Chrysler - did Cerberus blow it?

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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.
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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.
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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
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On Thu, 17 May 2007 01:30:14 -0700, "Ted Mittelstaedt"

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. ----------------- TheSnoMan.com
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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
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It is going to take more than that, Daimler spent 500 million to sell Chyrsler after all the money was spent (most of it went back to Chysler Financail) and you do you spend a extra 500 milion to sell a company unless it stands to cost you a lot more to keep it. Chysler has major labor cost problems and either they reduce them a lot with major consesions or they go out of bussiness because there will be no 3rd option here. ----------------- TheSnoMan.com
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DC could afford to pay to dump Chrysler, they sucked cash out of Chrysler after the take over. That Chrysler cash got DC profitable again.
DC will still own part of Chrysler so I expect they will still benefit from Chryslers higher parts volume and lower costs. Also I expect Chrysler will still benefit from what they get from Mercedes. So both sides should be happy; at least for a while.
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They lost their arse with that purchase and made nothing off of it. Bought it for 35 billion and sold it for a bit over 7 billion. Chysler has got not cash to carry them through unless they get major concessions and many industry analists agree too.

Only one side is happy here and it is not Chysler. I will be really surprized if they are still around in a few years. Not that I want them to fail but the deck is stacked against them right now. ----------------- TheSnoMan.com
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That is patently false. Chrysler _had_ no cash.

BS. DC was profitable before the merger and except for 1 year, it's been Chrysler dragging down the profits ever since.

Yep, those low cost Compass and Caliber interiors.

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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.

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Generally you're correct, but I've heard a number of hemi buyers say they changed from Mercedes to Chrysler because that drive train was almost half the price of the Mercedes.
However most Mercedes buyers don't buy for performance, just image. We have many Mercedes vehicles around here and they just put along in the city and seldom are seen on the highway.
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wrote:

Well, we lived in Germany for five years and Mercedes, in Germany, are not de-tuned as they are for America. Over 100mph is not unusual on the Autobahn, although it may be slower today. I am sure that there are many Mercedes owners, in America, who do not know how to drive a Mercedes. But I never drove a Mercedes in Germany, I drove an E-Type Jaguar, so what do I know.
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mileage at our much lower speeds is poor. Germany needs to put some limits on the Autobahn speeds. which are very bad for the environment and unfortunately sometimes bad for those in the very fast moving cars.
I shake my head and chuckle when I see someone here driving a car designed for twice our speeds, just tooling along here. What a waste of money and a misapplication of technology.
It's not how to drive a Mercedes, it's just that the rich who buy them here are gentle mature drivers who seldom even go on the highway and never in snow; thankfully.
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Now that IS poppycock.
1. Germany does not NEED to put in general speed limits. The environmental impact is not as great as some people like to think. Anyway, huge chunks of the German motorway network are already limited (to 130 km/h or less) and much of the time in certain sections traffic is too heavy to go much above the speed limit.
Furthermore, stretches of motorway have a guide max of 130 km/h. Whilst that is not a legal limit, it could have insurance payout implications when having an accident above that.
2. Mercedes is not only for the rich. It is for everyone. Even omitting the A and B Classes, in Germany the C is a top-selling car and has been for years, as is the BMW 3. (around number 5 or better).
DAS
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And on average S-Class Mercs put in very high annual mileages because senior execs use them.
DAS
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ubiquitous econoboxes kept around 120kph, and speed limits in the cities. I was there last month, rented a BMW 3-series *diesel,* what a great car that was. Had it up to 228KPH (about 140mph) at one time but usually I kept it around 160-170KPH (100mph) and still returned about 26mpg. The only cars passing me were the big Audis and Mercedes.
No diesel smell, no clattering, very smooth. When will these diesels be available in the US?
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Is the low-sulfur diesel available all over the US yet?
DAS
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15ppm "Ultra-Low Sulfur" diesel was mandated in January 2007. I assume it was mandated all over the country, that's what we have in Michigan.

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We have it in OR also. What the ironic thing is, is that this mandate is one of the reasons fuel prices went up - it's more costly to refine heavy crude to get rid of the sulfur - yet the diesel prices here are lower than gasoline.
Ted
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Ted Mittelstaedt wrote:

I don't know what the knew mandate actually costs but in general diesel is far cheaper to refine than gasoline.
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