Chrysler, heavily dependent on light trucks (jeeps, minivans, pickups), was whipsawed by the spike in gasoline prices in summer 2008. Then came the credit crunch; when its access to lease financing disappeared, it lost 20% of sales overnight. As cash drained, it attempted to work out a deal with its many creditors, and failed. Assuming the firm emerges from Chapter 11 – rather than collapsing into liquidation as dealers and other creditors play "chicken" in hopes of a bigger slice of a rapidly shrinking pie – what will it need to survive?
First, Chrysler has neither the cash – nor after a mass of white-collar buyouts, the people – to develop new cars. It strikes me as unlikely that it will receive an infusion of cash and the stability to rebuild its famous design and engineering capabilities. Fiat doesn't have the money. Nor does it have the people, because it has no expertise in large cars, SUVs and light trucks to supplement whatever remains of Chrysler's historically famous but leanly staffed product development organization. Chrysler thus faces a long 2 years, until new product arrives via Fiat.
It will then face the challenge of selling Fiats. The new product will consist almost entirely of small cars, because as a company firmly rooted in southern Europe and strong in Brazil and other developing markets, that is Fiat's core strength. But neither Chrysler, nor any other company operating in the US, has been able to make a go of that on a consistent basis.
On paper we have policies to encourage a domestic market for small, fuel-efficient vehicles: CAFE, or Corporate Average Fuel Efficiency requirements, in place since 1977. Under CAFE, in order to sell a large car, firms must sell small cars, or they will exceed the average "mpg" standards that legislation imposes. The problem Americans have not bought into that policy: they want power. Given separate, less stringent standards for trucks, the entire market shifted towards light trucks (which for CAFE includes jeeps and minivans, and not just pickups). Small cars remain a small slice of the market, but in 2012 Chrysler's jeeps and minivans and pickups will be dated; small cars will be the only "new" product they will have on offer.
Absent a polar shift in American politics, to enable a stiff gas tax, Chrysler will not survive to 2015.
Now in the longer haul they need to not just survive, they need to gain back at least a modicum of market share. To stay in the auto business will require the cash to continue funding new product develop. That is in itself not an insuperable barrier. But in the background firms also need to be able to fund supporting research and development so that they can bring a range of new technologies to market, particularly electric vehicles (whether they run off of batteries, small "hybrid" engines or fuel cells). At present Chrysler is wholly incapable of doing that by itself. Fiat is probably too small as well. A beefy combination of the two might be another story, particularly as a smaller company has greater leeway to buy technology from independent suppliers. (Larger companies want to withhold core technologies from larger rivals, but Fiat-Chrysler may be viewed as a way to leverage their own investment, rather than as a threat.)
That too appears unlikely. Over the past 15 years vast improvements in engineering tools -- computer design and simulation, specifically -- have enabled car companies to spin off vehicles from their core platforms more quickly and at lower cost than ever before. And the U.S. market is so large that it supports a plethora of firms -- 14 at last count. From how many varieties does a consumer need to choose a minivan? Or mid-size car? Or whatever type of vehicle? Hundreds of models are on offer. There is no reason to assume Chrysler cars will improve so markedly that they will be able to pull away from the field and secure more sales than the company does today. Or that they will make money: given the competition, profits were falling across the industry even as sales boomed. There's no reason to think they'll recover.
And no sales pitch from President Obama will change that.
First, Chrysler has neither the cash – nor after a mass of white-collar buyouts, the people – to develop new cars. It strikes me as unlikely that it will receive an infusion of cash and the stability to rebuild its famous design and engineering capabilities. Fiat doesn't have the money. Nor does it have the people, because it has no expertise in large cars, SUVs and light trucks to supplement whatever remains of Chrysler's historically famous but leanly staffed product development organization. Chrysler thus faces a long 2 years, until new product arrives via Fiat.
It will then face the challenge of selling Fiats. The new product will consist almost entirely of small cars, because as a company firmly rooted in southern Europe and strong in Brazil and other developing markets, that is Fiat's core strength. But neither Chrysler, nor any other company operating in the US, has been able to make a go of that on a consistent basis.
On paper we have policies to encourage a domestic market for small, fuel-efficient vehicles: CAFE, or Corporate Average Fuel Efficiency requirements, in place since 1977. Under CAFE, in order to sell a large car, firms must sell small cars, or they will exceed the average "mpg" standards that legislation imposes. The problem Americans have not bought into that policy: they want power. Given separate, less stringent standards for trucks, the entire market shifted towards light trucks (which for CAFE includes jeeps and minivans, and not just pickups). Small cars remain a small slice of the market, but in 2012 Chrysler's jeeps and minivans and pickups will be dated; small cars will be the only "new" product they will have on offer.
Absent a polar shift in American politics, to enable a stiff gas tax, Chrysler will not survive to 2015.
Now in the longer haul they need to not just survive, they need to gain back at least a modicum of market share. To stay in the auto business will require the cash to continue funding new product develop. That is in itself not an insuperable barrier. But in the background firms also need to be able to fund supporting research and development so that they can bring a range of new technologies to market, particularly electric vehicles (whether they run off of batteries, small "hybrid" engines or fuel cells). At present Chrysler is wholly incapable of doing that by itself. Fiat is probably too small as well. A beefy combination of the two might be another story, particularly as a smaller company has greater leeway to buy technology from independent suppliers. (Larger companies want to withhold core technologies from larger rivals, but Fiat-Chrysler may be viewed as a way to leverage their own investment, rather than as a threat.)
That too appears unlikely. Over the past 15 years vast improvements in engineering tools -- computer design and simulation, specifically -- have enabled car companies to spin off vehicles from their core platforms more quickly and at lower cost than ever before. And the U.S. market is so large that it supports a plethora of firms -- 14 at last count. From how many varieties does a consumer need to choose a minivan? Or mid-size car? Or whatever type of vehicle? Hundreds of models are on offer. There is no reason to assume Chrysler cars will improve so markedly that they will be able to pull away from the field and secure more sales than the company does today. Or that they will make money: given the competition, profits were falling across the industry even as sales boomed. There's no reason to think they'll recover.
And no sales pitch from President Obama will change that.
Thanks to JJ and DR for the back-and-forth behind this.
If fuel prices stay low Chrysler could see tremendous gross profits on a per unit basis if consumers start buying trucks and SUVs again. We saw that in the early eighties when everyone thought Chrysler was saved by the K Car. What really did it, and allowed them to pay off the loan guarantees early, was the fact that people started buying high margin vehicles again.
ReplyDeleteAt a conference this week, Paul Taylor, chief economist for NADA stated, "It was the mortgage securities and the bursting of the real estate value bubble that caused the Asset Backed securities market to disappear, and along with it the money that financed floor plans and vehicles. I'm sure he's right. As that was preceded by the fuel price spike, already vulnerable domestic auto companies were pushed toward insolvency. I believe it is possible that the Ford family decided to take decisive action early to preclude having to go to the government at some point. As everyone knows, the Ford family owns a special brand of stock that affords them their lifestyle and control of FOMOCO. It is unlikely that the government would have preserved that. I give them credit for looking down the road!
But now, Chrysler's fate is in the hands of the bankruptcy judge, who is no rookie. Judge Gonzales is going to have to make some tough calls with the President breathing down his neck. The biggest issue is the Issue of a Section 363 sale. This is where Chrysler wants to sell its clean assets to freshly created corporation to avoid the slog that will occur for "non clean" assets. That is the only possible way Chrysler can emerge from the process quickly. As I see it, this is the single most critical issue facing Judge Gonzales. He will have to determine if section 363 sale is "fair" and not a strategy to dodge rightful obligations. As a staunch defender of Dealers, I am convinced that the strategy IS IN FACT a strategy designed to undermine the ONLY CUSTOMERS Chrysler has, their Dealers. We'll be watching closely to see what Judge Gonzales has to say about that!
"Cash for Guzzlers"
ReplyDeleteSomeone please explain this one to me! Surely I am not understanding this program correctly. The "Cash for Clunkers" would scrap old vehicles. With Cash for Guzzlers the taxpayers subsidize the purchase of a new vehicle and the trade in goes on guzzling for the new owner who buys the trade in? Am I missing something here?
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ReplyDelete