Chrysler - did Cerberus blow it?

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

- 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.