Riding the recovery gear sans Daimler

Known for its styling and a number of engineering firsts, <?xml:namespace prefix = st1 ns = "urn:schemas:contacts" />Chrysler always works on shoe string budgets ….. suffered losses on a single miscalculation or error.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" /> 

The automobile’s most competitive market gets murkier as Daimler Chrysler exited from its nine year roller coaster ride with the Chrysler group. As the deal closed with the sale of Chrysler Group to Cerberus, a private equity firm, Daimler still retains a 19.9% stake in Chrysler.

Daimler Chrysler AG, born out of the “merger of equals” on <?xml:namespace prefix = st2 ns = "urn:schemas-microsoft-com:office:smarttags" />Sep 18th 1998 between the Chrysler group and Daimler Benz, emerged as a single entity consisting of the Mercedes group for luxury, the Chrysler Group for mass market and the commercial truck and van division.

As the company got incorporated in Germany, American mutual funds withdrew leaving almost three-fourth’s of the shares with the Germans. This merger of growth was done to increase speed in vehicle development and exploit the extraordinary opportunities of combined heritage. Ironically in 2001 it found faltered when Chrysler Group announced a record loss in its history amounting to $3.6 billion.

This led to an exodus of Chrysler’s American executives as Daimler’s Dieter Zetsche and Wolfgang Bernhard came to rescue Chrysler with a recovery plan amounting to 26000 layoffs, 20% of the Chrysler workforce. It revived the product line revitalizing the Jeep brand and bringing up Daimler’s transmission and building rear wheel drive hits like the 300C and Dodge Magnum.

As they pulled off to a profit Tom LaSorda, the now CEO of Chrysler Group, aimed at keeping the momentum for profitability. But last year it surprised to find itself building inventory to lie in borrowed parking lots surrounding the Detroit metropolis.

For the end of 2006 the Chrysler group announced an annual loss of $1.5 billion on GAAP amidst a fall of 6% in annual unit sales. The group which announced its recovery and transformation plan this February indicated idling 400,000 units capacity per annum leading to around 13000 layoffs, burning cash through 2007.

At the start of the merger Chrysler group, which contributed for 45% of the $155 billion entity, is now throwing in only 31% of the combined 2006 revenue of $200 billion. The shares of the merged entity which then debuted at $90 in the New York stock exchange, dropped to as low as $34 during the 2001 turmoil and has never come back to the old quoted value. Its main competitor, BMW has seen more than two folds increase in shares over similar period, where as its cross-town rival, Porsche have posted five folds rise which left the German shareholders impatient thus leading to the sale.

A railway mechanic with a passion for automobiles, Walter P Chrysler entered the automotive industry through Buick, an entity of General Motors, as a works manager, taking a salary cut. In a period of eight years he moved up to the president of Buick before taking retirement at the age of 44 after disagreeing with Durant. Later he came as a white knight for the sick automotive units of Maxwell, Chalmers and Wills Overland.

With the engineering trio of Zeder, Skelton and Breer, his Chrysler brand of cars got tremendous response and he incorporated the Chrysler Corporation in 1925 from the Maxwell and Chalmers Company. In 1928 he bought the Dodge Motor company after the death of Dodge brothers and kept it as a separate icon. The company had four divisions at that time Dodge, Chrysler, now extinct Plymouth and Desoto, a brand ahead of its times.

After Walter’s death in 1940 the company suffered alternate periods of profits and losses coming to a near bankruptcy in 1979. Lee Iacocca then led the recovery and did a quick turnaround saving the company’s legacy. The company later acquired the American Motor Corporation thus bringing the Jeep brand to its fold. It also took credit in creating the minivan segment bringing the Town & Country into America’s household.

During the 1990s the team of Casting, Gale and Lutz introduced the platform team, a product based multi disciplinary team to speed up design. Today these platform teams work closely in grandiosity at the sprawling Chrysler Technical Centre at Auburn Hills, a means to concurrent product development, which also houses a manufacturing pilot plant and an evaluation course within.

Chrysler has almost worked independently to confirm its vehicles to NHTSA safety and fuel economy standards. Being younger and smaller of the Big Three, it has the capability to improve fast. The Harbor Report repeatedly commented the Chrysler group at having the fastest rate of productivity improvement.

Chrysler, known for its styling and a number of engineering firsts, always works on shoe string budgets of almost a third of the development cost compared to GM. It had to take risks to survive, used unconventional methods to eliminate costs and suffered losses on a single miscalculation or error.

The commercial failure of the Airflow and the 1950s union strikes affected it more than what GM had with Corvair or Ford with the Firestone tires. With three-fourths of the product line weighed towards fuel hungry pickups, SUVs and minivans, even a small skew in the product-market mix may harm the company badly.

North America represents 90% of the Chrysler group’s business with most of the annual production of 2.7million units produced in North America. This has led it to be pulled in for long negotiation days with the UAW for givebacks. The company’s attempts to internationalize had been in vain with the Simca of France, Rootes of UK ending in financial disaster. The company’s alliances with Mitsubishi didn’t make it go much further so are its attempts to put up production plants in Latin America.

With the completion of the Cerberus sale and the labor contracts coming for renewal it will go through the restructuring pains as seen with auto suppliers like Delphi, Tower automotive. The UAW’s resolve to fight it out will make this a painful transition; all these at a time of slowing US economy and a forecasted shrink in the North American automotive market. This de-merger will see Daimler Chrysler’s OICA ranking of five dropping to nine for the Chrysler Group and Daimler AG’s ranking falling to eleven.

Its rear wheel drive vehicles, credited for its last recovery, are already losing steam. With call for tightening fuel standards in North America and an uncertain trend in gas prices, it remains to be seen how it will deliver. However the company is pitching heavily on more fuel efficient engines.

As part of the recovery it has targeted to reduce drastically the number of truck platforms. Interest in its highest selling Dodge Ram is seen fading, as the Japanese have started closing in at the last bastions of Detroit, pickups. Once protected by import levies of 25%, the transplants have started churning out pickups from San Antonio, Canton, and Ontario. Last year its market share in North American market slipped to 13% from an overall average of 15% it generally had.

Chrysler now has to make the bold moves in its product lineup, while marketing heavily its smaller and mid-size SUVs like the Jeep Wrangler, Jeep Compass/Patriot and Dodge Nitro. To succeed it has to expand in emerging markets thus spreading its developmental costs and complement it with an aggressive brand management.

Being the least of the Big Three, it has taken the brunt from the incentives offered by GM & Ford, selling its vehicles at negative net pricing. According to Edmunds.com, a comprehensive car pricing site, the current factory rebate of its best selling pickup, Dodge Ram, amounts to $6000 and $3000 for its minivan. It seems the old saying of 1950’s still holds well that General motors can bankrupt Ford and Chrysler by reducing the price of its vehicles by $50 and $25 respectively. Detroit companies need to get out of this loop and that too very fast. Chrysler’s sale to Cerberus may be the beginning to it.