Chrysler's Next Move
Now that Chrysler filed for bankruptcy, what does the road ahead hold? Paul Eisenstein maps out the company’s future and says it may be rolling again by mid-summer.
With today’s filing for Chapter 11 bankruptcy-court protection in a New York federal court, faltering Chrysler takes what very well could be the critical step back from impending failure. But the move, forced upon it by recalcitrant lenders and a tough-minded White House, also poses a variety of challenges, even if the company does emerge from bankruptcy and partners with its Italian white knight, Fiat SpA.
The decision to go into Chapter 11 was made late Wednesday night after a group of holdout lenders and hedge funds refused to accept a sweetened version of the $2 billion payout authorized by the U.S. Treasury Department.
Many analysts question whether Chrysler can now update existing products, add new ones, fix nagging quality problems, and develop futuristic technologies without a huge helping hand from Italy.
Barring some unforeseen roadblock, Chrysler could emerge a new company by the beginning of July. The timing would play out well, as the automaker plans to shutter all of its assembly plants while it’s in Chapter 11. By summer, those retailers left would likely be running short of product, despite the current industry sales slump.
Who would replace CEO Bob Nardelli at that point remains uncertain, but it’s highly likely that Fiat’s chairman, the North American-educated Sergio Marchionne, would demand a voice in the successor’s selection. While Fiat will initially hold just a 20 percent stake, that is expected to grow to 35 percent, as the Italian maker meets several pre-set conditions.
First, it must help expand Chrysler’s weak global distribution network. That’s long been a stumbling block for the U.S. maker’s efforts to improve its competitive situation. Secondly, Fiat must launch production in the States of a new, high-mileage engine. And, thirdly, it will need to help Chrysler introduce a new, high-mileage vehicle.
Washington lawmakers have made much of Detroit’s focus on low-efficiency light trucks in recent months. And many have demanded that Chrysler and GM, in return for federal aid, abandon these products in favor of high-mileage small cars and hybrids.
While that position might play well in the media, and in political sound bites, it underscores the reality—some would say hypocrisy—of the U.S. marketplace. “Americans don’t like small cars,” asserted analyst Jim Hall, of 2953 Analytics, a suburban Detroit consulting firm, and the latest numbers back him up. While Toyota saw sales of its Prius hybrid-electric vehicle surge to more than 20,000, in June 2008, during the peak of last year’s fuel price runup, volumes plunged to barely 6,000 a month during the first quarter of 2009. And other HEVs haven’t done much better, nor have conventionally powered small cars, such as the Nissan Versa and Honda Fit.
“The government’s now a part owner and it’s going to discover they need to give consumers a reason to buy [small, high-mileage] cars,” stressed Hall. That may force the government to reconsider regulations, such as the Corporate Average Fuel Economy, or CAFE, standard, which demands higher fuel efficiency of the auto industry, but gives no incentive to consumers. But it’s unclear whether the Obama administration or the Democratically controlled Congress would have the will to prop up demand for such vehicles by adding new, European-style taxes to gasoline.
There are alternatives, though, such as the diesel engines that now account for more than half of all European sales, as well as next-generation hybrids, and the plug-in hybrids that many makers, such as GM, are racing to develop.
Fiat’s assistance won’t—and can’t—be limited to the development of just one or two vehicles, various industry observers warn. As its finances have collapsed, Chrysler has slashed its workforce to the point, says one mid-level engineer, “You can fire a cannon down the halls at CTC (the automaker’s suburban Detroit technical center) and not hit anyone.” Many analysts question whether Chrysler can now update existing products, add new ones, fix nagging quality problems and develop futuristic powertrain technologies without a huge helping hand from Italy.
The question, says analyst Joe Phillippi of AutoTrends Consulting, is “just how soon help can arrive.” There’s frequent talk of adding a Chrysler version of the Fiat 500, but insiders warn that homologating the minicar to American safety standards would take two to three years, and the same is likely true for most other products sold in Europe by Fiat and its Lancia and Alfa Romeo divisions.
For now, an influx of cash is a great first step. The U.S. government, which had provided Chrysler with billions of dollars in aid last December, balked at offering another tranche of cash, with President Barack Obama last month telling the automaker it first had to come up with a viability plan that would include a deal with Fiat. Now, the government will offer an additonal $3.3 billion to keep Chrysler going during the court-supervised bankruptcy—which one senior administration official described as “surgical,” and suggested should last 30 to 60 days. Coming out of the Chapter 11 process, the government would offer an addtional $4.7 billion in loans.
In return, it would receive an 8 percent stake. (The Canadian government and the government of Ontario would receive another 2 percent in the new Chrysler.) Ostensibly, that would put the White House in a position to dictate policy at Chrysler, but that senior official, speaking solely on background, insisted Washington does not have an interest in a day-to-day role in Chrysler’s operations. It will, however, play a part, he said, in selecting some of the new company’s board of directors.
“I believe that the president wants the government to be an owner, and not a manager,” said Hall.
There is always some degree of uncertainty as to what will happen, now that Chrysler’s case has been thrown on the mercy of the bankruptcy court. White House sources, speaking on background, said they were confident things would work out in their—and the automaker’s—favor. But there are other potential obstacles that could delay the fast-tracking of the Chapter 11 process.
Like its domestic rivals, GM and Ford Motor Co., Chrysler has been trying in recent years to pare back the number of dealers representing its three brands, Chrysler, Dodge, and Jeep. Even before it went begging for federal aid, it was aiming to slough off a third of its 3,600 retailers, and it may aim for an even lower number under court protection (GM, meanwhile, is facing its own restructuring deadline. The automaker has until June 1 to work out a debt-for-equity swap with lenders, and today’s filing by Chrysler, along with the harsh words of the president, send a clear signal that there'll be no last-minute payoff for lenders dragging things out.)
In the near-term, Chrysler will have to struggle with what it already has, along with the modest number of new vehicles it has been able to squeeze through the product development pipeline. That includes a completely updated version of its once-popular 300 sedan. Insiders who have seen the car say it is a sign that Chrysler really could regain its competitive edge. It is not only stylish on the exterior, a hallmark of the original 300, but boasts a world-class interior, something Chrysler has long been faulted for.
As the president has suggested, Chrysler is getting the life support needed to begin a new life. But there are still a lot of issues to resolve before it's clear it can survive on its own, outside intensive care.
Paul A. Eisenstein is an award-winning journalist who has covered the automotive industry for 30 years. He is founder and editor of TheDetroitBureau.com, an online magazine serving as the voice of the auto industry.