Analysis Chrysler Unveils its Latest Recovery Plan

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Comments: 5

Tag: Chrysler, Fiat, 5 Year Plan, Restructuring, bankruptcy, bailout, financial, projections, Dodge, Ram, Jeep, Kidder, Marchionne

November 11, 2009

On November 4th, the new management team at Chrysler Group LLC conducted an all-day presentation outlining its 5-Year Business Plan (Chrysler LLC Business Homepage) to the public.  The company outlined its marketing strategy and focus for each brand, including its future product plans.  Chrysler updated the status on its cash flow position and business objectives over the next 5-years, including market share and profit-loss goals.    

Chrysler’s plan also assumes a more conservative recovery in US auto sales than that projected by industry consensus, as its plans are based upon a market of 14.5 million sales by 2014.  The plan presented projects market share gains from 9% today to over 14% by 2014.

The company also is planning for global growth from 1.3 million sales in 2009 to 2.8 million in 2014.  To become less dependent on the US market, global growth is planned to account for 18% of sales - up from 11% (Figure 1).  US fleet sales will be reduced to 12%.

Figure 1: Worldwide Sales by Market - (click to enlarge)

The majority of the growth is projected to be through the expansion of the Chrysler and Jeep brands (Figure 2).  By 2014, Chrysler will add two additional nameplates for a total of seven (Figure 3).  The Jeep brand will consolidate the Compass and Patriot into one model and add a small crossover.  By leveraging its global brand recognition, Jeep will be distributed globally and contribute to the majority of the company's expansion into international markets.

Figure 2: Worldwide Sales by Brand - (click to enlarge)

All brands growing significantly with 2014 volumes at:

o    Jeep ~800k

o    Dodge ~600k)

o    Chrysler ~600k)

o    Ram ~400k

o    Fiat ~100k

o    Contract Fiat Group brands (from zero to ~300k)

The company also plans to increase funds allocated to product development from $2.9 billion in 2009 to a peak of $5.7 billion in 2012.  This is consistent with the launch of the new Fiat based product.  Next year, the company will increase spending to $4.1 billion.  Chrysler will also manufacturer vehicles for Fiat at its facilities.  In 2010, most of its small and midsized lineup will receive a freshening as well as new large SUVs and sedans (See end of article for pictures).  

Presentations were given on product plans, brand positioning and marketing for each brand.  For specifics see the presentations.

o    Dodge will refocus on “Life style” oriented vehicles (Presentation)

o    Chrysler will be aligned with Fiats’s Lancia division (Presentation)

o    Jeep New Advertising Tag Line “i live. i ride. i am. Jeep” (Presentation)

o    Ram Trucks New Advertising Tag Line “My Name is Ram” (Presentation)

Figure 3: Chrysler Group Product Plans - (click to enlarge)

Under the current plan, Chrysler anticipates it will have $7 billion in cash-on-hand at the end of 2009.  An Initial Public Offering is highly unlikely to occur earlier than 2011.  Finally, the plan calls for full repayment of the US Treasury’s money used to finance the company post bankruptcy by 2014.

In 2010, the company plans to break even while growing revenue 158% to $67.5 billion in 2014 (Figure 4).  The plan also calls out all Treasury loans to be paid by that time and generate $3 billion in cash and make $5.2 billion on the upside.  Chrysler will continue to carry $4 billion in debt including approximately a $2 billion loan from the Department of Energy to develop fuel efficient vehicles.

 

 Figure 4: Chrysler Group Financial Summary Targets 2010 through 2014 - (click to enlarge)

Analysis:

Chrysler's 5-Year Business Plan is certainly suspect and whether the company can meet the aggressive targets set in 2014 is very questionable.  Based upon the company’s product plans, it will not be until 2012 until vehicles will be built using Fiat’s resources.  That is still approximately two to three years away and the company will have to rely upon refreshes and enhancements to lackluster models currently on the market to build momentum.

In many ways, the plan is similar to that rolled out by the company’s German management earlier this decade – bring out new product and grow the business by a million units, expand in international markets, control inventory and improve quality etc.  There certainly was nothing in the presentations that indicated there was a paradigm shift at Chrysler.  Overall the plan was grand concept but very disappointing because there was not a lot of substance.

The presentations and topics were generally remedial including the ones that focused on quality and manufacturing.  For example, Chrysler did not discuss how or if they were going to adopt real flexible manufacturing plants as other companies have done to produce multiple models on the same assembly line including those off different architectures.  Chrysler’s head of manufacturing talked about cleaning the plants up, making assembly operations more ergonomic for the operator and reducing clutter at stations but lacked substance. Also an initiative is in place to improve the quality of their products.

The presentation that focused on product development was just as trite.  There was no serious discussion on where Chrysler’s vehicle development process was to where it is going.  Chrysler product development chief outlined a strategy that reduces the time by five months.  However, the presentation never stated how long that actually is to put it into context. Given that the new Fiat based product is still three years or so away, it would appear the time to develop a product is no worse than the rest of the industry.  The presentation also focused on virtual prototyping in vehicle development to cut cost and reduce time – but that is the status quo in the rest of the industry.  

For the most part, many of the presentations were inconsequential and would leave any industry veteran questioning just what sort of shape the company was in under both Daimler and Cerberus.  What the presenters portrayed as a new religion (on many topics) at Chrysler should be assumed to be part of the company’s core business process.

Chrysler’s revenue and market share assumption are very suspect.  Using Chrysler’s projected volume for next year of 1.6 to 1.7 million vehicles, I estimate that Chrysler may generate $24 to $34 billion in revenue - that is significantly lower than the estimates Chrysler presented of $40 to $45 billion in 2010.  In my analysis, it was assumed Chrysler will generate between $15,000 and $20,000 per vehicle manufactured.   Revenue will certainly be up from the $15 to $18 billion the company projected for 2009 because of the sharp production cuts this year (Figure 5).  Chrysler’s projected recovery to 1.6 to 1.7 million vehicle sales next year is also very questionable considering monthly sales have been hovering around 60,000 in the US.  Furthermore, the competition is getting stronger and will introduce new product while Chrysler has to wait until 2012 for the new mass appeal Fiat based vehicles.

Figure 5: Chrysler Group Financial Targets 2010 through 2014 - (click to enlarge)

It also would have been more beneficial if the company provided a full analysis of its balance sheet and profit-loss picture as of the Q3 2009 to better gauge the company’s projections until 2014.   Transparency is still lacking at the company.  Considering that the company appears to want to hold fleet sales at about 15%, their volume forecast appears very optimistic for next year and that puts their revenue estimates in question.  Furthermore, the new fullsize cars and large SUVs to be released next year may be released too late in the year to substantially improve the revenue picture and certainly not to the degree Chrysler anticipates.

Chrysler’s revenue projections also likely assume better pricing than the conservative estimate I used to project a revenue range.  Better pricing may not be an accurate assumption by Chrysler as the market for its larger Jeeps, fullsize passenger cars and trucks dwindles because of fuel economy regulations and the rise in the price of fuel.  Moreover, it is unlikely cheap credit will return, which certainly inflated that market segment.  With the possible exception of Jeep, Chrysler and Dodge brands do not command premium pricing in the market and even Jeep relied upon large incentive spending to move the product.

What was also lacking from the presentations was a coordinated theme.  Chrysler provided an outline without much substance.  For example the plan did not say, this is where we are, this is where we are going and more importantly this is how we are going to get there.  Each presentation seemed disjointed and lacked a clear, reasonable vision for the company.  Much of the content appeared a rehash of the prior restructuring plans submitted to the US Treasury and Congress.

What was more disappointing was the company did not offer a good glimpse as to the future direction of the product.  Chrysler may be saving that for the upcoming auto show circuit but one would think at such an important event the focus would be placed on the product.  Presenting a grand vision and strategy is nice but it always comes down to the product and how well it is executed.  

A hard look at the product was sufficiently lacking that the whole 5-Year Plan was put into doubt.  There was talk about refreshing the current product to make it more appealing until 2012 when the Fiat-based vehicles arrive.  The company provided a peek at the interior upgrade on the Dodge Caliber due next year (Figure  6).  There was talk about aligning the Chrysler brand with Fiat’s upscale Lancia.  However, that is still years away and Chrysler must rely on its current offerings to make it to 2012.  Like the Dodge Caliber interior, any freshening to the Chrysler line up is expected to be minor and for the most part transparent to the consumer.  Furthermore, with the exception of the bold Chrysler 300, Daimler failed to move the brand upscale which leaves doubts if Fiat can succeed especially by aligning product with its quirky Lancia brand.  

Figure 6: Interior of Current Caliber (upper) and Refreshened Caliber (lower) - (click to enlarge)

What Chrysler’s 5-Year Plan really identified was that the company became an empty shell after Daimler and Cerberus gutted the company.  After listening to Chrysler’s executives present their vision and going over the presentations, I am left empty considering it has been almost a year since Fiat first announced its intentions to partner with Chrysler.  

Even the Obama Administration was apprehensive about Chrysler's prospects with Fiat.  The following is an exerpt of the discussions to save Chrysler from the New Yorker magazine:

Obama asked Steven Rattner, the head of the auto task force, who had been one of the four to vote yes in Summers’s office, “What do you think the percentage likelihood is that, if we give this deal a chance, it will succeed?” Rattner didn’t make the decision any easier. “Fifty-one per cent,” he said. “But, Mr. President, in my experience, deals get worse, not better, over time.”

The above statements are very true today after reviewing the company’s plan.  Unlike GM, which had a full pipeline of new vehicles to release post bankruptcy, Chrysler will have to wait until 2012.  Chrysler announced positive cash flow and projects to have $7 billion in cash-on-hand at the end of the year.  However, it would appear the company really has not begun investing as of yet and its cash flow is improving to fill dealers lots because of the sharp cuts in production earlier this year.  Time will tell if that is sustainable once the dealers are full.  It must be remembered that Daimler once had ambitious plans for the Chrysler Group.  Finally, I did not see anything in the latest restructuring under Fiat management that offered any assurance that this one will succeed.

 

 New 2010 Release Large SUVs and Sedans (Lower photo Charger) - (click to enlarger)

 

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Comments
Wed Nov 11, 2009 7:03 am
Name: WTF | Comment: New Grand Cherokee, New 300C, New Fiat 500, Refreshed Wrangler, Journey, Complete REDESIGN of the Sebring and T&C. 7 COMPETITIVE models before 2011. And there is more. Malibu/Fusion updates are good examples.

Wed Nov 11, 2009 7:06 am
Name: WTF2 | Comment: And REDESIGNED Sebring would come with doppia frizione dry clutch.

Tue Jul 27, 2010 1:57 pm
Name: mtaylor | Comment: use the side and some aspects of the rear of the chrysler phaeton for the basis of the next 300. reword the front to today do more with the headlights on the teaser photo. note: on photo of the clayrump make tail light lense narrower and add to the sedan version of the phaeton extend bottom of lense a bit longer you can acheive the look they are trying to capture...........

Sat Jul 31, 2010 1:41 pm
Name: haypops | Comment: I fear that Chrysler's new products are not going to be "new enough". Instead of gaining market share, they will drop some. Some former Japanese buyers will shift to "Detroit" brands, but GM and
Ford will benefit there, not Chrysler. Also VW and Hyundai/Kia are acting quite agressively to increase market share.

Thu Aug 05, 2010 6:55 pm
Name: mtaylor | Comment: chrysler should take the gloves off with their designs and let them flow. i keep saying this but no ones listening so ill try again. use the chrysler phaeton concept as the basis of the next chrysler 300c. shame to say but if this car isnt what people have been waiting for it may be over. rework the front end into 2011 and your revenue will increase four fold........

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