When news first leaked out that General Motors (GM) was interested in buying Chrysler from private equity firm Cerberus Capital Management, the general reaction from auto-industry watchers was: Are they crazy?
Chrysler's sales are down 30% and the company is losing money. Its product lineup is loaded with trucks and sport-utility vehicles and its cars are also-rans. The Chrysler and Dodge brands don't have enough strong passenger cars and crossovers. Even the beloved Jeep brand is suffering as SUV sales have tanked.
But on that very troubled landscape, some of GM's top executives see an opportunity. Chrysler, after all, has managed to sell 1.2 million vehicles so far this year, and it reported $1.1 billion in earnings before interest, taxes, depreciation, and amortization (EBITDA) for the first half. But the company admits it is still losing money and burning cash. Chrysler had sales of $61 billion in 2006, the last full year for which it was required to report its financial performance.
Looks Good on Paper
If GM executives determine that Chrysler can be restructured, they think it could be a great opportunity to add sales and a handful of good products while boosting profits by slashing costs. Their plan: Grab the tens of billions in Chrysler revenues, cut overhead costs at headquarters, and book a nice profit.
On paper, it all looks good. GM gets a nice book of business and eliminates a competitor from the scene, giving every survivor a shot at more sales and better pricing. The hard part will be getting the union to accept the cuts needed to get to the profitable revenue stream that GM covets. To sell the benefits of buying Chrysler to its own board of directors and shareholders, GM would have to build a case that the costs that come with buying out thousands of United Auto Workers and winding down Chrysler's bloated chain of dealers won't dwarf the benefits. Concedes one GM executive: "No deal comes without risk."
GM wouldn't keep the whole company. The biggest of the Big Three likes Jeep, the minivans, the Dodge Ram pickup, and cars like the Chrysler 300. Other vehicles, such as the Chrysler Sebring and Dodge Avenger, or big SUVs like the Dodge Durango, could disappear. GM already has strong products for buyers of those Chrysler vehicles.
Workers and Plants Would Be Cut
But here's where the strategy breaks down. Getting rid of cars GM doesn't want means dumping plants and workers, too. Already, there is union opposition to a deal. Appearing Oct. 14 on WWJ radio in Detroit, UAW President Ron Gettelfinger said he wouldn't endorse a GM-Chrysler deal because, "I personally would not want to see anything that would result in a consolidation that would mean the elimination of additional jobs."
A deal with GM would be a tough one for the union to swallow. Chrysler already needs to cut as many as four plants and shed more workers, says Ron Harbour, a partner with consulting firm Oliver Wyman. Gettelfinger won't just let a new owner slash jobs. Automakers want the union to accept forced buyouts, because right now workers can be offered buyouts but they don't have to take them. Even with a merger, the workers are protected by the UAW contract, says Sean McAlinden, chief economist at the Center for Automotive Research. "The UAW doesn't like it," McAlinden says. "They'd be consolidated and lose more members."
Consider this. Closing the plant in suburban Detroit that makes the Avenger and Sebring means shedding 1,400 workers. If buyouts cost about $100,000 per worker, that would cost $140 million. McAlinden thinks Chrysler will need to drop its union workforce from 36,000 to 25,000. At that rate, buyouts could cost Chrysler or its new owner more than $1 billion.
Truck Market Down 25%
GM likes the Jeep brand. So do other suitors who have been examining Chrysler over the past couple of months. But the Detroit factory that makes the Grand Cherokee is running at only about 75% of production, says Harbour.
Outside carmakers also eye the minivan program, a longtime breadwinner for Chrysler. But sales have been falling and Chrysler will idle its St. Louis minivan plant at the end of October 2008, using another in Windsor, Ont., to make what the market wants. Chrysler also has three factories making the Dodge Ram pickup. The truck is all new and has some good technology and features -- like a smoother suspension and storage boxes in the bed -- but the truck market is down 25% this year and Ram sales are off 30%. There, too, analysts say, Chrysler may have to cut production or even close a plant if pickup sales aren't strong enough.
Don't expect Chrysler sales to turn up. In the year since Cerberus has taken over, insiders at Chrysler say, few new products have been developed besides the new Dodge Ram pickup truck that can really help boost revenue. "What you have," says Eric Noble, president of auto industry consulting firm The CarLab, "is one big ship that is listing has pulled up alongside one that's sinking and proposed that they tie together."
Not a Done Deal
Does all of this mean GM can never get the benefits that some of its executives want? It would be tough to execute. One GM executive, who spoke on condition of anonymity, said it all depends on what kind of deal Cerberus would be willing to do. If some cash comes back GM's way in the deal -- a sum that is sufficient to restructure the company -- there could be a way through. If not, GM won't do any deal, says the executive.
Chrysler officials declined to comment on the matter, except to say that the company has talked to a number of carmakers about joint ventures and other partnerships. Cerberus officials could not be reached Tuesday for comment.
One scenario has GM giving Cerberus its 49% stake in lender GMAC Financial Services (GMAC) in exchange for Chrysler and $3 billion. JPMorgan (JPM) analyst Himanshu Patel says GM, which has $21 billion in cash but is burning it at a rate of $1 billion a month, could take the $3 billion and Chrysler's $10 billion in cash and come away with the car company and $13 billion.
From there, GM needs to figure out if that's enough money to make Chrysler a worthy business while also wrestling with its own problems. Risky indeed.
