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The Chrysler recovery plan

by David Zatz on

Chrysler LLC today submitted its viability plan to the U.S. Treasury Department, outlining the Company’s plans to enhance its products; complete its restructuring, and achieve concessions from stakeholders. The plan is required to be finalized by March 31. The detailed version is available on the Chrysler media site, and will be summarized at Allpar.

Chrysler LLC Chairman and CEO Robert L. Nardelli said, “We believe that Chrysler LLC will be viable based on the updated assumptions contained in this submission, and that an orderly restructuring outside of bankruptcy, together with the completion of our standalone viability plan, enhanced by a strategic alliance with Fiat, is the best option for Chrysler employees, our unions, dealers, suppliers and customers. Today, our people are eager to re-establish Chrysler as an iconic American company and, in the process, repay the U.S. government and taxpayers for their faith in our future. We believe the requested working capital loan is the least-costly alternative and will help provide an important stimulus to the U.S. economy and deliver positive results for American taxpayers. This plan will ensure the continued provision of health care and pension benefits to our active employees and retirees, while continuing to protect hundreds of thousands of middle class, quality American jobs at Chrysler, our dealer network and our suppliers.”

To help meet customer needs and increased federal fuel economy standards, Chrysler plans 24 vehicle launches in 48 months, and announced electric technology as a primary strategy for developing fuel-efficient, low emission vehicles, including an electric-drive vehicle in 2010.

The UAW, dealers, suppliers and 2nd lien lenders’ concessions have been implemented or fundamentally agreed upon. The signed term sheets for the Labor Modifications and VEBA modifications fundamentally comply with the requirements set forth in the U.S. Treasury Loan and would provide Chrysler with a work force cost structure that is competitive with the transplant automotive manufacturers.

Since Chrysler LLC’s original $7 billion submission, there has been an unprecedented decline in the automotive sector. The continued lack of credit affects consumers and dealers, leading to reduced wholesale orders. Chrysler thus revised its Seasonally Adjusted Annual Rate (SAAR) forecast, projecting a SAAR level of 10.1 million units for this year (a 40-year low for the industry) and an average SAAR level of 10.8 million units for 2009-2012. For Chrysler, this represents a sales decline of approximately 720,000 units, (or an average 180,000 units per year) assuming a 10 percent market share – around $18 billion in lost revenue and a $3.6 billion decline in cash inflows during the four years.

Based on this, Chrysler will require incremental financial support to continue its restructuring and is seeking an incremental $2 billion in addition to the remaining $3 billion.

Chrysler LLC Viability Plan Highlights

Chrysler has signed a non-binding agreement to pursue a strategic alliance with Fiat that represents significant strategic and financial benefits to stakeholders. The proposed Fiat Alliance would enhance Chrysler’s viability plan and would provide the Company with access to competitive fuel-efficient vehicle platforms, distribution capabilities in key growth markets and substantial cost-saving opportunities.

In 2010, the Company will launch four platforms: a new Jeep Grand Cherokee, a new Dodge Charger, a new Dodge Durango, and a new Chrysler 300 (the most awarded car in automotive history since its launch in 2005).

In 2008, Chrysler had six vehicles with highway fuel economy of 28 miles per gallon or better. For 2009, 73% of Chrysler LLC’s vehicles improved fuel economy compared with the prior year’s model. Fuel economy will continue to improve in 2010 with the introduction of the all-new Phoenix V-6 engine, which will provide fuel efficiency improvements of between 6% to 8% over the engines it replaces. A two-mode hybrid version of the Company’s best-selling vehicle, the Dodge Ram, is scheduled for 2010. The first Chrysler electric-drive vehicle (other than two series of electric minivans sold during the 1990s and apparently forgotten by the company) is scheduled to reach the market in 2010, to be followed by other electric-drive vehicles, including Range-extended Electric Vehicles.

The Fiat alliance would further help the Company achieve these standards as Chrysler gains access to Fiat’s smaller, fuel-efficient platforms and powertrain technologies, reducing capital expenditures while developing vehicles that support the country’s energy security and environmental objectives.

Through year end 2008, Chrysler has:

Reduced fixed costs by $3.1 billion
Reduced its work force by 32,000 (a 37 percent reduction since January 2007)
Eliminated 12 production shifts
Eliminated 1.2 million units (more than 30 percent) of production capacity
Discontinued four vehicle models
Disposed of $700 million in non-earning assets
Improved manufacturing productivity to equal Toyota as the best in the industry as measured by assembly hours per vehicle according to the Harbour Report
Achieved lowest warranty claim rate in Chrysler’s history
Recorded the fewest product recalls among leading automakers in 2008
The following additional restructuring actions are planned in 2009:

Reduce fixed costs by $700 million
Reduce one shift of manufacturing
Reduce total manpower by 3,000 people
Discontinue three vehicle models
Take out 100,000 units of capacity
Sell $300 million additional non-earning assets

Chrysler will fully comply with the restrictions established under section 111 of EESA relative to executive privileges and compensation. In addition, the Company has suspended the 401k match, incentive bonuses, merit increases and has eliminated retiree life insurance benefits.

Chrysler will achieve cost savings/improved cash flow through a number of initiatives including: reduced dealer margins, elimination of fuel fill, reduction of service contract margins.

The Company has initiated the dialogue with its suppliers and believes that it will be able to obtain substantial cost reductions from suppliers that will result in achieving targeted savings. Chrysler supports the supplier associations’ proposals, which would provide a government guarantee of OEM accounts payables.

Chrysler anticipates that the holders of the 2nd Lien Debt will agree to convert 100 percent of their debt to equity. Chrysler’s Viability Plan includes expectations to further reduce its outstanding debt by $5 billion. In addition to strengthening the Company’s balance sheet for the long term, this reduction will also provide immediate cash flow via interest savings of between $350 million and $400 million annually.

David Zatz founded Allpar in 1998 (based on a site he had begun in 1993-94), after years of writing reviews for retail trades. He has been quoted by the New York Times, the Daily Telegraph, the Detroit News, and USA Today. Before making Allpar a full-time career, he was a consultant in organizational psychology. You can reach him by using our contact form (much preferred) or by calling (313) 766-2304


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