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Marchionne moves to the margins

by Bill Cawthon on

FCA CEO Sergio Marchionne recently said that the replacements for the current Dodge Dart and Chrysler 200 would be created and built by “partners:”

So there will be a number of things that will be put in place in the next 18 months, things that have been agreed and detailed, that will effectively withdraw the current Chrysler 200 and Dodge Dart from the marketplace over an prolonged period of time during which we will be continuing discussions with potential partners that will be able to allow us to access that architecture and effectively provide us the product from their facilities that will allow us to continue to cover the market.

Fiat-Chrysler-Trucks

When the new UAW contract showed factory changes, FCA showed that it wanted to end passenger car production in the U.S.  Most believed at the time that car production would be moved to Mexico.

The main benefit of dropping the relatively unsuccessful car lines is not paying for the engineering of their replacements, while being able to increase production of crossovers, pickups, and utilities. Both moves allow the company to pay off its debt faster, to prepare for the next recession and reduce its overhead costs.

Refitting an assembly plant is cheaper than building a new one, and the Wrangler and Warren Truck plants are already running flat-out; and either building fresh or buying an old plant, such as the Diamond Star facility, carries long-term obligations that FCA could regret in the future.

Mr. Marchionne was trained as an accountant, and he knows where the money is: “There has been, in our view, a permanent shift towards UVs and pickup trucks.”

Chrysler-Car-Truck-Sales-Web

Marchionne said that FCA would not be driven by volume. Instead, the driving force will be margin. Trucks and crossovers have it; cars don’t.

One danger in Mr. Marchionne’s assumptions is the belief that oil prices will remain low over the next three years. The history of average retail gasoline prices since President Clinton signed the Commodities Modernization Act of 2000 shows that three-year assumptions on oil prices may involve some pain. The chart below, showing average U.S. retail gasoline costs (regular) into three-year segments, shows how volatile prices can be. There is now a glut, but it takes little to trigger a panic.

Gasoline-Prices-2001-2016-Web

On the other hand, FCA’s light truck sales have not been as sensitive to fuel prices as they once were, and crossovers have become far more capable of high gas mileage. Indeed, crossovers and trucks may be easier for FCA to fit with their new standardized hybrid and electric powertrain systems, increasing their economy.

The revised 2018 plan lets FCA pare down debt more quickly. It’s a plan guaranteed to make a capital junkie happy.

Bill Cawthon grew up in the auto industry in the 1950s. His Dad worked for Chrysler and Bill spent a number of Saturdays down on the plant floor at Dodge Main in Hamtramck. Bill is also the U.S. market correspondent for just-auto.com, a British auto industry publication, and a member of the Texas Auto Writers Association, which has named the Jeep Grand Cherokee the “SUV of Texas” several times and named the Ram 1500 as the “Truck of Texas” two years running.

Bill has owned five Plymouths (including the only 1962 “Texan”), one Dodge and one Chrysler and is still trying to figure out how to justify a Wrangler. He also has owned at least one of every 1:87 scale model of a Chrysler product. You can reach him directly at (206) 888-7324 or by using the form.


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