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Firm Running Chrysler Is Getting Trial By Fire

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The Associated Press

Published: August 6, 2008

DETROIT - After running Chrysler for a year, Cerberus Capital Management must be wondering if its mascot, the three-headed dog that guards the gates of hell, is protecting it from the underworld or leading it into the flames.

Since the private equity firm bought 80.1 percent of Chrysler from the former DaimlerChrysler AG one year ago this week, little has gone right. Gasoline spiked to $4 per gallon, driving people away from the trucks and sport utility vehicles that dominate Chrysler's lineup.

Consumers were spooked by a weak economy, the U.S. housing market went belly-up, and credit markets tightened, limiting Chrysler's ability to borrow. U.S. auto sales are down 11 percent this year and are not expected to improve soon.

"Their timing is horrendous," said Gerald Meyers, a former American Motors Corp. chairman now teaching leadership at the University of Michigan. "They couldn't have picked a worse time to get into the automobile business domestically."

The troubles are mounting. Chrysler's sales are down 23 percent so far this year, the worst drop of any major automaker. And Chrysler has stopped offering leases through its financial arm because of falling truck and SUV values.

At the same time, Chrysler Financial only renewed $24 billion of its $30 billion in credit lines, which will hurt Chrysler's ability to provide loans to buyers and dealers. Fitch Ratings has downgraded Chrysler further into junk territory, saying it expects the company's finances to fall to the minimum levels required to fund its operations as early as next year.

Chrysler puts a positive spin on the headlines. The maker of Town & Country minivans, Dodge Ram pickups and Jeep Wranglers would not make any executives available for this story, but in a conference call to announce July sales last week, Vice Chairman and President Jim Press said a company should be judged by how it performs when times are tough.

"The strongest steel comes from the hottest fire, and while this is like dancing on the sun, we're making significant improvements in our business," said Press, who was lured from Toyota to lead Chrysler's marketing.

Last fall, Chrysler negotiated a new contract with the United Auto Workers union that is expected to save billions. It has announced partnerships with Asian automakers that could help expand its small-car lineup and its reach - something Chrysler needs because it relies on trucks, SUVs and crossovers for nearly three-quarters of its sales. And it recently tied with industry leader Toyota for North American manufacturing productivity, according to the influential Harbour Report.

The Auburn Hills, Mich.-based automaker says it's performing ahead of its expectations, with $11.7 billion in cash on hand at the end of June and earnings of $1.1 billion in the first half of the year before interest, taxes, depreciation and amortization.

That means it is making money from its core business of making and selling cars, but before financial obligations like paying taxes, servicing debt, deducting the value of aging assets and recording expenses taken over time.

As a privately held company, Chrysler isn't required to release financial information, and it didn't provide its net income or other details. Daimler AG, which owns the remaining 19.9 percent of Chrysler, indicated through its own financial results last month that Chrysler lost an estimated $510 million in the first quarter.

Chrysler cites significant job cuts and asset sales as some of the reasons it is exceeding its targets. But JPMorgan auto analyst Himanshu Patel estimates that Chrysler will burn through nearly $4 billion this year.

CERBERUS' STRATEGY

PEOPLE: Eliminated 29,000 jobs; hired six top executives, including Jim Press from Toyota

PRODUCTS: Killed Chrysler Pacifica, Crossfire, PT Cruiser convertible and Dodge Magnum; introduced minivan, crossover, two hybrid SUVs and soon will launch new Dodge Ram pickup; plans to cut trucks, add small cars

PRODUCTION: Reduced factory output by 1.1 million vehicles over past 18 months; cut shifts at six plants; will close St. Louis minivan plant

PARTNERSHIPS: Forged joint production agreements with Nissan, VW and two Chinese automakers - Chery and Great Wall Motor; is looking for other deals to expand its global footprint

PROMOTION: Broke ground by offering $2.99 gas incentive and later zero percent financing for 72 months, even on small models; is abandoning leasing; moving to trim and consolidate dealer network

Sources: Chrysler, Detroit News research

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