Why Chrysler Still Might Not Survive

U.S.News & World Report
Why Chrysler Still Might Not Survive
Thursday April 30, 3:31 pm ET

By Rick Newman



Give President Obama credit for his boldest bailout plan yet. Unlike some of the open-ended bank bailouts, his Chrysler plan makes hard choices, sets public standards and deadlines, and puts some burden on stakeholders besides the U.S. government. By forcing Chrysler into bankruptcy, Obama has committed to a process that will determine winners and losers and force concessions on those unwilling to make them voluntarily.

But Obama's claim that bankruptcy gives Chrysler a "new lease on life" may be wishful thinking. Bankruptcy reorganization and a Fiat merger might be Chrysler's best chance for survival, but the "New Chrysler," as the administration calls it, could end up being no more successful than New Coke, one of the biggest business flops ever. Here's why:

No cars.
Obama praised Chrysler's accomplishments in cutting tough deals with its unions and most of its creditors. But it takes compelling cars to succeed in the car industry, and Chrysler still has few. The Fiat merger is supposed to give Chrysler new versions of some popular Fiat vehicles, like the 500 compact car. Okay, great. But unless Obama takes the unusual step of waiving U.S. safety and environmental laws, it will take well over a year for such cars to be retrofitted for the U.S. market - and even longer before they're actually built here, which is one of the conditions the new company must meet to get up to $8 billion in additional aid. For the next 12 months at least, Chrysler will still be offering the same lineup of inefficient, underperforming vehicles, and losing market share the whole time.

Small margins.
The last two years have proven that every successful automaker needs a stable of competitive small cars - one of Fiat's strengths - but those are just part of the formula. Small cars tend to have small profit margins, no matter how many you sell, which is why it's vital to have compelling larger vehicles, too. Chrysler's 300 sedan was a big hit, but it's near the end of its lifecycle, and few of Chrysler's other big vehicles are tops in their segment. When the car market was going gangbusters, a few hits in the lineup could make up for a few duds. But with industry sales down 40 percent from their peak, every vehicle needs to pull its own weight, and even a combined Chrysler-Fiat fleet doesn't seem to have enough standouts.

Lots of competition.
The revitalized Chrysler is hardly the only company planning to introduce hot new small cars that will take the market by storm. Chevrolet has the Cruze. Ford has the Fiesta. Toyota, Honda and Nissan already build some of the best small cars, and they're certainly not planning to give up their huge edge in the segment. So even if the 500 and a couple other Fiats are big hits when they arrive in America, the competition is only going to intensify. And other makes already in the market have a key first-mover advantage.

Convoluted ownership.
If the Obama plan goes as expected, Chrsyler will emerge from bankruptcy being jointly owned by the United Auto Workers, Fiat, and the U.S. and Canadian governments. Those vastly different entities share a common cause for the moment - saving a big North American employer and using its infrastructure as a springboard for Fiat. But it's hard to imagine a more awkward ownership structure for something as complex as a car company. The U.S. government and the UAW? The U.S. government and the Italians? Will they really maintain a unified focus for as long as it takes for Chrysler to repay up to $12 billion in federal loans and get out of the government's clutches? Chrysler's failed 9-year marriage to Germany's Daimler AG is a poignant reminder of how difficult it can be to hold together a sprawling operation when the biggest stakeholders have diverging interests.

Ford.
There's one domestic automaker positioned to benefit from the woes at Chrysler and General Motors. Ford is still nursing its own string of deep losses -- but doing so without government aid or the stigma associated with bankruptcy. And as it turns around its own operation, Ford has started to slowly gain market share, largely at the expense of its crosstown rivals. Ford could make further gains as Chrysler works through bankruptcy, and GM approaches it. Obama has pledged government backing for the warranties on all Chrysler and GM products, but buying from a solvent automaker still beats taking your chances on a fuzzy government guarantee. That's old-fashioned capitalism, which may yet play a role in the historic realignment of the automakers.

http://biz.yahoo.com/usnews/090430/30_why_chrysler_still_might_not_survive.html;_ylt=Ak4I9f5eS163H2qBgdj9syy7YWsA?.&.pf=loans