Chrysler - A Virtual Company?
Does A Virtual Car Company Work?
Jerry Flint - Forbes
The news and rumors about Chrysler get more and more troubling.
The company is in desperate need of a competitive mid-sized car. Earlier in the year, the leader of the team that was beginning work on such a vehicle resigned suddenly. Now the company is apparently talking to Nissan (nasdaq: NSANY - news - people ) about a mid-sized car that Nissan would build for Chrysler.
The two companies have already signed off on a deal in which Nissan will build, in Japan, a small car that Chrysler will sell here as a 2010 model. Another agreed upon join venture involves a derivative of the Nissan Versa, a smallish car made in Mexico that Chrysler will sell in South America, but not here. I doubt it will amount to any large number of cars.
For the past several years, there has been talk of Chrysler getting cars from a Chinese company, Chery Automobile, but Chery has yet to prove it can build vehicles for U.S. standards.
Another disturbing indicator is Chrysler's abrupt bailout from the car leasing business, whereby it gave dealers only one week's notice. The price decline of pickup and sport utility vehicles is causing huge losses on leases for all manufacturers, and many companies are scaling back their leasing operations. Chrysler's end-it-all is the most dramatic.
Then there is the serious decline in Chrysler's sales, a 29% drop-off in July and down 22% in the first six months vs. last year.
All the Detroit companies are hurting because they focused on trucks--vehicles that quickly fell out of favor because of higher fuel prices. Chrysler had the largest share of pickups, minivans and SUVs, and the smallest percentage of traditional passenger cars.
While General Motors (nyse: GM - news - people ) and Ford Motor (nyse: F - news - people ) are tooling plants to build new small cars, (called B size) and new compact cars (C size), Chrysler says nothing except that it is looking for cars from Nissan or Chery or possibly someone else. I have not heard a word about Chrysler retooling a North American plant for a new subcompact or compact car, or readying a more fuel-efficient four-cylinder engine. As far as I know, Chrysler will kill its once-successful PT Cruiser small car in 2010; I have not heard about any replacement.
To be fair, General Motors and Ford are "borrowing" their new small-car designs from foreign subsidiaries. Chrysler has no such foreign operations that could help it with new models, and it is spending $1.8 billion, it says, to re-engineer its Jeep Grand Cherokee and the factory where it builds that SUV. That is a hefty sum.
All this sounds as if Chrysler does not plan to design and build any new passenger cars other than its big sedans. The only reasons I can think of for this strategy: The company does not have the money, or it does not have the talent left to do the job on its own.
To counter rumors of serious financial trouble, Chrysler, which is now a private company, says it was actually profitable in the first half, with a $1.1 billion operating profit. Some of us have a tough time believing that a money-losing company can run a 16% first-half production decline in North America and come out with a profit.
Some analysts say that buying cars from another automaker is smart--globalism exemplified. It is an extension of the "virtual" company, a common strategy for outfits selling devices like personal computers and consumer electronics, where the home company focuses on marketing, distributing and branding, while outsourcing manufacturing to others. Maybe this is the way to do business in those industries, but it has largely been a failure in the car business.
If anyone wants a Nissan vehicle, why not buy one from a Nissan dealer? I do not see the appeal of a Nissan labeled as a Chrysler. Chrysler either has to charge more than Nissan in order to make a decent profit on the car, or accept a lower profit margin to keep its price competitive against the similar Nissan model. Such outsourcing damages the morale and even the ability of your own engineering team to create excellent vehicles.
Chrysler has had plenty of experience with selling someone else's automobiles in their dealerships. From the 1970s and into the 1990s, it took Mitsubishi (other-otc: MSBHY.PK - news - people ) cars and sold them as Chryslers, Dodges and Plymouths. These vehicles may have filled gaps in Chrysler's lineup and helped dealers with their product needs, but most of these were mediocre cars that did Chrysler's reputation no good.
It is not only Chrysler that has failed in such endeavors. Mitsubishi dealers have had little success selling a re-badged Dodge pickup; General Motors' attempt to provide struggling Isuzu with pickups and sport utility vehicles ended in failure, as did its efforts to expand its Saab division with a warmed over small car sourced from Subaru. GM also gave up on its efforts to sell cars from Isuzu and Suzuki (other-otc: SZKMF.PK - news - people ) with a Chevrolet or Geo nameplate. A few years ago, a SUV built by Isuzu found few buyers at Acura dealerships.
Despite denials, there is a belief that Cerberus Capital Management, which bought Chrysler, is not a long-term investor but an in-and-outer that just wants to, as a friend said, "put lipstick on the pig and sell it."
Chrysler does have a redeeming feature. Someone can probably buy this company on the cheap. Somewhere there is someone--I hope an American--who wants to own an auto company.
This company has come back before--more than once, more than twice. I see no reason why it cannot rebound again, but it will not happen by buying cars from Japan or China or anywhere else.
If Chrysler wants to be in the auto business, it has to build its own cars and trucks.
This story posted by LeaseTrader.com, the automotive service company that lets people transfer out of their Car Leases early. If you're looking to swap a lease or transfer out of your car lease, please visit www.leasetrader.com