May 25th, 2007 by Dave
America seems to be celebrating the return of Chrysler to American soil. Though the company has been slashed and burned by Daimler, suffering insults, taunts, mass layoffs, factory closings, firings of key people who dared to talk back, cash-robbing, and insane levels of cost-cutting, Chrysler has survived and is being supported by many people who have spent the last seven years insulting it.
Now the Chrysler brand can stretch its wings, and I, for one, think it should do it for real. That means there can’t be a Chrysler PT Cruiser, a Chrysler Sebring sedan with a four-cylinder or a 200 horsepower V6, a V6 powered Chrysler 300 with interior trim that belongs in a Honda Civic, or a base Chrysler Town & Country that is identical in just about every meaningful way to the Dodge Caravan.
Those vehicles can’t all move to Dodge, which is trying to take the big, bold Ram styling and Cummins-diesel-power reputation and transfer them to its cars, as well. Then Dodge would be a great big mess.
Instead, the Chrysler brand needs to stop measuring itself purely by sales volume and start considering profits and reputation. The advertising has moved in the right direction, but the product doesn’t support it. There’s no personal status in owning a Chrysler when the brand includes a large variety of strippers, including heavy cars with small engines. It would be like BMW selling the base Mini as a BMW, which you’ll notice it does not do. Or like Cadillac selling the Cimarron, the car that nearly destroyed Caddy’s reputation. Or like Mercury selling tarted-up Escorts, which finalized the death of Mercury’s once-elite reputation.
Now think about the China cars, and you will probably agree -
Plymouth needs to come back.
Plymouth is the value division, the Chevy, the Ford, the Toyota, the big amorphous blog division that doesn’t try to strike out on its own and be unique and clear about where it’s coming from. Plymouth is where you get your bread-and-butter cars, your family sedans, your commuter cars, your standard minivans. Plymouth is where Chrysler houses its inoffensive, practical vehicles. If they make a performance car, it’s a Road Runner or a Duster, not a Barracuda or GTX or ‘Cuda. (Look back and see which ones sold well. The Barracudas and ‘Cudas stagnated on dealer lots with the GTX. The Road Runners and Dusters sold like gangbusters.)
Plymouth will happily take on the China cars, and they’ll fit. Plymouth will take on the base model 300, letting Dodge sell Chargers without 2.7s, and Chrysler sell ONLY 300C versions of the 300. Plymouth will take the four-cylinder Sebrings - or ALL of the Sebrings other than the convertibles. Plymouth will take any Town & Country that isn’t fully loaded, and call it a Voyager.
There are even lots of pre-made customers for Plymouth, assuming they get some cars. I estimate the demand for Plymouth to be at least 80,000 vehicles per year without advertising (but with marketing). That’s not a bad return considering how hard Chrysler and Dodge are fighting for each customer with rebates and advertising. But it’s not totally about Plymouth sales. It’s about profits.
The financial problem with Chrysler now, bigger than retiree costs, or health care costs, or warrantee costs, is the cost of sales. Rebates are thousands of dollars per vehicle, and advertising and marketing are both expensive. Some people say adding Plymouth would only add to the costs, but I disagree. Scion and Mini did well with guerilla marketing, and I think Plymouth could ride on Cerberus’ buzz and guerilla marketing for a while too. Plymouth would also have a built in advantage of being able to use existing names and reputations for cars people liked and remember well - Voyager, Valiant, Duster. (I’m thinking Horizon for the China car if Hornet isn’t used.)
The big payoff, though, isn’t the added sales that Plymouth might bring. The big payoff is strengthening Dodge and Chrysler so they wouldn’t need huge rebates and huge advertising to draw people in. People will pay for status, and Chrysler has none right now. To bring Chrysler up, it needs Plymouth to fill in its low end. Dodge could accommodate Chrysler, but then it would lose its desired “Ram tough” positioning.
Toyota now has three brands; Honda and Nissan have two each; Ford has Ford, Mazda, and Lincoln in addition to numerous other domestic and foreign brands; GM has many. Even BMW has two brands in the US now, and when Mercedes brings Smart here, they’ll have two as well. As the world’s fourth largest automaker, Chrysler can certainly afford a third brand, especially one that will tell the world - and its past, discarded, insulted customers, ready to return at the right time - that their pride has returned. Walter Chrysler said that without Plymouth, there would be no Chrysler. It’s hard to say whether he was talking about financials or branding, but I believe it’s true.
Please Digg this!
May 14th, 2007 by Dave
Cerberus took ownership of about 80% of Chrysler Group, including Chrysler Financial, in return for a guaranteed investment, assumption of liabilities as well as assets, and a token payment that appears to be less than the transaction and sale costs. The deal was incredible, considering that Chrysler + Chrysler Financial appeared to be running at a net profit for most of the recent past, and the terms appear to reflect leaked statements by DaimlerChrysler board members (and public statements from stockholders) to the effect that Chryler was less than worthless.
The details: Cerberus pays $7.4 billion, $5 billion of which goes to Chrysler Corporation LLC and $1.05 billion to Chrysler Financial Services; Daimler gets the remaining $1.35 billion, but loans back $400 million of it. Daimler retains all debt from Chrysler Group, costing Daimler a net $650 million plus prepayment compensation of $878 million and transaction costs. Chrysler’s pension fund is currently overfunded but the health care costs are a major issue. Closing of the deal is expected in the third quarter of 2007.
The five key reasons for choosing Cerberus were "a sustainable, successful future for Chrysler; minimal risks and liabilities for Daimler in the future; the certainty of the transaction; speed; and the value of the transaction." Other reasons suggested by Allpar readers include being able to keep a chunk to continue to profit from Chrysler; realization that Mercedes would never integrate money-saving Chrysler technologies, outside of certain assembly processes adopted early on; that Mercedes was unwilling to share any current technology, and that Mercedes-priced components and architectures made cars below the $30,000 level uneconomical; needing the cash; wanting to be free from the health-care liabilities; and realizing that Daimler was completely unable to run Chrysler, any more than BMW was able to run Rover.
Chrysler does owe Dieter Zetsche a debt of gratitude. It would have been easy for him to continue in the footsteps of Juergen Schrempp, and to keep squeezing and downsizing and perhaps acquiring new companies to squeeze and downsize and merge together. It may also have been easy for him to sell Chrysler for more cash - for example, to Kirk Kerkorian (not that we can say for sure whether that would have been bad, especially as Kirk was talking employee ownership and has Jerry York on his side). But we suspect that he actually protected Chrysler as much as he could, given his possibly tenuous status at DCX - with Juergen Schrempp & Co still very much active on the Board - and did try to create a soft landing.
What Daimler gets out of the deal
DaimlerChrysler can change its name to Daimler AG (what happened to Benz?) and run their bus, van, and car companies without distraction, while raking about 20% off of Chrysler’s profits. At the same time, Mercedes’ dependence on Chrysler for volume discounts and royalties on less than ideal parts can continue for the near term, at least; joint purchasing and drivetrain development will continue, and no doubt Chrysler will keep paying royalties for five-speed transmissions while Mercedes will get free access to next-generation V6 engines. A Joint Automotive Council of board members from each company will be established so both sides can decide on new and current projects.
The new company
An affiliate of Cerberus, Chrysler Holding LLC, will own 80.1% of Chrysler Holding LLC, while Daimler will own 19.9%. Chrysler Holding LLC includes Chrysler Corporation LLC and Chrysler Financial Services LLC. Tom LaSorda, Eric Ridenour and Tom Sidlik will leave the Daimler Board of Management, which will go down to six members.
Cerebrus gets a company with a history of profitability, next-generation technology waiting to be implemented, some of the world’s most advanced, flexible auto plants, a huge number of dedicated, experienced, intelligent employees, and the consistently-profitable former Chrysler Credit (which may actually have a surprise loss soon due to a number of less than ideal loans in the recent past), all for agreeing to put reasonable sums of money into their own businesses and for making a relatively small payment to Daimler.
Unfortunately, the downsizing plan is still in effect, cutting over 400,000 vehicles per year and closing at least one factory (as well as investing in others). This will increase the percentage of cash paid to retirees vs current employees; there will be fewer vehicles sold and fewer people working per retiree.
Some reasons we’re happy Daimler will be history
The problem with Chrysler since 1998 has been running the company for the benefit of Mercedes, not for the benefit of DaimlerChrysler as a whole. Getting out from Daimler is unquestionably a plus; Chrysler has been cut to a third of their prior size and have been constrained in what they can make. The question is never "what would make a good profit," it’s "what can Mercedes use and what can use Mercedes parts" (with a huge dose of “no, that might take away Mercedes sales.” Money was spent on a Crossfire replacement when we need a Neon replacement, and building the LX and JS to Mercedes architectures no doubt increased their weight and cost. The Mercedes five-speed automatic is more expensive and less reliable and lower performing than the ZF automatic, from what I’ve been told - not to mention Chrysler’s own five-speed truck automatic, which is eminently usable on cars (having been developed from the ancient TorqueFlite).
Though (as of May 16, 2007) we’re sure there are plenty of strings attached to this deal, Chrysler will be run by people who want to make money, not transfer profits to another division’s budget line and pretend they’re losing money, as it appears Daimler has been doing. Just as you wouldn’t want Toyota to make the Corolla a downsized Lexus LS, you don’t want the Sebring to be a downsized S-Class just to lower the component costs of the S-Class. That’s one of the things that killed GM - according to DeLorean anyway - was when they lowered Caddy and Olds costs by making Chevy and Pontiac accommodate them. Yes, it lowered the total number of parts in inventory, and yes, it made parts cheaper for Caddy and Olds, but it also made Chevys and Pontiacs too heavy and expensive to make!
Another good thing to come out of this is, hopefully, the removal of the German (and American!) "cost-cutting experts" who have made Chrysler’s cars less competitive. Maybe Chrysler can start to add back in all those things that made their vehicles special to their owners - things like comfortable seats and windshield wiper de-icers for minivans, not to mention four-cylinder engines that produce some torque at low rpm. One particular rapid cost-cutter is certain to remain in Stuttgart. And we’re probably not going to see any more "German engineering" ads!
Reason for hope
We have reason to hope. Perhaps Wolfgang Bernhard does know how to do something other than slash jobs, close factories that later turn out to be needed, and make specialty sports cars. Tom LaSorda might be a pretty good leader when his leash is taken off; he’s getting to be well liked, at least. We know that Chrysler still has many good, dedicated engineers, and we also suspect that many employees will work much harder for an independent, American Chrysler than for an amorphous, money-sucking, abusive DaimlerChrysler.
I think anyone with the cash to buy Chrysler would be nuts not to, and that they don’t need to strip the company to turn a quick profit - particularly if they plan to resell when the record profits return.
There’s not much left to cut, anyway. They could sell factories, but there’s only one plant that’s underused right now; the others are all very much needed. Even the under-used plant could be used to build the cars they need to be selling, the Corolla/Neon class that was abandoned in favor of the cute-ute Compass/Caliber/Patriot. The basic research departments were decimated by Daimler already. Anything they cut now would just eliminate their profits later, unless they plan to move everything to China, and that’s been turning out to be less than ideal lately - a short-sighted strategy if ever there was one (not unlike Daimler’s providing Hyundai with the one key technology, engines, they needed to become a real threat).
The Players
Cerberus has profited from its ties to key Republicans, and in one case, a timely $110,000 donation to suspect congressman Jerry Lewis was almost instantly rewarded with the renewal of a controversial $1 billion contract and the firing of US Attorney Carol Lam fired, who was investigating Lewis’ contributors (presumably including Cerebrus). Steven Feinberg himself is a "paper guy," who rose up through the ranks of the buy-and-sell Wall Street crowd.
Cerberus appears to have set itself up as a member of the “pay to play” politically-based contracts game; Dan Quayle is in charge of European operations, and the chair of the company itself is former Republican Treasury secretary John Snow. But that doesn’t mean they’ll hire some ex-Party hack to run Chrysler; we need not fear seeing Randy "Duke" Cunningham or Mark Foley in the President’s chair. The moral concerns we have about Cerebrus (and for that matter the "all that matters is short-term profit" reputation of some private equity firms) do not necessarily affect their ability to run Chrysler, and in any huge company, there can be some highly moral and some highly immoral divisions. A few bad apples doesn’t necessarily poison the entire farm, and it’s a huge farm.
There’s even a lighter side to the political machinations. They might be able to buy Chrysler some military contracts for Jeep and Dodge trucks; and they are putting serious money into the company. What’s more, they are getting Chrysler Financial in the deal, which should make Chrysler profitable without slashing.
Tom LaSorda is reportedly to remain CEO, but Wolfgang Bernhard, the slash-and-burn, flashy Mercedes man, will most likely be running the show from behind the scenes. On the lighter side, Bernhard is "a car guy," which might mean more enthusiasm for the company; on the darker side, there is no reason to believe he is steeped in Chrysler history or has any better ability to run a mass-market automaker than DCX did. Though Chrysler might see Firepowers and Tomahawks, it might not see the Reliants and Spirits that sold in huge numbers (or, in modern terms, Corollas and Camrys), and it can’t keep the factories running with exotics.
Also in Cerberus’ stable is David Thursfield, who ran Ford’s highly successful operations outside the Americas before joining Cerebrus in 2004.
Cerebrus does appear to have a record of turning companies around and being in the game for the long run; they’ve sometimes been contrasted to the standard slash-burn-flip private-equity firms. Cerebrus already owns 51% of GMAC Financial Services and is buying out Tower Automotive, a parts supplier; it also owns Guilford Mills, a large American auto-seat supplier in the U.S., and Peguform Group, a German auto-plastic maker.
If you know more about Cerebrus and the players, please post it here in the comments.
An alternative that might have pushed DCX to go faster
Even as Cerebrus was buying Chrysler, Kirk Kerkorian was apparently meeting with the plant workers in Toledo who wanted to take Chrysler over in an employee buyout. They would have raised investment funds using Kerkorian and the sale of stock to buy Chrysler from Daimler. The plan was moderately far advanced, but it appears that Daimler would never have agreed to sell to the employees, Kerkorian, or both, and the UAW and CAW provided no support for the plan, preferring to back the private equity firms (even Magna was working with a private equity firm, albeit one with a solid reputation).
Looking to the future
Chrysler is likely to do much better under Cerebrus than under Daimler. New products should be lighter and cheaper to build without the need to build to Mercedes specifications, and without the need (at least on future vehicles) to use Mercedes components even when they are sorely outclassed by cheaper ones. The horrific German Engineering ads which decimated sales will disappear, and Chrysler will not be publicly criticized and dragged into the dirt by their new owners. The anonymous leaks from Mercedes directors on how terrible Chrysler is (ignoring the fact that Mercedes gets lower quality rankings in just about every survey) will end, and the stigma of owning a Chrysler will fade. We hope, incidentally, that in addition to the destruction of the myriad of DaimlerChrysler signs, that by 2009 we will see the first new Plymouth rolling down the lines.
We are much more optimistic than we were before we started to investigate Cerberus; at that point, the chief issues that popped up were the sleazier aspects of the company. As we delved deeper, though, it seemed more and more that Cerberus succeeds not by strip-and-flip but by rebuilding companies that have been terribly managed. Chrysler has been terribly managed for most of its life.
We are disappointed Canada did not finally get its own auto company, but it’s good to have Chrysler back on American soil. Maybe with all the government connections Cerebrus has, Chrysler can even get a nice fat military contract and start building Army vehicles again. We just hope they never bring up any controversy - that they do what they did in the 1940s, not what Cerebrus did in the 21st Century.
Being an American company again means that if they DO go public again, their stock will be purchased by index funds again, and that’ll be good for an instant boost.
Only the future will tell us what will happen with Chrysler, and that future is still far off, in the third quarter - and we might not know what’s really in store until 2008. Let’s hope it’s good news and not bad news. I, for one, think it would be hard, though not impossible, for Cerebrus to be worse than Daimler.
Also read: DaimlerChrysler era editorials
May 16 update
According to a source at Chrysler Group, Tom LaSorda, Dieter Zetsche, and Cerberus managers (including CEO Steve Feinberg) met with senior management last night to clarify the future. The name of the company will be Chrysler Holdings; the Pentastar will be the corporate logo again, saving a considerable glazing fee for the Chrysler Technical Center. Tom LaSorda seemed very excited to be free from Daimler; Dieter on the other hand was bittersweet, saying that his years at Chrysler were the best years of his career and his life. He said he realized that the differences between Mercedes and Chrysler made real integration impossible, and that both had to do what they did best. The two companies will continue to share items like diesel engines, 4×4 components, hybrids and fuel cells, and electronics.
Steve Feinberg called his company a blue-collar capital investment firm that stresses long term growth, calling Chrysler a once in a lifetime opportunity and saying he wanted Cerberus to have the legacy of helping Chrysler to flourish. He did not provide a clear role for Wolfgang Bernhard, who was present, and said he would quickly trade in his Chevy pickup for a Ram. He did not see any vertical integration with Cerberus suppliers. He also noted that naming the company after the dog-guard of Hell was a huge mistake.
Questions we’ve been asked
What will this mean for Dodge Motorsports? Answer: we don’t know. I personally hope it means the NASCAR money goes into bringing back Plymouth or Viper racing or something else that isn’t professional wrestling.
Will they bring back Plymouth? Will the make the ‘Cuda and Imperial? Answer: I don’t even know if they know! Plymouth is certainly a long shot, even long-term. I don’t think they people there necessarily understand or care about Chrysler’s history and what has worked before.
Will they make the Dodge Challenger? Answer: yes, it’s too far advanced to be playing with now.
Will they sell Sprinters and Ram 4500s? Answer: I don’t see why not; after all, GM sold Toyotas for quite a while, and Chrysler sold Mitsubishis. Ford still sells modified Mazdas and Volvos.
May 11th, 2007 by Dave
We’re trying a new format at allpar - as seen in http://allpar.com/model/jeep/patriot.html - which is described mechanically in this weborial article: http://weborial.com/how-to/center.shtml … the hardest part was making it work in Explorer. I don’t think it’ll work in IE6, but most people are on IE7 now, and it will work there, without harming IE6.
The idea is to make it easier to read the pages, which in a wide browser can be daunting. The width is a big wider than I’d like, but it accommodates most tables and photos. To make it easier to hold your place in the articles, I’ve also increased the line spacing quite a bit. I had a border originally, but I dropped that for a cleaner “white space look.” You can see the original format at that Weborial page, with the borders.
This takes a few second per page to install, but with 1,280 pages, I’m in no hurry to sweep the entire site. New pages will be created with it, old pages will get it when they are updated. In a way this will provide a “pre-May-2007″ check so you can see how long a page has sat without updating! It also will help going forward because to make it work I have to make each page conform to the current web standards, and tell them to use UTF-8 character encoding.
I did try doing some en masse but it didn’t work quite as well as I’d hoped it would…
I’m also trying to relieve some of the load on the server, which for some reason seems to be a bit more stressed than in the past despite having a much faster I/O system and more RAM. It’s probably something to do with having other domains share IP addresses. Apparently there’s a shortage of IPs now…
May 8th, 2007 by Dave
DaimlerChrysler has shown that it’s not very good at managing auto companies. Though dominant in trucks, the company has been less than stellar in cars. Mercedes cars have been overpriced, underwhelming in reliability (to put it nicely, since they’ve done far worse than supposedly “poor” Chrysler in most surveys), and losing ground off-and-on to Lexus, with some huge rebates in recent times. Chrysler has been so grossly mismanaged by DCX it would take many blog entries to cover the ways.
What’s really needed is to split off both car groups. Let them merge together, and leave the huge German empire of commercial trucks and old-boy-networks to have fun with whatever it likes to do. If Daimler-Benz wants to go off and buy some more companies and bankrupt them, that’s fine; it won’t interfere with Mercedes-Chrysler.
Mercedes-Chrysler would be able to make both Chryslers and Mercedes much better and more cheaply without DCX. Being headquartered in the innovative United States, rather than German, because that’s where the bulk of the business is, M-C would be able to use all those great German technologies developed in the Mercedes R&D labs - but unlike Mercedes, they’d figure out ways to use them more cheaply, more effectively, and more attractively for the car buyer. Rather than have arrogant engineers in Stuttgart decide what drivers like, Chrysler would actually watch and think about what car buyers do, and tailor the technologies to them instead of the other way around. The senior Mercedes engineers could work with the Chrysler kids (and senior Chrylser engineers could work with Mercedes kids) to combine the key lessons of experience with the exuberance and energy of youth.
Mercedes cars would become much cheaper, because Chrysler knows how to build cars well at reasonable cost, and because they could draw on the Chrysler parts base. Chrysler cars would become better, because they would not have to buy parts just to reduce Mercedes’ prices or because the parts were made or designed in Greater Germany. Indeed, one can see Mercedes replacing Imperial - as the best that Chrysler could accomplish, with a little help from across the pond.
Mercedes-Chrysler is an idea whose time has come. Will it happen? Well, probably not. But it’s a pleasant thought - a reorganization that would actually realize the benefits of the takeover.
