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Failing Grades? DaimlerChrysler Must do Balancing Act to Fight off its Financial Woes
By Martha Hindes

For DaimlerChrysler, the formal release of its first quarter earnings report simply stated the obvious. Just about every aspect of the business except its elite Mercedes-Benz vehicle line was awash in red ink or struggling to stay in the black. And as the German-American company pushes to bring its balance sheet back into the plus column, it isn't just a loss of income from vehicle sales that it must deal with.

Nipping at the heels of the struggling Chrysler Group's American operations are a growing number of problems. Those must form a formidable worry for the newly emerging management team sent in to the rescue after a purge of top American executives and the quiet disappearance of an estimated $9 million from Chrysler coffers around the end of last year.

"Unfortunately, things could get a lot worse at Chrysler before they get better," said Brett Hoselton, the senior automotive analyst for New York-based McDonald Securities.

Laying the Groundwork

DaimlerChrysler had let the financial community know nearly two months in advance that the first quarter of 2001 wasn't going to be one for the record books, and the official report didn't deviate from that expectation.

"We came in in the first quarter according to our forecast we made (on February 26)," said the Chrysler Group's recently installed president and CEO, Dr. Dieter Zetsche.

"We met our targets and over achieved them a little as far as the Chrysler Group is concerned," he said.

The company wouldn't identify what it meant by "over achieved" in a financial report that saw it lose $2.1 billion dollars in net income for the quarter. It does not break out its net income losses by its business groups, according to a company spokeswoman.

The contribution to operating profits on the Chrysler side - which includes Chrysler, Dodge and Jeep vehicle lines - was a negative $3.9 billion, or a negative $1.2 billion when adjusted for one-time costs including downsizing.

"I think the nicest way of saying it is that Chrysler has an awful lot of work ahead of them," said Hoselton.

The Cost of Optimism

"Chrysler realized immediately from a profitability standpoint as of the Fall of last year that it built too many cars and trucks and their earnings were overstated."

The price for that overproduction came in early 2001, when the company was forced to cut production by a whopping 30 percent so it wouldn't be swamped with unsold vehicles.

The "days supply" auto makers deal with in describing inventory is an illusive term that can sound good or bad according to which companies are making the projections and how those projections compare with their sales trends.

European and Asian companies have been notably lower in days supply for the North American market, thanks in part to a reputation of perceived quality compared with onging criticism of homegrown vehicles whether merited or not. Days supplies for the traditional Big Three (including the Chrysler operations) sometimes run into the triple digits. And an unacceptably high number of unsold brand new cars and trucks in storage or on dealer lots can often result in a quick adjustment of production schedules and an awkward attempt to explain how inventories got that way.

During a telephone call with members of the automotive media as earnings were announced, Zetsche sounded almost relieved when doling out the company's day's supply numbers it had gotten down to after beginning to tackle the problem of excess inventory.

"(We are) down to 53 days supply at the end of March," he said.

Building Distrust?

But controlling that excess inventory came at a cost.

Many of the 26,000 jobs previously announced to be on the chopping block had been dealt with by earnings time, and more salaried and hourly workers than expected took voluntary buyouts as their non-employee contract worker counterparts struggled to stay aboard.

But the purge left a bitter resentment among most employees still on the job, according to insiders. That has helped a lot of company survivors decide to bail before they could be tapped as next to be dismissed, with some high-end executives finding new homes with arch-rivals General Motors and Ford. That has been depleting the Chrysler Group's pool of talent and experience just when it needs to have those resources available for continuity.

Suppliers, which were expected to take a hit by cutting five percent from their costs following a mandate by DaimlerChrysler, weren't being as cooperative as the company had forecast two months before. Not only had DaimlerChrysler officials been confident that suppliers would acquiesce, but they looked forward to even greater cost cuts during the subsequent two years.

A Little Backpeddling

"Overall we're getting a good response," said Zetsche. But, in contrast to earlier predictions, he added: "We're not getting the five percent in total. We didn't expect that...The vast majority are really coming to the party."

Analyst Phil Gott, whose specialty for Standard & Poor's DRI in Boston is the supplier industry, was skeptical about such optimism. "I haven't found too many that will meet the demands," he said.

Gott's research on cost pressures in the automotive industry shows it is not a very profitable business to be in, particularly for the American vehicle manufacturers that tend to have older plants and equipment and a graying workforce.

It's even tougher for automotive suppliers sandwiched between downward pressures from those Original Equipment manufacturer's (OEMs) they serve and the need to eke out some profit for their own shareholders. And giving in to DaimlerChrysler almost certainly would bring the same demand from their other OEM customers seeking to pare costs.

"Companies that are 100 percent automotive are really in rough shape," said Gott. "It's a very expensive business to be in."

Those suppliers being pressured by DaimlerChrysler realistically have three choices, according to Gott: Give up the auto maker as a customer, hope it will back off in its demand for cost cuts, or work out a compromise.

"Going out of business isn't one of (those choices)," said Gott.

And McDonald's Hoselton concurs.

"Chrysler went out in the December and January timeframe with hands out in both directions...saying, 'Can you give us a price break?' The feedback I heard from the vast majority of suppliers was `NEIN!,'" said Hoselton.

A Smaller Voice

Those less able to fight back are the company's dealers, who have been absorbing recent cost cuts mandated by the company at the same time price increases for new vehicles have stagnated or fallen.

"Chrysler also simultaneously went to their dealer body and said, 'You need to give us a break too,'" said Hoselton

The company not only cut its share of some incentives, but went after the seeming little things that can add up to 15 percent of a dealership's net income in a year. For example, according to Hoselton, the company cut back on how much it gives the dealership for pre-delivery vehicle inspections - the final check before it is turned over to the buyer.

And the company no longer pays for the gas fill-up when a new car or truck is delivered to a customer. Now it's the dealer who must absorb that expense.

"Chrysler is getting its pound of flesh out of the dealers...but as you move forward five or 10 years, your relationship with the dealers is going to be terrible," said Hoselton. "They won't trust you."

But it's easier to take money away from one of 2,000 dealers rather than try to strong arm a seat manufacturer that is one of only four of its kind in the world, he said.

Sharing the Punishment

And dealing with Americans on their own turf isn't the company's only problem. Its controlling interest in Mitsubishi has brought its own share of financial problems, forcing the Japanese company to announce it will cut some 9,500 jobs. One compromise expected by analysts and Wall Street alike is the sharing of some operations between the Chrysler Group and Mitsubishi, such as common vehicle platforms.

"Getting their costs under control is really, really crucial," said analyst Dave Cole, with the Center for Automotive Research (CAR) in Ann Arbor, Michigan.

"One thing they have to do is fold Mitsubishi and Chrysler together with consolidated platforms," he said.

And Cole said uncertainty in the second quarter of the year could have a major impact on Chrysler's success in pursuing its restructuring plan.

Factors in the economy could offset each other, creating even more confusion among consumers. There could be even lower interest rates in the face of rising fuel prices and the possibility of rolling power blackouts spreading throughout the country, he said.

And the value of the Japanese yen against the U.S. dollar could have a negative impact on Chrysler as well as Ford and General Motors, said Hoselton.

"It doesn't take a brain surgeon to see when sales are at an all time high level and the (U.S.) Big Three are losing market share, that the Japanese are feeling the benefits of the weaker yen and they can incentivize the heck out of their cars," he said.


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