Nov 8, 2008

Business - Demise of Chrysler

Keith Naughton

As Chrysler commemorated its first anniversary under the ownership of private-equity player Cerberus Capital Management this summer, CEO Bob Nardelli issued a five-page letter to rally the troops. After all, things hadn't really worked out as Cerberus expected when it paid $7.4 billion to take Chrysler off Daimler's hands in 2007. Rather than "restoring an American icon," as Cerberus chairman John Snow declared back then, Chrysler sunk even further into the muck as gas prices soared and showroom traffic came to a standstill. Chrysler's guzzler-heavy lineup of SUVs and trucks did worse than most, with sales plummeting 25 percent and profits nowhere to be found. Still, Nardelli, once an acolyte of GE's Jack Welch, oozed optimism when he closed his long letter with these words of encouragement: "Chrysler may be down, but we're a long way from out. It's time for us to prove the naysayers wrong with another one of our patented comebacks!"

But it looks like Chrysler has run out of comebacks. Shortly after Nardelli wrote those words, Cerberus entered talks with General Motors to unload its Motown mistake. Despite reports of an impasse, a deal still appears to be just around the corner—if GM and a growing chorus of politicians can convince the federal government to put up $10 billion to $15 billion to finance the two ailing automakers' marriage of convenience. That means Chrysler, after defying death for decades, will finally succumb. Analysts expect GM to slash 34,000 Chrysler jobs—half its workforce—and shut down production of all but a handful of its slow-selling models. "Chrysler as we know it will cease to exist very soon," says auto consultant Kimberly Rodriguez of Grant Thornton, which predicts half of Chrysler's 14 factories will close.

It's an ignominious end for the company of Lee Iacocca and once-hot models like the Dodge Viper, PT Cruiser and the Hemi 300C. Daimler, which paid $36 billion for Chrysler in 1998, put a fitting coda on its investment last week. It valued its remaining 20 percent stake in Chrysler at zero.

So why would GM want a worthless automaker? Well, it certainly isn't about Chrysler's cars. It's about the cash. Chrysler said it had $11.7 billion in the till this summer, and GM desperately needs that money to survive. It also wants to get rid of one of its crosstown rivals so it doesn't have to match the outrageous rebates Chrysler puts on its models any more. "The real reason GM is doing this is to get their hands on that cash," says auto economist Sean McAlinden of the Center for Automotive Research, "and to put their competitor down. It's called 'buying the business.' In that way, you save GM."

If this sounds ruthless, that's because it is. GM is backed into a corner, running out of money, time and options. Its sales have tanked, it has lost $18.8 billion so far this year, and bankers will no longer lend it a penny. It's burning through more than $1 billion a month, and Wall Street expects it to run out of money by the middle of next year. To raise funds, GM is desperately trying to sell assets—the Hummer line, its riverfront headquarters—but has found no takers. Chrysler's cash stash might be its last hope. To put that money to work for its own interests, though, GM has to hollow out Chrysler. "GM will be hard pressed to clean out the Chrysler organization as quickly as possible," says University of Michigan business professor Gerald Meyers, who was CEO of American Motors when Chrysler bought it in 1987. "It's a nasty job."

But GM won't just get quick cash from Chrysler. It will also acquire substantial liabilities. That $11.7 billion came to Cerberus in the form of loans from banks, which expects that debt to be paid, with interest. There's also a new union fund that covers workers' health-care costs, to which GM will be expected to contribute $11 billion. Then there are all those workers and dealers who will have to be culled with billions in buyouts. Combined, the two companies will employ 205,000 workers in North America and have 22,000 dealers—half the total number of showrooms in the America.

To service these staggering obligations, GM is counting on taxpayer funding and might have to sell off bits of Chrysler to the highest bidder. Jeep, Chrysler's most precious possession, might fetch $2 billion, says McAlinden. (That's down from $5 billion a few years ago, when SUVs were still hip.) Nissan might be interested in buying the Dodge pickup-truck business. GM might want to hang onto Chrysler's profitable minivans, unless someone makes them a good offer. Chrysler's slow-selling cars aren't expected to attract much interest, but the automaker is already trying to sell its Viper sports-car line. "We'll see who is around to pick over the bones," says Meyers.

Why would the government want anything to do with this car carnage? The alternative is automotive Armageddon. Without the GM-Chrysler combo, its advocates argue, all of Detroit will tumble into bankruptcy. And that will take down thousands of parts suppliers, dealers and other businesses that depend on the American automakers. Even the Toyota, Honda and Nissan auto factories in America could shut down because their U.S. suppliers would go belly up. Total job loss: 2 million Americans, according to a study by the Center for Automotive Research. "A graceful exit for Chrysler is highly preferable to a catastrophe," says Cole. That's why the governors of six states just asked Treasury Secretary Henry Paulson and Fed chairman Ben Bernanke to take "immediate action" to bail out Detroit. The White House says it is talking to the automakers, but Paulson is reportedly reluctant to dip into the $700 billion in bailout money at his disposal. Rather, the administration is working to speed delivery of the $25 billion authorized by Congress last month to help automakers retool to make fuel-efficient cars.

In order for Detroit to live, by this reasoning, then Chrysler must die. Before it goes, though, it is worth having its illustrious, tempestuous, life flash before our eyes. It burst on the scene at the 1924 New York Auto Show, where former railroad mechanic Walter P. Chrysler wowed the crowds by introducing the Chrysler Six, a mechanical marvel with a powerful six-cylinder engine. After adding Dodge, Plymouth and De Soto to his empire, Chrysler overtook Henry Ford in the 1930s to become America's No. 2 automaker. During World War II, Chrysler cranked out 18,000 Sherman tanks, the main combat vehicle of the Allied forces. In 1952, Chrysler produced the Jupiter missile that carried two monkeys into space. In the muscle-car era, Chrysler produced memorable models like Plymouth Road Runner and the Dodge Challenger (which just came back to life). And finally, there was Iacocca, who engineered his K-car driven turnaround in the 1980s, paying off his government loans seven years early and with a $400 million profit to taxpayers.

I tried to reach Iacocca to hear his epitaph for the company he once saved. But his secretary says he doesn't want to talk about it. Friends, though, say he's saddened by this turn of events. Meyers, who once sold his company to Iacocca, sees no irony or even much similarity in Chrysler's fate today. "Back then you had a very successful company, Chrysler, buying into an unsuccessful company, AMC," says Meyers. "Now you have one unsuccessful company buying another unsuccessful company."

In the end, Chrysler lost its way. It survived wars, recessions and a depression. But after nine years of German ownership and one year in private equity's grip, Chrysler had become a shadow of the feisty company that did its best work when its back was against the wall. Instead, insiders say, the new product pipeline has run dry and now workers just fear for their future. There is neither the will, nor the wherewithal to mount that final comeback Nardelli asked for. "There's no economic reason for Chrysler to exist anymore," says Meyers. "This time, it's done for."

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