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Posted by MoparNorm on Friday, December 21, 2007 at 12:52:45 :
A few silver linings in this report from todays Wall Street Journal, there is hope for future better quality and products...the question remains however, will Chrysler survive long enough to see the turnaround?
Chrysler Faces
Financial Pinch,
Sees Asset Sales
By JOSÉE VALCOURT and NEAL E. BOUDETTE
December 21, 2007; Page A1
Chrysler LLC has slipped into a serious financial crunch just four months after Cerberus Capital Management LP swept in to save the auto maker.
At a meeting earlier this month, Chief Executive Robert Nardelli told employees the company is headed for a substantial loss this year and is scrambling to sell assets to raise cash, according to an account by two people present that Mr. Nardelli confirmed.
"Someone asked me, 'Are we bankrupt?'" Mr. Nardelli said at the meeting. "Technically, no. Operationally, yes. The only thing that keeps us from going into bankruptcy is the $10 billion investors entrusted us with."
In an interview yesterday, Mr. Nardelli acknowledged making the comment, saying it was intended to "convey a sense of urgency" among employees.
Cerberus is often viewed as among the shrewdest of the private-equity groups reshaping America's industrial landscape. But the Chrysler acquisition is turning into a case study of how deals made during the recently ended boom are going sour.
Cerberus's secretive chief, Stephen Feinberg, essentially paid nothing to DaimlerChrysler AG (now Daimler AG) for an 80.1% stake in Chrysler. He agreed to put $5 billion into Chrysler, and $1 billion into its financing unit. Cerberus secured $10 billion from investors to pull off the deal. Mr. Feinberg's goal was to spiff up the company and sell it or list its shares for a huge profit -- a feat Cerberus had pulled off many times before.
Mr. Feinberg put Mr. Nardelli at the wheel, giving the former Home Depot Inc. chief a chance to redeem his reputation after he left the retailer in January under a hail of criticism over his hefty pay and heavy-handed style.
Mr. Nardelli arrived to find Chrysler's vehicle sales and cost-savings efforts were falling well short of their targets. Some models had faults such as cheap plastic interiors and noisy rides. He learned that Chrysler badly lags behind on fuel-saving technologies and will have to spend billions to catch up. Worse, the mortgage crisis and slowing economy mean U.S. auto sales are likely to fall next year to their lowest level in 10 years.
Mr. Nardelli and Vice Chairman Jim Press, the highly regarded Toyota Motor Corp. executive who jumped to Chrysler in September, had hoped to bring costs down enough to generate cash in 2008, and then use that money to develop gas-electric hybrids and other new vehicles, people familiar with the matter said. Instead, Chrysler appears headed for another loss in 2008.
INTERVIEW WITH NARDELLI
"When you look at the precipitous drop in the industry, we're going to be as aggressive as we can on the cost side." -- Chief Executive Robert Nardelli
In an interview yesterday, Mr. Nardelli declined to give a forecast for 2008, saying only that he thinks Chrysler "will make a pretty significant improvement" over the $1.6 billion the company will lose this year.
After making headlines by clashing with critics at a Home Depot shareholder meeting, Mr. Nardelli has worked hard to present a softer image. He speaks regularly with groups of employees, often striking a patriotic chord, declaring they will prove American companies can compete in the global auto industry.
At a November meeting with Chrysler's dealers in Las Vegas, he choked up when he talked about growing up as the son of a steelworker, and about his belief in American innovation, according to a video of the meeting seen by The Wall Street Journal. The dealers responded with a standing ovation lasting several minutes.
Originally, Cerberus's Mr. Feinberg envisioned another executive as his man at Chrysler: Wolfgang Bernhard, Chrysler's chief operating officer from 2001 to 2004. As Cerberus neared the closing of its deal to take Chrysler off the hands of the German auto maker now called Daimler AG, Mr. Bernhard took an office at Chrysler's Auburn Hills, Mich., headquarters, and began visiting design and engineering centers.
Mr. Bernhard was in line for the chairman's post, but he backed out when he learned that Mr. Nardelli, an automotive novice, would be CEO.
Mr. Nardelli took the job Aug. 6 and quickly began driving different models home every few days to familiarize himself with Chrysler's vehicles. He would sometimes meet in the mornings in the parking garage with engineers, who tutored him on how to evaluate a car's ride and other fine points, people familiar with the matter said.
He liked the new Jeep Grand Cherokee, but also saw Chrysler's product line had many serious weak spots. Riding the Sebring convertible, "I found the wind noise totally unacceptable and bordering on offensive at speeds of 80 mph," he wrote in a terse email to Chrysler's top designer, Trevor Creed. Griping about the cheap plastic of its interior, he added, "I sure hope that as we go forward, we don't punish the customer by thrifting the interior to meet a cost target."
The news was no better on the financial front. On three models -- the Chrysler Pacifica, Chrysler Crossfire and Dodge Magnum -- the company lost money for every one sold. Mr. Nardelli was irritated to discover that a program designed to save $250 million to $300 million in parts and other costs was actually saving only $1 million because of rising commodity prices, people familiar with the matter said.
Messrs. Nardelli and Press agreed to stop making the money-losing cars and drew up plans for a crash program, called Project D, to replace the Sebring, these people said. Mr. Nardelli meets every Monday at noon with Mr. Press and other executives to go over the company's turnaround plan. Often the sessions last until 6 or 7 p.m., people familiar with the matter said.
In October, the United Auto Workers union narrowly ratified a new contract that allows Chrysler to slash its labor costs in the years ahead. The contract calls for Chrysler to create a fund that the union will use to cover health-care costs for its retirees. That will take billions in liabilities off Chrysler's books, but it also means the company will have to come up with $8.8 billion by 2010 to start the fund.
In October, U.S. vehicle sales came in at an annualized pace of 16.3 million, and Chrysler's own sales were down 9%. The drop would have been even greater had the company not pushed thousands of vehicles to rental fleets, a practice that hurts resale values.
Mr. Nardelli was dumbfounded to learn Chrysler was running its plants based on a forecast of U.S. industry sales of about 17 million. Chrysler had set to produce 2.8 million cars this year, but was on track to sell only about 2.6 million, people familiar with the matter said.
The overly optimistic forecast forced the company to keep "a cost structure well beyond affordability," Mr. Nardelli said at the meeting earlier this month, in which he addressed Chrysler engineers at an auditorium outside Detroit.
Chrysler announced in November it would almost double planned job cuts to 24,000, and eliminate shifts at five plants. New internal forecasts anticipate U.S. sales for all makers of 15.5 million next year. "We took some pretty aggressive steps in resizing our footprint," Mr. Nardelli said in the interview.
At a 13-hour meeting in New York on Wednesday, Mr. Feinberg and other Chrysler board members expressed "unwavering support" for the company's direction, Mr. Nardelli said.
A senior Cerberus executive said both Cerberus and Chrysler have ample cash supplies. He added that Chrysler's turnaround is progressing as Cerberus had expected.
As the mortgage crisis has worsened, Cerberus itself has run into trouble. GMAC Financial Services, the lender it bought from General Motors Corp. for $12 billion, is now swamped with losses tied to subprime loans. Cerberus is also trying to back out of a deal to buy United Rentals Inc., after appearing to have overpaid for the equipment company.
With revenue likely to be under pressure -- and little likelihood of a further cash infusion from his private-equity bosses -- Mr. Nardelli is pushing harder to trim expenses. It's a tall order for car developers who have also been told to upgrade interiors and improve the look of Chrysler products. "If you're an engineer, you're beating your head against a wall," said one person familiar with the matter.
Concerned Chrysler's management could use some help, Mr. Nardelli has brought in consultants, including some former Home Depot executives, to help out. Dennis Donovan, a former human-resources chief at Home Depot now working for Cerberus, is advising Chrysler's HR department. A marketing consultant, Peter Arnell, is helping to overhaul the positioning of the Chrysler, Dodge and Jeep brands.
Another ex-Home Depot executive, John Campi, is working in purchasing. Chrysler purchases about $40 billion in parts and materials a year, almost all of it from suppliers in North America. Mr. Campi has pushed to buy more parts from Asia, people familiar with the matter said, including car and truck batteries from India. Chrysler executives warned that the batteries are difficult to ship and apt to lose their charge in transport, but he is pushing ahead with the effort, these people said.
Chrysler's top communications official, Jason Vines, resigned last week after clashing with Mr. Nardelli, people familiar with the matter said.
In his talk with the group of engineers, Mr. Nardelli said the company will move "very aggressively" to dispose of about $1 billion in land, old plants and other assets, even if it has to sell them below book value. He noted that publicly owned companies hesitate to do that because they would have to charge the book loss against their earnings. But in a private company, "cash is king," Mr. Nardelli has told colleagues.
He told the engineers, "We need to generate cash to keep this machine running."
Write to Josée Valcourt at josee.valcourt@dowjones.com and Neal E. Boudette at neal.boudette@wsj.com
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