Global Insight Perspective | |
Significance | The task force will look at a range of initiatives, possibly similar to the CORE programme that has put Mercedes back on track, and will look to further restructure plants, with one possibly earmarked for closure. It will also seek longer-term relationships with suppliers to gain efficiencies. |
Implications | The creation of the task force follows the sweeping restructuring efforts in Germany that have seen Mercedes return to profit. However, two suppliers have reportedly declined to join the effort, indicating that the task may not be as straightforward as hoped as the OEM and supplier industries increasingly come into conflict. |
Outlook | The decline in Chrysler's fortunes has been more serious than expected this year. Sales had been expected to witness a significant downturn, but adverse local market conditions have hit Chrysler particularly hard—especially in the highly profitable large SUV/pick-up segments—and it may well be one of the plants producing the former that is closed down. |
DaimlerChrysler (DCX) has formed a special task force to assist its U.S. Chrysler unit's efforts at further restructuring, which is intended to cut US$1,000 a unit from its production costs. The task force includes high-level officials from the company's Mercedes Car Group, including restructuring "guru" Rainer Schmückle, Mercedes' chief operating officer (COO). Chrysler spokesman Jason Vines said that the task force is "working on getting through the speed bump we face", adding that Mercedes and Chrysler often exchange knowledge and personnel in an ongoing effort to maximise business operations.
The new task force arrives as Chrysler is expected to report a third-quarter loss in the region of US$1.5 billion next week after sales of its large pick-ups and sports-utility vehicles (SUVs) have stalled and costly advertising and incentive campaigns have failed to ignite the market. The disastrous third-quarter performance is expected to mean that Chrysler Group's losses for the year will be forecast to reach about US$1.2 billion in 2006 following 12 straight quarters of profits.
Current Chrysler Chief Executive Tom LaSorda will head the task force, which is designed to study solutions over a number of months. "There is a frequent exchange of experiences between Mercedes and Chrysler", DaimlerChrysler spokesman Marc Binder said. "In this context Rainer Schmückle brings in his broad-based knowledge as well as his experience at Chrysler." Schmückle has been responsible for the restructuring of Mercedes Car Group under the umbrella of its CORE programme, which saw 8,500 hourly workers laid off; prior to that, he was responsible for restructuring DCX's Freightliner commercial vehicle (CV) division. Vines said that Chrysler is examining the CORE programme to see what elements might be applicable to its recovery effort. This could spell the end for its Newark, Delaware plant that produces the Dodge Durango and Chrysler Aspen large SUVs, sales of which fell below expectations this year because of higher fuel costs. The Newark plant operates just one shift and therefore is unlikely to be profitable as two shifts is the normal minimum required to attain profitability.
Chrysler said that its recovery will focus on production cuts and the launch of new models, but it has not ruled out structural changes. The company has already announced a 24% cut in third-quarter production of 90,000 vehicles, and an overall drop in second-half output of 16% in an attempt to reduce inventory to the region of 500,000 units from the current 600,000. The company is also seeking concessions on healthcare from the United Auto Workers (UAW) union along the lines of those granted to Ford and General Motors (GM), but is experiencing resistance due to the recent years of profitability enjoyed by Chrysler.
Outlook and Implications
Chrysler is seeking to deal aggressively with what it refers to as the "speed bump" it is currently facing. Given the advanced stage the group is at in terms of its new model programme, and the fact that a number of these new models have all the credentials to be a considerable sales success and are aimed squarely at expanding segments, Chrysler's problems appear more short-term and therefore negotiable.
However, Chrysler's increased sales in the crossover and passenger car segments will not allow it to match the huge profits that are to be made in the large SUV and pick-up segments. Therefore, further savings in purchasing, development, sales, marketing and manufacturing must be made to ensure that the group can make money from less profitable vehicles.
Chrysler is the best equipped of the struggling U.S. automakers to make a swift recovery, largely because it has emerged from the sweeping restructuring efforts it undertook six years ago and is now a leaner and largely profitable company, until very recently, when market events exacerbated its cyclical issues. Chrysler still has obstacles to overcome in the form of reluctant Chrysler dealers, who are resisting Chrysler's demands that they stock slow-moving models, and the UAW, which has not shown much in the way of co-operation in response to the automaker's request for healthcare concessions. However, with a winning model line-up set to come to market next year and an experienced management team in charge, the company can look forward to negotiating this "speed bump" without too much difficulty.