otherwise weak May for carmakers, reporting a 10 percent gain that serves as “confirmation that our 2011 models continue to resonate with consumers,” according to Fred Diaz, head of the carmaker’s Ram truck division. Significantly, sales were up across the product spectrum, from the compact Chrysler 200 to the big Ram pickups.

Joe Phillippi, a long-time automotive analyst and head of AutoTrends Consulting, attributes Chrysler’s sales gain to the carmaker’s marketing and advertising efforts.

“Their commercials get your attention and bring shoppers into the showroom,” he said.

The carmaker took a big risk during this year’s Super Bowl, spending an estimated $8 million to $9 million on airing an unusual two-minute commercial featuring rap star Eminem. Using scenes of a struggling but resurgent Detroit, the piece underscored Chrysler’s own nascent turnaround as much as it focused on the new Chrysler 200 sedan.

The commercial went viral, adding tens of millions of views on top of the attention it  generated during the big game. The 200 has generated significantly better sales traction since that commercial aired than many reviewers had initially anticipated.

Of course, it doesn’t hurt that Chrysler had the right car as fuel prices began to soar, and as the March 11 disaster in Japan led to huge cuts in production by rivals like Toyota, Nissan and Honda. The latter carmaker’s new 2012 Civic, a key competitor to the Chrysler 200, won’t be back in full production until the fall, Honda recently announced.

Chrysler has also scored with other new products, including the all-new Jeep Grand Cherokee, which is flying out of showrooms in spite of $4-a-gallon gas prices.

Analyst Phillippi warns that there remains “plenty of white space” in the domestic carmaker’s product portfolio — it desperately needs a competitive midsize sedan, for example — some of which won’t be filled in for several years.

“If you look beyond the truck portfolio, everything will depend on melding the Fiat and Chrysler design and engineering teams,” he said.

The Obama White House initially rejected Chrysler’s bailout bid, agreeing to provide help only after the Italian carmaker Fiat agreed to sign on as the U.S. automaker’s partner. Fiat initially received a 20 percent stake in Chrysler, but by meeting a series of targets, including the early payoff of the federal loans, it bumped that stake to 46 percent.

By purchasing the automaker’s remaining U.S. shares, meeting a final bailout hurdle by introducing a 40 mpg car into the Chrysler line-up and taking several other steps, Fiat’s holdings may reach more than 70 percent within the next year.

Marchionne has repeatedly delayed plans for a public stock offering, or IPO, and although he now promises one for 2012, Fiat has increased its holdings to a point that it “now makes an IPO an even more unlikely scenario at this stage,” said Deutsche Bank analyst Rod Lache.

For all intents and purposes, Chrysler and Fiat are now functioning as one company, in sharp contrast to Chrysler’s failed 1998 “merger of equals” with Daimler. The German carmaker never truly accepted the need to meld with its U.S. partner. Fiat, on the other hand, sees the alliance as essential to the future of both companies.

Marchionne sees it as vital to boost the two companies’ combined global sales volumes past the 5 million mark to achieve economies of scale — a process enhanced by sharing common product platforms and components. Significantly, it will be a two-way street. Several key Chrysler products are already fleshing out the Fiat line-up, including the U.S. carmaker’s new 300 sedan, which is being sold in Europe as the Thema, the new flagship of Fiat’s struggling Lancia brand.

Still, there are plenty of skeptics. It wasn’t quite as easy as Marchionne had hoped to pull together the private financing to replace Chrysler’s government loans. In the end, the carmaker wound up paying higher interest rates to assuage nervous lenders.

But the fact that Chrysler could raise money at all was a significant turnaround from the situation it found itself in barely two years ago as it filed for bankruptcy. Chrysler still has to prove it can deliver on its “second chance,” but considering what most observers had expected, it seems to be heading in the right direction.