Will Cerberus' Chrysler Build its own Cars?

[CSpec]

Rethinking the Car Company
Private-equity firm Cerberus is expected to transform Chrysler into an automobile manufacturer like no other. What the future may hold.

May 17, 2007 - Henry Ford created the defining engine of the American auto industry with his mighty River Rogue factory in the 1920s. Huge freighters loaded with iron ore and rubber docked at one end of mile-long warren of foundries and factories, while on the other end shiny black Model A automobiles rolled off the assembly line every 49 seconds. At the dawn of the Internet age, Michael Dell created a new model for manufacturing. At his factories, the guts of his computers—circuit boards, frames, memory chips—arrive fully built by suppliers before Dell workers snap them together in minutes. Unlike old Henry, who offered to paint your car any color as long as it was black, Dell custom-builds to each buyer’s specs. Lately, rivals are eating into Dell’s sales, but he still earned a place in business history by redefining what it means to be a computer company.

Now the new owners at Chrysler promise to rethink what it means to be a car company. Cerberus Capital Management, the Wall Street private-equity firm named for the three-headed dog that guards the gates of Hell, has Motown rabid with speculation this week about the fallout from its $7.4 billion buyout of beleaguered Chrysler. A skilled and secretive turnaround outfit, Cerberus is expected to overhaul Chrysler in a way that could create a new model for Detroit, which badly needs a tuneup. Last year, GM, Ford and Chrysler combined to lose more than $16 billion, as the remnants of Henry Ford’s old model finally ran out of gas. Detroit insiders say they expect Cerberus to shake up the moribund American auto industry by asking this simple question: does a car company have to build all its own cars?

It could prove to be a transformative question. Rather than each Detroit automaker building every kind of car and truck—and losing their shirt on most of them—they could be design and brand houses that build only the things that make them money. After all, the thinking goes, customers only care about the product, the brand and the price. Why not focus on designing a car, marketing it and selling it, rather than manufacturing it? This might be heresy in the Motor City, but it's commonplace in other industries. The pet-food scare taught us that many of the dog-food brands lining the shelves at PetSmart are all made by one manufacturer in Canada. Whirlpool makes washers for Kenmore and Kitchen Aide. Peel back the keyboard of your Gateway and you’ll find the same parts that went into that Dell laptop. So why shouldn’t GM make crossover utility vehicles for Chrysler, while Chrysler makes minivans for GM?

In fact, Cerberus officials say they would certainly consider unconventional collaborations for Chrysler. And pulling them off will be easier for a private company whose every move isn’t scrutinized by Wall Street. “Turning things around requires ingenuity. It requires trying different things. It requires asking questions that in many cases haven’t been asked before,” Cerberus Chairman and former U.S. Treasury Secretary John Snow told NEWSWEEK. “So are we open to new things? Absolutely. That’s what Cerberus does. It breaks the mold and finds new ways to do things that are better than they’ve been done in the past.”

Actually, Cerberus would not be the first to raise this radical concept with Chrysler. Late last year, GM approached Chrysler with an in-depth proposal to jointly develop new models, say sources familiar with the discussions. Had those negotiations crossed the finish line, GM might have developed Chrysler’s next Dodge Ram pickup, while Chrysler’s Jeep engineers might have worked on GM’s Hummer line. There was even talk of GM acquiring Chrysler. Instead, DaimlerChrysler put a stop to all that by putting its American problem child in play on Valentine’s Day. Now, though, the buzz inside GM is that Cerberus could bring Chrysler back to the table to reopen discussions about such collaborations, especially since the two automakers now share a private-equity owner. Cerberus last year bought a controlling stake in GM’s financing arm, GMAC.

Chrysler has already taken smaller steps in this direction. The gas-electric hybrid system debuting on the Dodge Durango next year was engineered by GM and will first appear on its Chevy Tahoe. Next year, Chrysler will begin building minivans for VW, which will be a version of its own Dodge Caravan. And Chrysler is hiring China’s Chery Automobile Co. to produce its new small car, the Dodge Hornet. The once sacrosanct rule that motor companies must build their own motors is become a relic of last-century thinking. As governments around the world combat global warming by mandating high- mileage cars, Chrysler won’t be able to go it alone in developing the high-tech propulsion systems that will be required. “The costs are horrendously expensive,” says Mike Jackson, CEO of United Auto Group, Chrysler’s top dealer. “They’ll absolutely have to have alliances with other automakers.”

You’d think the biggest roadblock to this revolution would be the unions, which are bleeding members. But Cerberus CEO Stephen Feinberg is already working a charm offensive. The reclusive billionaire impresses auto execs and labor bosses with his earthy approach that comes from his humble roots as the son of a factory worker. “He reminds me of me,” says Chrysler CEO Tom LaSorda, the son of labor leaders, “except he has a lot more money.” First, Feinberg won over the UAW’s steely president, Ron Gettelfinger, who went from calling Cerberus “strip and flip” to endorsing it as the best thing for his brethren. Then Feinberg worked on Canadian Auto Workers President Buzz Hargrove, who decried the deal when it was announced last Monday. The next morning, Feinberg met with Hargrove for coffee in Chrysler’s 15th-floor conference room. “We’re not about slice and dice and sell,” Feinberg told him. “We’re in here for the long term.” Hargrove did his own flip. “He certainly convinced us,” he said.

Labor’s acquiescence in Cerberus's takeover of Chrysler is critical. Auto execs hope it signals a willingness to bargain a transformative contract in negotiations this summer that will make a serious dent in Detroit’s crushing cost disadvantage against the Japanese. If that breakthrough comes, other innovations will follow and Cerberus can start planning its exit strategy. “Private-equity firms hang around three to five years,” says Harvard business professor Nabil El-Hage, “but they start thinking about their exit strategy after three to five minutes.” So who will own Chrysler after Cerberus leaves town? The automaker could go public again. Or maybe GM will still be interested. After all, they could already be partners by then.

[regfootball]

best thing Chrysler could do right now for the next year or two is to rebadge a couple mitsubishis to stock the showroom. at least for a couple years until they figure out how to untangle from the nasty mess Daimler left them in.

slapping a dodge badge on the new lancer for example would add a nice entry that would attract fuel conscious shoppers.

Edited May 19, 2007 by regfootball

[LosAngeles]

best thing Chrysler could do right now for the next year or two is to rebadge a couple mitsubishis to stock the showroom. at least for a couple years until they figure out how to untangle from the nasty mess Daimler left them in.

slapping a dodge badge on the new lancer for example would add a nice entry that would attract fuel conscious shoppers.

I'd instead look to PSA or Fiat and grab something different. Especially PSA. The Peugeot 204, 407, and 607 could make a lot of noise in Mopar dealerships.

[BrewSwillis]

best thing Chrysler could do right now for the next year or two is to rebadge a couple mitsubishis to stock the showroom. at least for a couple years until they figure out how to untangle from the nasty mess Daimler left them in.

slapping a dodge badge on the new lancer for example would add a nice entry that would attract fuel conscious shoppers.

Something like this??

(not my chop....just found on Allpar a while ago)

[vonVeezelsnider]

Well, if it means that GM can get its hands on those vans and improve their powertrain/transmissions, while retaining Lambda Superiority, well than I'm all for it... I can't see that realistically happening however.

[regfootball]

Something like this??

(not my chop....just found on Allpar a while ago)

nice find! exactly. i suggested mits because of chrysler's past alliances with them. and the new lancer is a good car. the current galant should have been rebadged as a stratus or intrepid. the avenger is alright but really isn't going to make much waves. the eclipse could have been made as a stratus coupe. or avenger coupe.

mits may sell 40-50k lancers here this year but if they were selling them in dodge showrooms too they could easily double that and help dodge keep some market share.

Edited May 23, 2007 by regfootball

[Intrepidation]

nice find! exactly. i suggested mits because of chrysler's past alliances with them. and the new lancer is a good car. the current galant should have been rebadged as a stratus or intrepid. the avenger is alright but really isn't going to make much waves. the eclipse could have been made as a stratus coupe. or avenger coupe.

mits may sell 40-50k lancers here this year but if they were selling them in dodge showrooms too they could easily double that and help dodge keep some market share.

Like teh Eclipse made much waves in the first place? The Avenger probably sells more in a month than the Galant sells in a year

Plus, the Avenger is at least unique...it doesn't look like a wannabe Camry.

[Duncan]

Like teh Eclipse made much waves in the first place? The Avenger probably sells more in a month than the Galant sells in a year

Plus, the Avenger is at least unique...it doesn't look like a wannabe Camry.

Right, it looks like a shrunken Charger - which may or may not be a good thing. I'm not entirely sold on either the Avenger or the Sebring - both have crappy interiors and bad packaging. In their favor, they do offer the still-smooth 3.5 V6, but you will definitely pay good money for it.

Cerberus, in my opinion, can only be good for Chrysler - Daimler was too busy making sure their own stuff was at the top of the divisional heap to give a crap about what the so-called "Chrysler Group" was making. Or NOT making, for that matter - the loss of a genuine Neon replacement was a huge misstep that needs to rectified quickly - I don't think the quirky Caliber's gonna be rolling in the hit parade any time soon.

Cerberus will want to make profits, sooner rather than later - and the best way to do that in today's more frugal auto market is with good, solid small cars. The proposed Lancer rework would be a good start in the short term. As much as I like Peugeot designs, though, I wouldn't jump to import a bunch of 307s - PSA hasn't sold cars in the US in a good long while, so they may not be exactly ready for the differing demands of American buyers. (Also, who wants to repeat something like Chrysler's series of Renault-related disasters?)

I don't mind seeing Daimler go, though. Someone over at Allpar made a good point, too - now that they've made themselves smaller and ultimately less profitable again with the loss of Chrysler, there's always a chance one of the other big boys might try a takeover bid...hello, DaimlerToyota?

[Duncan]

Like teh Eclipse made much waves in the first place? The Avenger probably sells more in a month than the Galant sells in a year

Plus, the Avenger is at least unique...it doesn't look like a wannabe Camry.

Right, it looks like a shrunken Charger - which may or may not be a good thing. I'm not entirely sold on either the Avenger or the Sebring - both have crappy interiors and bad packaging. In their favor, they do offer the still-smooth 3.5 V6, but you will definitely pay good money for it.

Cerberus, in my opinion, can only be good for Chrysler - Daimler was too busy making sure their own stuff was at the top of the divisional heap to give a crap about what the so-called "Chrysler Group" was making. Or NOT making, for that matter - the loss of a genuine Neon replacement was a huge misstep that needs to rectified quickly - I don't think the quirky Caliber's gonna be rolling in the hit parade any time soon.

Cerberus will want to make profits, sooner rather than later - and the best way to do that in today's more frugal auto market is with good, solid small cars. The proposed Lancer rework would be a good start in the short term. As much as I like Peugeot designs, though, I wouldn't jump to import a bunch of 307s - PSA hasn't sold cars in the US in a good long while, so they may not be exactly ready for the differing demands of American buyers. (Also, who wants to repeat something like Chrysler's series of Renault-related disasters?)

I don't mind seeing Daimler go, though. Someone over at Allpar made a good point, too - now that they've made themselves smaller and ultimately less profitable again with the loss of Chrysler, there's always a chance one of the other big boys might try a takeover bid...hello, DaimlerToyota?