Chrysler: Doomed to Fail

Some friends have asked me what I think about Chrysler, so I’ve prepared this FAQ.

Why is Chrysler in the trouble it’s in?
The immediate issue is that Chrysler is essentially out of money. That’s the problem the government has been trying to resolve by loaning it a seemingly unending stream of cash. Your cash.

But obviously, if you peel back the onion one layer, the reason Chrysler has run out of money is that for years it’s been building notoriously unreliable, quirky, uncompetitive cars that fewer and fewer people want.

So will bankruptcy help Chrysler?
No. The government argues—and they’re about the only ones who claim this to be true—that Chrysler’s key problem is cost structure. In other words, if Chrysler could only cut its expenses dramatically, then it would be profitable, and thus would be a viable business.

Yes, Chrysler’s cost structure should be reworked: it has too many employees, too many plants, too many dealers, and it pays its UAW workers an uncompetitively high wage. That’s the expense side of the equation, and it’s a fixable problem. But the government apparently missed Accounting 101, where one learns the equation:

Profitability = Revenue – Expenses

Chrysler needs to increase revenue, otherwise it won’t be profitable and simply cannot continue operations.

So how would Chrysler increase revenue?
They need to make (a) better cars that (b) people want. These are distinct issues. (A) is doable. There’s a lot that goes into (A): good engineering, good styling and good reliability, to name a few. But Chrysler has a mixed bag of product goodness.

Its most mainstream car, the 300C, is actually a fairly well-engineered vehicle with some solid (albeit dated) Mercedes-Benz underpinnings. But its sales have been hindered by, among other things, the car’s love-it-or-hate-it styling, and the fact that it’s too big for the most popular mid-sized car segment. Moreover, it has nothing significant to offer over the Camry or Accord, the two mainstream cars everyone in the auto industry benchmarks.

The smaller car in Chrysler’s lineup, the Sebring, is a product engineering disaster, with absolutely no stand-out qualities versus the competition. It’s really no better than the cars it replaced, the Cirrus/Stratus twins, that were launched in 1995.

On the truck side, Chrysler has a stupidly large portfolio of quirky vehicles. Like the Nitro, which is a tiny, goofy-looking and underpowered mini-SUV that somehow replaced the acceptably decent Neon, which was a compact sedan. Huh?

Chrysler once led in the minivan class, but today Chrysler’s minivan offerings typically rank dead last against the now wide field of competition. And minivan sales are dropping, anyway.

Thank God Chrysler Never Produced This

Thank God Chrysler Never Produced This

There’s one surprising bright spot in Chrysler’s portfolio, which is its new Ram pickup. In a comparo of full-size pickups by Car and Driver Magazine, the Ram took top honors. Its biggest and perhaps only downside: deplorable fuel economy. Woops.

Oh, and speaking of bad product: in Consumer Reports’ latest survey of vehicle reliability, Chrysler ranked 32nd out of 34 overall among all brands sold in the United States, beating only Saturn and Land Rover. And referring to overall product quality, in April 2009 Consumer Reports wrote:

“Chrysler is at the bottom of the class, with a drop in its overall score and average reliability rating. Most models from the manufacturer have noisy, inefficient, unrefined powertrains; subpar interiors; and poor visibility. Chrysler is the only automaker with no models on our Recommended list.”

As if Chrysler’s poor product lineup wasn’t problem enough, (B) is the much, much harder piece to execute. Do you know anyone who owns a Chrysler product and would buy another? I don’t, either. And now that Chrysler has been tarred and feathered in the media, coupled with bankruptcy concerns, do you think anybody wants to give Chrysler money? And does Chrysler make a single vehicle you would seriously consider over a competitor’s product?

(B) boils down to a marketing problem, and frankly, as a marketer myself, I don’t know if this one can be solved. Ford and GM have been struggling with this for decades, too, and all I’ve seen is that strong marketing in this industry can blip sales up for a short time, but in the longer-run market share has continued to erode. Don’t be surprised to see some kind of “This is the New Chrysler” campaign. It won’t work.

Okay, so how does Fiat fit into all this?
If you didn’t notice, Fiat has no U.S. operations. They haven’t sold cars here in decades. But like any automaker, sales success in the U.S. is critical to growth because Americans (except for the last year) buy a lot of cars. So Fiat wants in. To do that, they need North American manufacturing and parts suppliers, and a dealer network. This is called a supply chain, and it’s really hard to develop one from scratch. So, Fiat is thinking they could piggy-back on Chrysler’s supply chain.

So would that help Chrysler?
Nope. Fiat’s product line-up has a problem similar to Chrysler’s: a bunch of quirky, uncompetitive niche vehicles. Chrysler has told the government that Fiat makes incredibly fuel-efficient cars, which meets the Obama Adminstration’s desire that the Big Three make more environmentally-friendly vehicles. Well, yes, Fiat makes some respectably fuel-efficient vehicles. They’re fuel-efficient because they’re tiny and have underpowered engines—a recipe Americans don’t want. They also look quirky or boring, depending on your point of view, and have few, if any, product advantages over smaller cars from brands that have gained traction here. Nobody will buy them. I mean, really, do any of these Fiat gems available in the U.K. appeal to you?

As a particular example, Chrysler has talked about selling the Fiat 500 here—a tiny car that looks, well, ugly to me. Yes, it gets great mileage. But that’s its only selling point. Interestingly, Ford sells the Fiat 500 in Europe as a rebadged Ford Ka. Ford studied whether the Ka would sell in the U.S. and decided it wouldn’t. If Ford—which hasn’t collapsed like Chrysler—couldn’t figure out how to make money on this Fiat model here, why would anyone think that Chrysler/Fiat could?

And let’s not ignore that the majority of corporate mergers—particularly in the auto industry—fail miserably, for a variety of reasons. I don’t see why Fiat/Chrysler would be any different.

But does that mean Chrysler is doomed?
Yes! The problem is timeline. Consider:

  • Car sales are not going to pick up dramatically for at least another year.  During this time, Chrysler can cut expenses until the cows come home, but the revenue variable in the profitability equation will continue to drop.
  • Chrysler—whether or not they’re tired up with Fiat—could theoretically start developing competitive cars right now. But they don’t have the money to do so. It costs billions. Moreover, it takes 3-4 years to get a car from the drawing board into production. By then, Chrysler will have long been deceased. And, to date, Chrysler has not significantly invested in the development of a small, fuel-efficient gasoline, or a viable hybrid model, or an electric vehicle. They’re already way, way behind the competition.
  • Fiat can give Chrysler a cash infusion and some additional product to sell. Cash could fund new product development, but it would take years to see the fruit of that. And again, nobody on this side of the pond will want to buy anything in Fiat’s product portfolio.

So what should Chrysler do?
Liquidate! Chrysler does have some salable assets, albeit few. Like the new Ram pickup. Pickups will always be in demand, and several foreign brands need one. Maybe Nissan? Their Titan pickup is uncompetitive. So they could literally takeover production of the Ram and call it their own.

Or the Jeep brand. From an engineering perspective, they’re terrible vehicles, but the brand has a cult following that may never die. Maybe that’s what Fiat should take over, and only that. It’s a very strong brand in Europe, too.

Really?
Yes. I’m sorry, folks, but Chrysler is dead, and has been for some time. Cause of death: suicide. It’s time to move beyond the denial stage and just accept it.

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3 responses to “Chrysler: Doomed to Fail

  1. Josh Turner

    The Nitro is actually a Jeep Liberty. The vehicle that replaced the Neon is the Caliber. For some reason, Dodge builds two Jeep versions of this product–the Compass and the Patriot. Both are terrible, but the Compass is by far the worst.

    The current Sebring is actually much less desirable than the vehicle that it replaced, but I have to take issue with your assessment of the minivans. The current crop of ChryCo minivans is actually quite nice to drive, and they are full of well thought-0ut features. You are right, though, that this is a dying segment.

    The Fiat 500 is a niche product whose most direct competition (in the US) is the slightly larger Mini Cooper. It will sell reasonably well, I am certain, among the urban trendy, but “reasonably well” for a product like that means 10-20,000 units a year, I bet. It’s not going to save Chrysler. What’s even more ironic is that it is a retro-chic vehicle that is every bit as backward looking as the much maligned Dodge Charger. It’s just looking back to a different past.

    I haven’t read any of the bankruptcy papers, but one of the claims made in favor of re-organization is that liquidation actually will bring in less money than people think. News reports suggest that the company says that there is much less value in the “stand-alone” assets than the dissenting creditors are claiming. I think they’ve got a point. In this market, I don’t see anyone paying to add single product lines; Jeep may be the exception (and depending on what Chrysler’s deal is with Nissan for the next generation Titan, I suppose Nissan might want the Ram). But the mantra over the past couple of decades has been to reduce brands and reduce product complexity; who is going to want to add an entirely new platform/set of engines/etc. to their operations just to gain a single product line? Moreover, the market is both soft (as GM’s experience in trying to unload Saturn, Saab, Hummer et al. has shown) and flooded (see GM). If you are looking for a sales/manufacturing channel, or even assets in such a channel, you have your pick of any or all of those products/brands. It’s really hard to see how Chrysler gets anything more than the 1 pound or whatever it was that BMW got from Phoenix when they “sold” Rover to that group.

    So, I don’t think liquidation is a plausible alternative (or, rather, I think liquidation would destroy even more value than reorganization). Chrysler’s been desperately trying to sell itself to anyone and everyone for months, and the Fiat deal is literally the only thing on the table. It’s a bad plan for all the reasons you list, but it’s the only one out there.

  2. Patrick Bateman

    My bad on the lineage of the Nitro; I indeed meant the Caliber. I’ll agree that the newest Chrysler minivans are much improved and not altogether horrendous, but I think the market has spoken and declared the Toyota Sienna and Honda Odyssey the winners in this segment.

    Liquidation is by no means a “good” alternative, but I think it’s the only viable one. I just don’t understand what the point or re-organization is. What would a re-organized Chrysler look like one or two years from now? My guess: much smaller, with a much improved cost structure…but even lower market share and still pathetically unprofitable, and will ultimately end up in liquidation, anyway. Without good product AND consumer willingness to buy, the company is dead. Liquidation would allow investors to get whatever they can right now, because over time Chrysler’s paltry assets will continue to decline in value. Whether or not anyone would buy any of Chrysler’s assets at a reasonable price–or ANY price–I don’t know. But I think we’re deluding ourselves if we believe that Chrysler will somehow magically emerge from re-org and start selling enough cars again to prosper.

  3. Josh Turner

    I guess my point is that liquidation and reorganization don’t seem that much different in this case. What will a reorganized Chrysler look like? The American division of Fiat. A liquidated Chrysler would look much the same. The difference between liquidation and reorganization is thus not so much the end result, but where the money flows in the interim.

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