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Chrysler: Crafting a Reprieve

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A "Principle" Reason

The paper identifies "a multiplier principle" that shows "why even small changes in investment, government, or consumption can trigger much larger changes in output."

The white paper also indicates that the principle works in either direction. A positive factor can build up to a booming economy. A negative factor can launch a downward spiral.

Already there are signs such a downward spiral could be underway. Other auto companies including Ford and General Motors have begun layoffs of their own, although mostly through adjusted plant schedules at this time with workforces already downsized from a decade ago. The impact is spreading down through the ranks of suppliers, many under pressure from DaimlerChrysler to cut a minimum of 5 percent from their costs.

Based on the Keynesian model, a failed Chrysler operation in the U.S. would begin a domino effect through the economy, then expand into virtually all other areas of the country, including the military, as the trend gained momentum. The potential danger such a scenario poses for an economy already on the brink of recession is obvious.

Beating The Drums of Recession

A warning about troubles in the industry was sounded as far back as August at an annual University of Michigan industry conference.

"The industry was having record volumes with marginal profitability," said Cole, the head of CAR. "We were saying, 'We hit a rock in the road and some parts will fall off. "

While fear and negative speculation can foster an economic downturn - "You can create a recession by saying one's coming," said Ronis - the loss of Chrysler would be huge.

"Every time you cut another job, you're changing people's buying habits," she said.

"People stop buying because they are too afraid to spend a dime. They don't know the long-term prospects," she said. "There is a ripple effect that it has on the economy that's enormous."

Sharpening the Axe Again

With a fifth of the Chrysler-side workforce on the chopping block already, that number and impact is likely to escalate on Monday when Schrempp announces his promised recovery plan.

The plan was a hurriedly announced effort to retain his position of power following revelation the company - now Schrempp's empire - would report dismal fourth quarter earnings.

It was a desperation move for Schrempp, who now finds himself in a vulnerable position comparable to that of Bill Gates at Microsoft a few years ago. Gates, as a captain of industry, got slapped down mightily by the U.S. government for appearing to overstep his enormous power.

Schrempp has been slapped by demands from Kuwait, the company's second largest shareholder, and Germany's Deutsche Bank, the largest. They reportedly have demanded a turn-around in Chrysler fortunes by mid-March - or else. It's likely the German government could intercede as well, since the DaimlerChrysler problem could impact that country's relations with the U.S.

Behind Closed Doors

At present, one can only envision what's going on in German board rooms as the crisis keeps on building and questions continue to surface.

With the very relations between allied governments at risk, would Schrempp be able to further consolidate his power? Would he be allowed to regain total control by the crucial deadline on Monday that he himself set for revealing a recovery plan for the company?

Or, instead, would he under pressure from his longtime mentor Hilmar Kopper, who sits on the boards at both Deutsche Bank and DaimlerChrysler in Germany.

The answer could come in an ultimatum: Put Americans back at the helm. Return the $9 billion any way necessary - from a credit line to a promissory note to an outright cash giveback. In essence, do what's necessary to repair the relations between world powers that have been severely tested by the events of the past few months.

Executive Orders

Schrempp appears to have little choice. Short of winning a pardon from Kopper and solidifying his power at the helm of DaimlerChrysler, his options appear limited. That could include a humble returning of the spoils of victory to America accompanied by a profuse apology, or a complete severing of the relationship.

Where executive heads had been rolling, there was the unexpected recruitment of a high ranking Ford executive by DaimlerChrysler this week. He will head the company's marketing operations and try to rejuvenate lagging vehicle sales.

And it's expected the company will use some Mercedes engines in high-end Chrysler products.

In the Wings

Such moves make it all the more apparent that Schrempp is being prepared as a sacrifice to ensure that a solution is acceptable on all fronts, and to assuage the Germans' need to save face. According to sources inside the company, Juergen Hubbert - a "real car guy" who now is chairman of Mercedes Benz passenger car division - is waiting in the wings. He could take over Schrempp's chairmanship at any time should Schrempp fail to sufficiently live up to his promises.

Then there's the prospect of using the Michael Jordan or Tiger Woods approach, by bringing in someone with such undeniable superstar power he single-handedly could change the perception of the company. That leaves just one top executive from the two American auto makers who would be dynamic enough to qualify.

What if DaimlerChrysler could convince Jac Nasser, now president of Ford, to jump ship as former Chrysler Chairman Lee Iacocca did in 1979? Like Iacocca, Nasser is well aware he never will be chairman of Ford as long as a Ford family member is in the top executive ranks. And there have been rumors of renewed complaints of Nasserís power at Ford by company chairman William Clay Ford, Jr.

Room at the Top

Such a lure might work with Nasser if it included a promise of his ascension to chairman of DaimlerChrysler in the future. He most likely would join as vice chairman under Schrempp who, according to inside reports early Sunday, has won a temporary reprieve.

The board's concern is that an abrupt departure by Schrempp would destabilize the company, drive down stock prices and hamper its ability to borrow the money it would need to weather an economic downturn.

Sources also indicate that Nasser's name is being discussed both inside and outside the company. And during the past few weeks, DaimlerChrysler has quietly been raiding Ford of middle and upper management.

The recent actions could be a final attempt by the Germans to solve the problems they were largely responsible for creating. It could be an attempt to make Chrysler a pleasing bride for a marriage with another suitor. Or it could be an indication of the most desirable plan from a U.S. standpoint - allowing Chrysler to become an independent U.S. company again.

But how could such a separation be accomplished? Where Chrysler once had an estimated $9 billion in cash in its coffers, the barrel is now empty.

Meeting The Payroll

Based on known formulas for production and other costs, it will take a minimum of $5 billion for Chrysler to resume operation on its own.

That cash is needed to pay suppliers, pay its workforce, and to ensure the development of radically new and vibrant products rather than putting facelifts on older models. In addition, there are the costs of materials, of freight handling and hundreds of other obligations the company must meet.

According to internal sources, it isn't likely that Daimler, in Germany, would return more than $1.5 billion to the U.S entity. Some of the $9 billion has already been spent with the rest presumably in German bank accounts.

And Schrempp has plans to spend about $42 billion to rejuvenate the company, seeming to dwarf the importance of the $9 billion it took from Chrylser.

Heading to Court

It's doubtful the Kerkorian lawsuit - designed to get the American entity back on its feet - would be a factor in time to help Chrysler. If the litigants are successful in getting $8 billion in cash returned, it still will take years for such a lawsuit to work its way through the appropriate courts and appeal processes.

And where it's probable that criminal intent will be investigated regarding the deal between top officials on both sides of the merger, that would not bring back much-needed cash.

Chrysler's need for an infusion of money and an expansive line of credit to continue operations independently is immediate. That leaves the problem squarely in the lap of the U.S. Congress with a familiar predicament it thought it had solved two decades before.

The critical need is a recognition of the importance of an independently-operating Chrysler, contributing solidly to the country's manufacturing base. As before, only Congress would have the ability to approve making up the $3.5 billion shortfall in some manner for the company's revival.

Unless the U.S. government wants a failed Chrysler to bring down a larger portion of the U.S. economy with it, the company needs to be freed from its German handlers and ownership brought back to the U.S.

With that accomplished, it will be up to the American government to have a Marshall plan ready to resuscitate the returning refugee.

 

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