Is the End Near for Chrysler?

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Researched by Industrial Info Resources (Sugar Land, Texas)--The fall of the American automakers, General Motors Corporation (NYSE:GM) (Detroit, Michigan), Ford Motor Company (NYSE:F) (Dearborn, Michigan) and Chrysler LLC (Auburn Hills, Michigan), commonly referred to as the Detroit Three, has been nothing if not very public and noisy. Their begging in Washington last year eventually garnered the Detroit Three billions of dollars in bailout cash to be used as a bridge into the new year to keep their respective companies operating. In the coming months, more attention will be focused on the ailing American automotive sector, as the companies are required as part of the bailout deal to submit detailed restructuring plans to Congress before April, or they will be required to pay back the bailout cash immediately. While Ford and GM are in reasonably safe shape, Chrysler is teetering on the brink of total collapse.

According to Chrysler's chief financial officer, the automaker requires $7 billion in cash every 45 days to maintain operation. That money is used to meet payroll, pay suppliers and produce vehicles. With Chrysler's sales down 30% in 2008, 53% in December 2008 alone, the question is, can the automaker survive 2009 as a standalone entity? The answer is probably not, given the current market conditions.

There has already been talk of Chrysler attempting to sell its Jeep line of vehicles; however, no clear-cut buyer has stepped forward and shown interest. The automaker's successful minivan line is also a possible selling point. However, if both of these parts were to be sold, that would leave the automaker with primarily poorly selling vehicles and would probably mean the Chrysler name would disappear for good, as the vehicles it would have left would not produce enough revenue to allow the automaker to remain in business.

Chrysler has tried just about everything in recent months to boost sales and cut costs. When gas prices were extremely high during the summer of 2008, the automaker trotted out a sales incentive program of fixed gas prices for three years on certain models of vehicle. This program would have had some marginal success if the automaker could get the public to purchase a large number of vehicles and if gas prices remained high. However, given the economic conditions facing the entire country, the sales did not appear and gas prices have dropped rapidly, rendering this sales program ineffective.

Chrysler also extended its annual holiday maintenance shutdown at all of its facilities by as much as two weeks in December and closed some facilities for an additional week in early December, hoping to allow sales to catch up with production. This also failed, as sales for December tanked. By year's end, Chrysler's market share had dropped to 11%, the lowest of any of its peers.

The company is now faced with problematic negotiations with both suppliers and the United Auto Workers union (UAW) (Detroit), as the automaker looks for additional methods of cutting costs. However, these negotiations have not yet begun and once they do they will certainly be spirited, difficult and long. The UAW and Chrysler recently agreed to a new four-year contract and it will be interesting to see whether the automaker can get the union to make additional concessions in the upcoming emergency negotiations. While it will be in the UAW's and suppliers' interests to make concessions, they cannot give away too much without further hurting themselves.

Now that the busy holiday season is over, the aforementioned negotiations should begin in earnest in only a matter of weeks. Chrysler is facing the direst of times in the coming months. If it cannot reach new agreements with the UAW and suppliers, reorganize management and operational policies, and find a way to get the consumer back into showrooms to purchase vehicles, when the March 31 deadline mandated by Congress arrives, Chrysler may well be forced to declare bankruptcy. Chrysler's upper management has a lot of work on its hands and very little time to achieve positive results. March 31 will arrive all too soon and come April 1 we could be down to a Detroit Two.

Industrial Info Resources (IIR) is a marketing information service specializing in industrial process, energy and financial related markets with products and services ranging from industry news, analytics, forecasting, plant and project databases, as well as multimedia services.