Chrysler comeback falters; gas guzzlers go unsold
Wednesday, September 20, 2006
By Neal E. Boudette in Detroit and Stephen Power in Frankfurt, The Wall Street Journal
Once viewed as Detroit's lone healthy auto maker, DaimlerChrysler AG's Chrysler Group is headed back to the repair shop with rivals General Motors Corp. and Ford Motor Co.
Chief Executive Officer Dieter Zetsche, the German engineer celebrated for bringing Chrysler back to profitability, conceded Tuesday that his strategy for ending the auto maker's long record of financial volatility had failed. The culprits: rising gas prices, slowing demand for big trucks and rising health-care costs for its unionized American workers.
After plunging into the red for the third time since 2000, Chrysler now is likely to face another restructuring. It also could lose its place among the U.S. market's big three, if rival Toyota Motor Corp. of Japan manages to retain its recent market-share gains. During an analysts conference Tuesday in Stuttgart, Germany, Mr. Zetsche followed up on the profit warning issued last week. He said Chrysler's U.S. arm would cut production 16 percent from the year-earlier level in the second half of this year, a deeper cut than previously forecast. He also said the company would consider further restructuring measures, surprising many who had assumed he was largely done with that process.
The trouble at Chrysler follows a string of 12 profitable quarters, underscoring how thin the ice has become for U.S. auto makers that continue to build big, gas-thirsty vehicles using relatively inflexible union labor.
Until recently, demand for the brawny and stylish Chrysler 300 sedan and for a fleet of trucks and sport-utility vehicles -- all available with "Hemi" V-8 engines -- had bulked up the company's profit. For much of this year, as gas prices rose above $3 a gallon, Chrysler executives kept cranking out SUVs, trucks and other Hemi-equipped models, betting that demand would remain strong.
That bet has gone sour. In July, DaimlerChrysler warned that the Chrysler Group would post a loss of as much as $600 million in the third quarter. Last week, it raised the quarterly-loss estimate to $1.5 billion.
The crunch, Chrysler's third in the past six years, comes as American auto makers face their biggest crisis since the recession and energy shocks of the late 1970s and early 1980s. Then, the federal government stepped in to rescue Chrysler Corp., and Ford had its own brush with near death.
In recent years, even as GM and Ford struggled, Chrysler appeared to be better fortified against the forces of global competition that are reshaping the auto industry. When Daimler-Benz AG merged with Chrysler Corp. in 1998, Daimler's then-CEO Jurgen Schrempp predicted the combined companies would become the most profitable car maker in the world. Just two years later, Chrysler's minivan sales tanked. The U.S. unit, which was posting hundreds of millions of dollars of losses, was bailed out by the German half of the company.
The prospect of further restructuring is an embarrassment for Mr. Zetsche. In 2000, he was sent to the U.S. from DaimlerChrysler's commercial-vehicles division to fix Chrysler. He quickly pushed through the type of restructuring GM and Ford are pursuing now, closing several plants and eliminating 26,000 jobs. He outlined an ambitious growth strategy, built around a low-cost plan for spinning multiple models from the same basic vehicle chassis. His goal was to increase annual sales within 10 years by one million vehicles.
Although an outsider, Mr. Zetsche quickly won esteem within both Chrysler and the Detroit automotive scene. With his avuncular personality, he mixed easily with staffers. He persuaded engineers at Mercedes-Benz to begin sharing technology with Chrysler, which helped the U.S. arm reduce the cost of developing new models. At auto shows, he took part in elaborate and often humorous introductions of new vehicles. At the 2005 Geneva auto show, for example, he smashed a glass wall with a guitar to unveil a new compact car.
His effort to revive the U.S. unit appeared to falter in the second quarter of 2003, when Chrysler notched a $2 billion loss on a big write-down for slow-selling vehicles. Its profit rebounded after it launched the Chrysler 300, a large, rear-wheel-drive sedan. It was the kind of car U.S. auto makers had all but stopped making, and it became the talk of the industry. It generated huge profits -- particularly when sold with the Hemi engine. Based on a legendary engine Chrysler produced in the muscle-car era of the 1960s and 70s, it captured a new generation of car buyers.
Last year, Chrysler accomplished a rare feat for a U.S. auto maker in recent years: it increased its market share in the U.S. Mr. Zetsche was rewarded in July 2005 when he was chosen to succeed Mr. Schrempp as DaimlerChrysler's chief executive.
Flying back to Detroit on the company plane after the announcement, Mr. Zetsche and a few aides popped a bottle of champagne. The next morning, he appeared before hundreds of Chrysler staffers jammed into an office atrium. His appointment, he said, was the result of their hard work. After pausing to keep his composure, he added: "I will always be a Chrysler guy." Some employees brushed away tears.
Mr. Zetsche planned to boost sales with the help of an underperforming brand in Chrysler's garage: Jeep. It had missed out on the sport-utility-vehicle boom of the 1990s, partly because there were only three models in Jeep's product line. Mr. Zetsche and his closest lieutenant, Wolfgang Bernhard, who has since left for a senior post at Volkswagen AG, planned to change that.
One of the new Jeep models was the seven-passenger Commander. Last summer, Chrysler launched the SUV with great optimism, hoping that the Commander, which is available with the Hemi engine, would become the same kind of hit as the 300.
But gas prices were rising. By the beginning of 2006, thousands of unsold Commanders were piling up at Detroit's airport and in parking lots and fields around the city. Chrysler offered rebates on the vehicle, badgered dealers to take more vehicles than they needed and sold off others to rental fleets. Problems mounted as minivan sales, another critical segment for Chrysler, shriveled.
By the summer, some dealers were bluntly advising Chrysler to cut production. In an effort to spur sales, Mr. Zetsche agreed to appear as "Dr. Z" in a series of commercials touting the combination of German and American engineering in Chrysler vehicles. In one, he is seen heading a soccer ball, and others made humorous references to his mustache. The ads left some consumers confused and thinking that Dr. Z was a fictitious character. Sales continued to slump. This month, Chrysler suspended the campaign.
Stuck with a bloated inventory, Chrysler said Tuesday it expects retail shipments to fall by 90,000 vehicles in the third quarter, down 24 percent from a year earlier, and by an additional 45,000 in the fourth quarter. It blamed a shift in consumer demand from trucks and sport-utility vehicles to passenger cars. Chrysler now is expected to post a loss for the full year, instead of turning a profit as previously forecast.
Chrysler Group President and Chief Executive Tom LaSorda said the company had expected its trucks to sell better over the summer. "You could question: Did we wait too long to cut production?" he said. "Yes, we did."
The production cuts could make DaimlerChrysler No. 4 in market share this year in the U.S., the world's largest auto market. Toyota, which is ramping up production in the U.S. as sales of its fuel-efficient models increase, currently holds the No. 3 spot. If Toyota holds onto that spot for the full year, it would mark a first for a foreign car maker.
Mr. Zetsche said it was "utterly unacceptable" for the company to surprise investors last Friday with the new loss forecast. He said the U.S. unit, which is in the middle of launching eight new models during the second half of 2006, will see an improvement in vehicle sales next year. He expressed optimism that Chrysler will get back on track once it purges its system of the unsold inventory and refocuses on new models such as the hot-selling Dodge Caliber miniwagon.
Mr. LaSorda said that as gas prices eased in recent weeks, he didn't see a big move back toward large trucks and SUVs. "I think we're going to see a permanent shift" toward smaller vehicles, he said. Chrysler is looking for a partner, possibly Chinese, to build a new subcompact car to sell in the U.S., he said, and the company hopes to outline a plan before the end of the year.
Mr. Zetsche was asked several times during Tuesday's presentation whether the auto maker would consider selling part or all of Chrysler. "I think the answer is a simple no," he said, adding: "We can think about the best way to run this business and what the best structure is." A DaimlerChrysler spokeswoman said Mr. Zetsche's comments "reinforced" the position "that selling Chrysler was not under consideration."
Mr. Zetsche said Chrysler still plans to address what he referred to as "noncompetitive" health-care costs, even though the United Auto Workers recently broke off talks. Chrysler is seeking the same concessions the union gave GM and Ford in the past year -- retiree health-care cuts and buyouts that could eliminate 64,000 jobs at the two companies. One reason the UAW broke off the talks was that Chrysler has been profitable in recent years, while the North American auto operations of GM and Ford ran up big losses.
UAW President Ron Gettelfinger recently got a seat on DaimlerChrysler's supervisory board. Chrysler's problems ratchet up pressure on him to agree to concessions ahead of 2007 national contract talks. Chrysler says its health-care costs have risen to $2.3 billion this year, up 7 percent from 2005. It estimates that health-care cuts similar to the ones at Ford and GM would have saved the company $340 million this year, or roughly $150 a vehicle. Mr. LaSorda said Tuesday that he wants to come to an agreement with the UAW "as fast as possible."
Some union employees aren't convinced Chrysler is as bad off as Ford and GM. "Personally, I'm still against going for health-care concessions," said Dale Hunt, 50, the president of UAW Local 7, which represents Chrysler's Jefferson North Assembly Plant. "They're not in the same position as Ford and General Motors, at least right now."
GM executives have said the company's recovery from a $10.6 billion loss last year will be strong and lasting, based on cost-cutting and new models.
Ford is embarking on its third major overhaul in the past five years, this time under a new chief executive, former Boeing Co. executive Alan Mulally.
Ford has warned that it expects to post a loss for the year and says its North American operations won't return to profitability until 2009, one year later than forecast.
http://www.post-gazette.com/pg/06263/723454-185.stm
Chrysler comeback falters; gas guzzlers go unsold
Linear Mode
