Counterpoint: Chrysler’s Not Going Anywhere

The Internet – including automotive websites and message boards, financial newspapers, and more – has been buzzing for the past few weeks with speculation about what will happen to DaimlerChrysler’s Chrysler group. I have the advantage of three weeks of news and analysis before commenting on where I think everything will end up, but it’s still pretty much anybody’s guess. I don’t think even Dr. Z knows how this will play out. But my suspicion is that Chrysler’s not going anywhere.

The speculation all began on February 14, when DaimlerChrysler presented their 2006 results to investors, and had to explain how they were going to fix the $1.48 billion loss that the Chrysler group had in 2006. CEO Dieter Zetsche said that “all options are on the table” with regard to the Chrysler group’s future. In simple terms, this meant to most observers that any of several possible scenarios could happen:

• Spinning the Chrysler group off of DaimlerChrysler as a separate company owned by DCX – or turning around and selling it to a private equity firm
• Selling the Chrysler group to another automaker (GM later emerged as a front runner and has been one of the few to not deny interest)
• Entering into strategic partnerships with other automakers

The situation appears to still be very much in flux, but at this point, I do not believe that GM or any other automaker will buy the Chrysler group. For GM, who already has too many divisions and too much product overlap (Pontiac G5, anyone?), adding three more to get eleven just makes their problems worse. Furthermore, adding Chrysler’s unfunded pension and retiree healthcare liabilities to GM’s own very substantial total would exacerbate that problem for GM as well. And how would GM pay whatever price DCX is asking for Chrysler? If you haven’t noticed, they have been selling stakes in car companies (Isuzu, Fuji Heavy Industries, Suzuki, and Fiat) and not buying them as they try to conserve cash to fund their restructuring. There would be further tens of thousands of jobs eliminated and a further loss of domestic market share as overlapping models were phased out.

Renault-Nissan actually sounds like a decent match on paper, but Carlos Ghosn and his team already have their hands full with a turnaround of Renault in Paris and is dealing with less-than-stellar Nissan results in the US for the past year. Plus, Renault-Nissan has publicly said that they are not interested, as have Hyundai and Volkswagen.

How about a Chinese manufacturer, using a purchase of Chrysler to get a foot in the US market, with an already-established dealer body, integrated production system, skilled workforce, substantial factory capacity, and a decent existing lineup? They certainly could afford it – but my guess is that Chinese manufacturers will tread more carefully into the US. I’ve read that at this time, they lack the necessary management talent to be players in the global automotive marketplace. Plus, they would probably experience a pretty substantial political backlash working against them

I could see Chrysler going to a private equity group. Cerberus Capital Management – recent purchasers of 51% of GMAC from General Motors – are rumored to have interest, and bids have been solicited from several other large players. According to both Detroit newspapers, both Cerberus and Blackstone Group are meeting with Chrysler to review its finances right now. I still don’t think that private equity is the most likely scenario, however.

Today, the thought occurred to me that all of the talk of selling Chrysler is just an elaborate attempt by Zetsche to gain a stronger hand in negotiations with the UAW later this year. He has made no secret of his disgust with the fact that the UAW granted healthcare cost concessions to Ford and GM, but not to Chrysler. Today, he said, “The union decided to treat Chrysler differently than GM or Ford, as far as health care was concerned, which was a disadvantage for Chrysler,” he said. “That was one fact we had to take into consideration in trying to understand the current situation and the potential options.” To me, that sure sounds like a man drawing a line in the sand, looking for a strong bargaining position.

Instead, the most likely scenario to me would be Chrysler completing its recently-announced restructuring plan under Tom LaSorda’s leadership. They’d hopefully be able to trim some structural costs while rolling out new models that are right for the US market in a time of high energy costs. I believe that we will see collaboration between Chrysler and GM on large SUVs – think of a rebadged Suburban, and possibly on the low end of the market as well, with Dodge selling rebadged Daewoos. Longer term, with the 25-year agreement just inked between Chrysler and Chery, we’ll probably see Chinese-built Dodges; however, Chrysler needs small car sales now, so rebadging Daewoos – which already meet US safety and emissions standards – from GM would probably be a faster solution than assisting Chery in the development of models suitable for the US.

I don’t think the Germans will get the price they want for Chrysler – analysts have pegged the value somewhere around $5 billion (excluding liabilities), which is about one-seventh of what Daimler-Benz paid for the company in 1998. Whatever happens, only one thing is certain…it’s going to be a bumpy ride for the next few months.