xcel
10-15-2006, 09:29 PM
Automaker works to unload pickup and SUV inventory. (http://www.freep.com/apps/pbcs.dll/article?AID=/20061015/BUSINESS01/610150556/1014)
Katie Merx - Detroit Free Press - Oct. 15, 2006
http://www.cleanmpg.com/photos/data/501/Dodge_3500_Cummins_Diesel.jpg
Large SUV and P/U inventory will cause huge losses for Daimler-Chrysler.
Anyone who's flown into Detroit this year could see the Chrysler Group had made far more pickups and SUVs than dealers had ordered - large Chrysler, Dodge and Jeep vehicles packed storage lots at the airport and throughout the metro Detroit-Toledo corridor.
Executives in Auburn Hills said they were confident the tide would turn in the summer as it did a year earlier with the help of attractive retail incentives.
They were wrong. Chrysler struggled to unload large inventories of trucks and SUVs throughout the summer despite generous incentives, as U.S. consumers continued to favor smaller fuel-efficient vehicles after several months of high gas prices. Making matters worse, it turned out, the company continued to crank out large, fuel-thirsty vehicles.
Now the company's self-proclaimed "overly optimistic" sales outlook is being blamed for an expected $1.5-billion third-quarter operating loss and a year-end forecast of a $1.2-billion loss.
Chrysler says several new models and an aggressive focus on controlling costs should help it rebound quickly and without undue misery.
But one question persists: Is this a one-quarter issue or a replay of problems from six years ago?
Much like six years ago, the overproduction and falling sales at the root of the third-quarter losses have forced the company to discount its vehicles and plead with dealers to order more from its massive sales bank. And the company is still forecasting a better fourth quarter and a return to profitability next year when several new models - including some smaller and more fuel-efficient vehicles - will be broadly available in showrooms.
But when Chrysler saw a similar set of circumstances unfold in 2000, the promise of a quick rebound evaporated in the fourth quarter and ended with a cumulative 2-year loss of nearly $4 billion, the elimination of tens of thousands of jobs and plant closings.
Chrysler says there are many differences between the two periods. In 2000, the company had just completed its merger with Germany's Daimler-Benz to become DaimlerChrysler AG, so it hadn't fully realized reductions in cost from bulk-purchasing power and parts sharing and the company hadn't been scaled down.
Since 2001, the company has sold or idled 15 plants, eliminated more than 40,000 positions, reduced product spending to $30 billion from $41 billion and has retooled many of its assembly plants so they can better adjust manufacturing levels to customer demand daily.
Additionally, the company said, it is launching 10 new products this year, more than any other time in its history and far more than the four it launched in 2000. Four of those models are rated to offer better than 30 m.p.g. and two are in the small SUV market, which Chrysler expects to double by 2010. The automaker has said it's in talks with foreign small-carmakers about partnering to enter the subcompact market.
Still analysts and former Chrysler executives say they see similarities between what has happened so far this year and the events leading to the Chrysler Group's 2000 loss and 2001 restructuring.
Sales have been down every month since April this year, compared with a year earlier. In 2000, sales were down compared with 1999 from April through July and again in the final three months of the year.
Vehicle discounts soared above the industry average. Incentives exceeded the industry average by more than $1,000 a vehicle in six of the first nine months of the year. In 2000, incentives grew throughout the year.
And then the company surprised investors with a profit warning late in the third quarter. This year the company warned on Sept. 15 that it would lose more than twice the $600-million quarterly loss it had predicted in July. In 2000, the company projected a loss of more than $500 million in the last week of the quarter.
Chrysler executives expected a return to profitability in the fourth quarter of 2000, but it didn't happen.
By mid-November, the company said it would lose $1.25 billion in the fourth quarter. Chrysler blamed its bad results on high incentive spending, bloated inventories and falling market share - much like today.
But analysts and former executives say it is not a foregone conclusion that the company is doomed for worse news and massive restructuring.
"I don't think they're going to go through the same drastic cuts they did before, with the exception maybe of a truck plant or two," said former Chrysler President Thomas Stallkamp. "But they should have trimmed production earlier in the year. We learned in the 1980s and '90s that building vehicles in excess of demand - building to the sales bank - caused problems. Yet in 2006, they got in trouble by building for the sales bank. History repeats itself."
In a Sept. 14 Webcast, two of Chrysler's top sales executives asked dealers to "be part of the solution" and order some of the 100,000 vehicles the company had built without orders. By Sept. 26, the company reported it had 39,000 units left to assign.
Stuffing dealer lots
Dealers said the company has offered to subsidize the financing costs - called floor-plan assistance - of ordering some vehicles if they committed to ordering several months of excess inventory. But by September, many dealers were reporting six to nine months of inventory on their lots and said they didn't have the money or room to order more stock - especially large trucks and SUVs.
"They've been stuffing dealer lots," Stallkamp said. "Now they've got to get their retail incentives going."
Then, Stallkamp said, the company needs to go back to building to demand.
While they acknowledge that the company's executives hung on to optimistic expectations for too long, most analysts said they wouldn't describe the situation at Chrysler as being as dire as at General Motors Corp. or Ford Motor Co., both of which won health-care concessions from the UAW that Chrysler wants.
"There are two reasons I wouldn't call this a crossroads for Chrysler," said John Casesa, managing partner at Casesa Strategic Advisors in New York. "One, they have a deep-pocketed parent in DaimlerChrysler and in previous restructurings they addressed some of the fixed cost problems that Ford and GM are only now addressing."
It is also possible that problems at Chrysler look worse than they really are, because Chrysler didn't launch many products early in the year, as it did in 2004 and 2005, said Erich Merkle, auto analyst at IRN Inc. in Grand Rapids.
"Sales are being skewed downward by the fact that they stopped production of the Sebring and Stratus," two of the company's consistent and relatively high-volume vehicles, Merkle said.
Chrysler began production of a new Sebring in July, and the Stratus replacement is expected next year.
And David Cole, chairman of the Center for Automotive Research in Ann Arbor, said it's hard to say exactly when Chrysler will return to profitability.
On the one hand, the company is already leaner than it was when it announced its losses in 2000. That could limit the amount of pain the automaker feels this time around as it tries to empty excess inventory, he said.
However, the automotive industry has only gotten more brutal since 2000, Cole said.
The U.S. market has grown to 286 models today from 181 models in 2000. Chrysler projects there will be 327 nameplates in the market by 2008.
"I think in some respects this is a more dangerous period than we have seen before," he said, because foreign automakers have gained more market share, GM and Ford are already working through massive restructurings and the market for retail auto sales is softer than it was six years ago.
"It isn't going to be a fatal period," Cole said. "They'll come back. The trick is to come back before things get too far out of control. It's like giving a transfusion to a patient. There's always the risk you'll get to the point of no return. I'm not suggesting Chrysler is there, but it's an issue."
Katie Merx - Detroit Free Press - Oct. 15, 2006
http://www.cleanmpg.com/photos/data/501/Dodge_3500_Cummins_Diesel.jpg
Large SUV and P/U inventory will cause huge losses for Daimler-Chrysler.
Anyone who's flown into Detroit this year could see the Chrysler Group had made far more pickups and SUVs than dealers had ordered - large Chrysler, Dodge and Jeep vehicles packed storage lots at the airport and throughout the metro Detroit-Toledo corridor.
Executives in Auburn Hills said they were confident the tide would turn in the summer as it did a year earlier with the help of attractive retail incentives.
They were wrong. Chrysler struggled to unload large inventories of trucks and SUVs throughout the summer despite generous incentives, as U.S. consumers continued to favor smaller fuel-efficient vehicles after several months of high gas prices. Making matters worse, it turned out, the company continued to crank out large, fuel-thirsty vehicles.
Now the company's self-proclaimed "overly optimistic" sales outlook is being blamed for an expected $1.5-billion third-quarter operating loss and a year-end forecast of a $1.2-billion loss.
Chrysler says several new models and an aggressive focus on controlling costs should help it rebound quickly and without undue misery.
But one question persists: Is this a one-quarter issue or a replay of problems from six years ago?
Much like six years ago, the overproduction and falling sales at the root of the third-quarter losses have forced the company to discount its vehicles and plead with dealers to order more from its massive sales bank. And the company is still forecasting a better fourth quarter and a return to profitability next year when several new models - including some smaller and more fuel-efficient vehicles - will be broadly available in showrooms.
But when Chrysler saw a similar set of circumstances unfold in 2000, the promise of a quick rebound evaporated in the fourth quarter and ended with a cumulative 2-year loss of nearly $4 billion, the elimination of tens of thousands of jobs and plant closings.
Chrysler says there are many differences between the two periods. In 2000, the company had just completed its merger with Germany's Daimler-Benz to become DaimlerChrysler AG, so it hadn't fully realized reductions in cost from bulk-purchasing power and parts sharing and the company hadn't been scaled down.
Since 2001, the company has sold or idled 15 plants, eliminated more than 40,000 positions, reduced product spending to $30 billion from $41 billion and has retooled many of its assembly plants so they can better adjust manufacturing levels to customer demand daily.
Additionally, the company said, it is launching 10 new products this year, more than any other time in its history and far more than the four it launched in 2000. Four of those models are rated to offer better than 30 m.p.g. and two are in the small SUV market, which Chrysler expects to double by 2010. The automaker has said it's in talks with foreign small-carmakers about partnering to enter the subcompact market.
Still analysts and former Chrysler executives say they see similarities between what has happened so far this year and the events leading to the Chrysler Group's 2000 loss and 2001 restructuring.
Sales have been down every month since April this year, compared with a year earlier. In 2000, sales were down compared with 1999 from April through July and again in the final three months of the year.
Vehicle discounts soared above the industry average. Incentives exceeded the industry average by more than $1,000 a vehicle in six of the first nine months of the year. In 2000, incentives grew throughout the year.
And then the company surprised investors with a profit warning late in the third quarter. This year the company warned on Sept. 15 that it would lose more than twice the $600-million quarterly loss it had predicted in July. In 2000, the company projected a loss of more than $500 million in the last week of the quarter.
Chrysler executives expected a return to profitability in the fourth quarter of 2000, but it didn't happen.
By mid-November, the company said it would lose $1.25 billion in the fourth quarter. Chrysler blamed its bad results on high incentive spending, bloated inventories and falling market share - much like today.
But analysts and former executives say it is not a foregone conclusion that the company is doomed for worse news and massive restructuring.
"I don't think they're going to go through the same drastic cuts they did before, with the exception maybe of a truck plant or two," said former Chrysler President Thomas Stallkamp. "But they should have trimmed production earlier in the year. We learned in the 1980s and '90s that building vehicles in excess of demand - building to the sales bank - caused problems. Yet in 2006, they got in trouble by building for the sales bank. History repeats itself."
In a Sept. 14 Webcast, two of Chrysler's top sales executives asked dealers to "be part of the solution" and order some of the 100,000 vehicles the company had built without orders. By Sept. 26, the company reported it had 39,000 units left to assign.
Stuffing dealer lots
Dealers said the company has offered to subsidize the financing costs - called floor-plan assistance - of ordering some vehicles if they committed to ordering several months of excess inventory. But by September, many dealers were reporting six to nine months of inventory on their lots and said they didn't have the money or room to order more stock - especially large trucks and SUVs.
"They've been stuffing dealer lots," Stallkamp said. "Now they've got to get their retail incentives going."
Then, Stallkamp said, the company needs to go back to building to demand.
While they acknowledge that the company's executives hung on to optimistic expectations for too long, most analysts said they wouldn't describe the situation at Chrysler as being as dire as at General Motors Corp. or Ford Motor Co., both of which won health-care concessions from the UAW that Chrysler wants.
"There are two reasons I wouldn't call this a crossroads for Chrysler," said John Casesa, managing partner at Casesa Strategic Advisors in New York. "One, they have a deep-pocketed parent in DaimlerChrysler and in previous restructurings they addressed some of the fixed cost problems that Ford and GM are only now addressing."
It is also possible that problems at Chrysler look worse than they really are, because Chrysler didn't launch many products early in the year, as it did in 2004 and 2005, said Erich Merkle, auto analyst at IRN Inc. in Grand Rapids.
"Sales are being skewed downward by the fact that they stopped production of the Sebring and Stratus," two of the company's consistent and relatively high-volume vehicles, Merkle said.
Chrysler began production of a new Sebring in July, and the Stratus replacement is expected next year.
And David Cole, chairman of the Center for Automotive Research in Ann Arbor, said it's hard to say exactly when Chrysler will return to profitability.
On the one hand, the company is already leaner than it was when it announced its losses in 2000. That could limit the amount of pain the automaker feels this time around as it tries to empty excess inventory, he said.
However, the automotive industry has only gotten more brutal since 2000, Cole said.
The U.S. market has grown to 286 models today from 181 models in 2000. Chrysler projects there will be 327 nameplates in the market by 2008.
"I think in some respects this is a more dangerous period than we have seen before," he said, because foreign automakers have gained more market share, GM and Ford are already working through massive restructurings and the market for retail auto sales is softer than it was six years ago.
"It isn't going to be a fatal period," Cole said. "They'll come back. The trick is to come back before things get too far out of control. It's like giving a transfusion to a patient. There's always the risk you'll get to the point of no return. I'm not suggesting Chrysler is there, but it's an issue."