Kids love to play connect the dots. When the dots are numbered sequentially (with a few outlining details thrown in to keep 'em focused), it's easy to do. When the numbers are missing, it's hard to see anything more than random points on a page. And so it is with Chrysler, an American automaker that's generated enough bloggable news during the last six months to keep Google News-alerted surfers away from their designated job for hours at a time. Even though only Chrysler's new owners know their real game plan, there's been enough new "dots" to form a recognizable pattern. What it reveals is a company on the cusp of a major revolution.
The first dot: DaimlerChrysler dumping selling Chrysler. Several companies showed interest in buying Chrysler early on, but most industry analysts expected Canada's Magna Corporation to be a shoo-in. Magna had the balls; Chairman and founder Frank Stronach is the personification of unbridled ambition. Magna had Chrysler-specific auto building experience; they held the contract to assemble Chryslers and Jeeps in Europe and run the paint shop at the Jeep Wrangler plant in Toledo, Ohio. And Magna had the money.
But before the Chrysler deal went down, the automaker announced it was moving production of Euro-spec Chryslers from the Magna-Steyr plant in Austria to Chrysler's plant in Brampton, Ontario. Magna wasn't happy. The Canadian Autoworkers Union (CAW) loved it. Dot two.
Third dot: the private equity firm Cerberus came from nowhere to grab the golden ring. It was the union's turn to be displeased. United Auto Workers (UAW) president Ron Gettelfinger and CAW president Buzz Hargrove both suspected that Cerberus was about to "strip and flip" their meal ticket. They saw storm clouds gathering over Auburn Hills.
And yet, after just one meeting with the three-headed dog's masters, both union leaders did a complete 180. Gettelfinger said the sale of Chrysler to the private equity fund was in the "best interests of our members." Hargrove, who had said he was "pissed off" over the sale, suddenly decided "Chrysler is better off under Cerberus ownership than they would be under Daimler." Dot four.
Fifth dot: after taking over Chrysler, Cerberus revamped the company's upper management. Union-friendly CEO Tom Lasorda suddenly found himself shuffled aside to a vice president's position. Former Home Depot CEO Robert Nardelli took over as Chrysler CEO. Toyota's Jim Press moved in as co-vice president, to run sales and marketing. Both came from companies known for their decidedly anti-union stance, yet the UAW and CAW were both uncharacteristically quiet about their selection.
Then came dot six: negotiating a new UAW contract. In return for ponying-up a bunch of billions for a health care VEBA superfund, the UAW's leadership agreed on a contract radically different from the GM deal. The Chrysler agreement doesn't include job guarantees or commitments not to close or sell plants. If the UAW's members ratify this agreement, it leaves Cerberus free and clear to shut down whatever plants they choose, whenever they choose. OR… sell those plants to someone else.
Last month, Magna surprised everyone. The fiercely anti-union company suddenly opened its plants to the CAW, inviting them to organize their employees. Owner Frank Stronach said the company "would embrace the union" under the "framework of fairness." He claimed an epiphany: Magna and unions need to work together to save North American auto industry jobs and create new employment. Dot seven.
Dot eight: Chrysler has announced it's [finally] ready to trim models across all three brands. The executions could mean a Chrysler plant now building several variations of one model for three divisions would build one model for one division. Although the divisions might share some components (e.g. engines or transmissions), the new regime will tie a specific production facility to a specific brand.
Connect the dots. As we predicted when Cerberus assumed control of Chrysler, the money men are getting ready to sell part or all of Chrysler to Magna, or, at the least, outsource production to them. This they can do because Chrysler’s unions have been well and truly appeased, paid off in billions and granted access to Magna’s expanding worldwide empire. This they will do because they’re a private equity firm that has always preferred right-now cash cows to long-term plays.
Magna is also on board because, well, it’s what Frank wanted then, it’s what Frank wants now and Frank’s got the cash to do the deal. Ah, but is this a picture of resurgent automaker? Nope. It’s an abstract image; one that allows both artist and onlookers to see what they want to see. One thing’s for sure: it's still very much a work in progress.
Frank, kudos. What an intriguing article.
Not forgetting that Walter Chrysler purchased Dodge Brothers “back in the day” and Chrysler Corp. bought up American Motors (with it’s Jeep division) in 1987.
Now the speculation starts. Who goes where?
I’m not even going to try to speculate (for a change).
Except to say you forgot “dot #9” – Chery (PRC) and it’s contract with Chrysler to supply cars (dropping Visionary Vehicles like a hot potato).
And, “dot #10” – the announcement yesterday or today by Chrysler that it would be henceforth – eventually – wanting 50% of it’s global sales OUTSIDE THE USA.
The problem is that the people in the industry are too used to how things were. What they really needed was someone like Ghosn…
And at least Cerebrus will cut the cruft off the company, take all the bad publicity associated and then make a profit… Magna can come in as the heroes who saved Chrysler from those evil private equity guys and enjoy the benefits of the hard decisions being made by someone else.
Now if only equity could flip GM and Ford the same way…
Just learned about “dot #11” on a brand-x auto news site – Chrysler is saying that Chery is not going to be their partner on the upcoming Hornet line – they’re looking for an (additional?) dance partner….
More speculation is now inevitable!
glenn126 : Just learned about “dot #11″ on a brand-x auto news site – Chrysler is saying that Chery is not going to be their partner on the upcoming Hornet line – they’re looking for an (additional?) dance partner…. That's why I didn't include the Chinese connection as a "dot" yet. There's still too much flux there to nail down what will come of it and how it will affect the overall picture. <conjecture mode> As far as who will go where, I wouldn't be surprised to see Jeep go one way (or stay with Cerberus) and Chrysler/Dodge go another (to Magna). That's when they'll split up Lasorda and Press, with each going with one or the other to run that company as CEO. Since most of Press' experience is with cars, he'll go with Chrysler/Dodge and Lasorda will go with Jeep. Nardelli, in the meantime will stay with Cerberus to take apart charge of another of their holdings. </conjecture mode>
Thanks Frank. This entire saga has left me puzzled, but your flow of logic made sense of it to me. If your predictions come true, then I think everyone will benefit. I just wonder what Magna has up its sleeve. It is hard for me to believe that a fiercely anti-union company is going to open its shores to the UAW without a way to control them. If they don’t have a killswitch to prevent the UAW from getting too strong, they could very well end up in worse shape than before.
I have to
wonder if Chrysler will break up into three small pieces.
Chrysler.
Dodge.
American Motors – whoops I mean, Jeep.
Or, perhaps Chrysler-Jeep as one entity, and Dodge as the other.
(Dodge could then bring back Plymouth and sell Chinese made cheap-ass Chery and other Chinese cars under that brand).
As for Magna, well, if Stronach were to buy (a portion of) Chrysler, the union contracts would stay in place in the plants he buys anyway, and he’d have to smoke the peace pipe with the UAW and CAW – so perhaps this is his way of burying the hatchet (to continue with the wild west metaphores).
Wonder if Renault is sorry they got rid of American Motors and Jeep now, and whether Ghosn would be interested in Jeep? Or Chrysler? Or Dodge?
So may players, so little time (before Chapter 7).
Most people have NO idea that Studebaker-Canada “nearly” signed on with Nissan / Datsun to import (and possibly assemble in Canada for all North America) modern cars in 1965. The reason that Gordon Grundy (Stude-Can Prez) failed? Stude-USA (his bosses) had a hired-gun lawyer call him to say “go check out a deal with Toyota too” and Nissan never forgave him. The lawyer’s name was Richard Milhous Nixon… Just one missed international long distance phone call in a Tokyo hotel could have made the difference.
Otherwise, instead of Infiniti dealers, we might still have Studebaker dealers. And who knows, Renault might not have had to rescue Nissan (since from 1966, Datsun could have had a far larger dealer-network throughout the US and may therefore have never lost 1st place in Japanese car sales to Toyota in the US).
G=series = Hawk (coupe and sedan)
M35/M45 = Lark VI and Lark VIII
FX35/FX45 = Wagonaire
QX56 = Conestoga
See, and I wasn’t going to do that (conjecture).
A two-way break up now seems somewhat possible, with Magna getting half of it and Cerberus keeping the other half. Now, the question is, who gets what? Of the three brands, Jeep seems the strongest, but SUVs are a declining segment, so who gets Chrysler; Jeep or Dodge? That is, would it be Chrysler-Jeep and Dodge, or Chrysler-Dodge and Jeep (Dodge-Jeep and Chrysler seems unlikely)?
Also, what’s the logic here? I don’t see how two tiny car companies are any stronger than one pretty small one (Chrysler is much smaller than either Ford or GM (or Toyota, for that matter)). I guess the logic would be that Cerberus would make a mint selling some, but not all, of Chrysler Corp. to Magna, and that’s all that matters.
Chrysler’s main problem right now is that they have very limited overseas presence (something that one would attempt to change even if you weren’t breaking up the company). That, and thier current line up sucks, but…
Excellent editorial. I saw that Frank was inviting the union into his plants and I couldn’t figure out why. I suspected it might have something to do with chrysler but couldn’t come up with a viable option.
Thanks for connecting the dots for me.
It does make perfect sense for Chrysler to own the brand and someone else to do the manufacturing. Like Nike only owning the designs and outsourcing production overseas.
PG
Great read. Not sure I buy it, but certainly makes a lot of sense. It’s this sort of article that sets TTAC apart from the rest, and keeps me coming back.
I see a three company posssibility:
1. Jeep – now for sale by Cerberus.
2. Chrysler – a gutted company that has no production, but merely resales badged cars.
3. Bigger Magna – a company that now has the ability to make cars for chrysler, themselves, or anyone else.
Chrysler has all the liability of supplying the dealers with cars, but most of them will not be able to stick with the new program and will be forced to sell. Thus you get dealer consolidation at low cost.
After the dealer consolidation, Cerberus can then sell the rest to Magna, or Tata, or anyone else who wants the name and dealer network (which is now an asset rather than a liability.
PS did I hear it right on the ad today that the new chrysler warranties are non-transferable?
Interesting editorial, and a well thought out one at that. However, I continue to maintain that this is not a strip-and-flip (there is nothing much to flip at this point in time), but a branding play.
I am betting on Cerberus creating an outsourcing model, which uses outsiders to build and possibly design the vehicles. Under this scenario, Chrysler Group would handle the marketing, provide consumer financing, manage the relationship with the distribution network (dealers), and develop the product strategy associated with the brands.
That does not entail killing off or selling brands that currently have no value. That does mean cutting the deadwood (killing off the weakest products) and creating a few winners. If the plan is successful, Chrysler Group could eventually spin out Jeep and Chrysler/ Dodge as seperate units, most likely to foreign automakers looking for a North American brand and distribution network. The play for the buyer would be in the fact that the outsourced functions could be returned in-house, and the projected savings resulting from that in-sourcing would be the motivator to buy Jeep and/or C/D.
If you just look at who Chrysler has hired, this makes perfect sense. Cerberus would not have likely bothered putting the talent that it has on the payroll lately if intended to do much immediate dumping. You also see this in its discussions with Chinese makers to JV manufacturing, which would leave much of the actual assembly process to somebody else.
It also makes sense from a private equity standpoint. Rather than take on every function, a PE shop would believe that it makes sense to outsource the functions that don’t create value-added for the brand. The outsourcing model is increasingly common in manufacturing, so Cerberus would simply be extending it to a business where it has not generally been done before. (In fact, Chrysler has some experience with this already, as it did for years with Mitsubishi.)
The main stumbling block here is whether Chrysler can ensure production quantities and quality by using a third-party or JV partner. It’s tough enough to get a third-party to properly assemble a toy without parts that snap off or paint made with lead, so it’s a bit of a gamble to expect a partner to properly build an item as complex as a car, and to do so with sufficient quality and on schedule.
Can Chrysler be turned into a ‘virtual’ auto company with all production outsourced?
That would be pretty refreshing, and difficult.
Toyota is able to do it in Japan with tightly controlled contractors that all operate under the Toyota production system. But the cooperation between Toyota and its contractors is so tight that they pretty much look like a single corporation.
Could something like that be pulled off with Magna (and potential other contractors, such as China) without losing control of design, technology, supply chain and quality?
I suspect Stronach became union-friendly when someone pointed out to him that a large labor-intensive business doesn’t run too well unless you have a well-trained union to do most of your labor relations work for you.
— Bitter UAW retiree.
Could something like that be pulled off with Magna (and potential other contractors, such as China) without losing control of design, technology, supply chain and quality?
Design isn’t a problem. If anything, design is not a strong suit for Chrysler, so it may be better off if it outsourced it. You could save a lot of salaries in Auburn Hills if you paid someone such as Giorgetto Giugiaro to make the vehicles attractive (for a change.)
Technology isn’t much of a problem, given that Chrysler has no leading edge technology. You can buy or license the toys from someone else, and keep a few people on staff to dream up the sequel to the chilled cupholders.
Supply chain and product quality are the two tough hurdles. I am personally not confident that the quality issues will be easily managed, and question how it could be done in the 3-5 year timeframe typical of many private equity investments. It will be interesting to see if it can be done.
I look it at this way, and perhaps Cerberus does, too — it won’t cost much to find out, relatively speaking, because it would be the JV partner that takes on much of the implementation risk. If the company dies, Cerberus will not have lost much (in some respects, they got the company almost for free); if it succeeds, this could be an enormous home run. If worst comes to worst, they could sell off Jeep and the financial arm to recover some cash and come out of it with minimal pain.
Wow, you mean Chrysler is still in business ?
Could Jeep be sold to GM (and paired with the stumbiling Hummer sales channel) with Chrysler/Dodge sold to Magna?
from serious car manufacturers,let`s not mention mad tv russian lada, or whatever, only 2 have shown consistent inability to deal with manufacturing processes. and it is- the great britain, and the usa. wow, and the external debt for great britain stands at 8.2 trillion dollars. this happens when robbing colonies stops as a routine practice, but hands are too lazy to deal with moulds or chips.( well at least they deal with fish&chips). well think making a great country out of sotheby`s or lloyd`s. won`t work. both countries have shown unbelievable subpar fit and finish attitudes, both have faked state- of- being- domestic by rebadging imports. only brittons have escaped into expensive luxury market, where you don`t have to justify your bulging price. well, what a difference a 340k or 380 k bentley would make? try that with a 20k family sedan!and then we see that the king, pardon, the queen is naked.Only brits have gone further. they have almost eliminated car industry, and not because their economy has advanced, because their stinginess, and lack of attitude in cars have killed their industry the same way as it will kill american industry in 20 years. arrogancy usually goes in hand with hand with mediocrity. well, at least japanese are modest, and humble. maybe let`s start with that, and already in kindergarten. when this negligence aftermath already has striken union contracts or whatever, we are fighting the consequences. deal with the roots. seed in your children the sense of achievement, and hardship as stairs towards them, and you may wake up one day in a rich country…….
Let me think this through why I write. The players in this Chrysler picture are Cerberus, Magna, the UAW, the CAW, Jeep, Dodge, Chrysler, and the dealers.
Before the union contract Chrysler/Cerberus had three major problems making long term growth diffacult. They were:
1. A huge liability in retiree health care
2. Restrictive union contract
3. A bloated and under performing dealer network.
Major problems 1 and 2 got somewhat solved with the new union contract. The company forms the VEBA giving the UAW mega dollars to spend on “health care”. They got a two tier wage structure that gets rid of any long term obligations for retirement benefits or health care for new hires and these second tier people.
Now it is time to work on problem three. How do you get rid of 50% to 75% of the existing dealer network?
First, Chrysler/Cerberus sells off all the profitable manufacturing in North America to Megna. This will of cource include Jeep, Chrysler, and Dodge products. Since Magna is so receptive to unions now this makes the UAW and the CAW happy. The non profitable operations in NA are either sold to whoever wants them at firesale prices or simply shut down. Magna is free to sell and excess capacity at these facilities to make whatever for whoever.
Second, Chrysler/Cerberus sells off to a newly formed investement group the design, engineering, marketing, and finance group. This newly formed group contracts with Magna to be the exclusive manufacture of the Dodge, Jeep, and Chrysler brands. The terms of the sale with this group includes some sort of wording that gives Chrysler/Cerberus exclusive distribution rights to the Jeep, Chrysler, and Dodge.
Third, The only thing now that Chrysler/Cerberus ownes is the dealer network. If you think about it they really don’t own anything because all the dealers are franchises so they would have no physical assets except the franchise fees they collect. A quick chapter 7 and all these dealer contracts are history. At the liquadition sale some newly created company purchases these rights and can renegociate a dealer network. One that is in line with the market share of the new three part Chrysler.
Everyone is now happy. And, because all these companies are private there could be all sorts of overlap in ownership.
Wow, these ideas are all more similar than they are different.
“Can Chrysler be turned into a ‘virtual’ auto company with all production outsourced?”
I’ve been saying since the beginning of the Cerberus era that this is almost surely the plan. You can check my posts on other Chrysler threads to see where I think this is going.
In summary, the global electronics manufacturing business is mostly outsourced today while 30 years ago the manufacturing was typically done in-house by the company which put it’s name on the final product. There really isn’t a good reason why the automotive industry couldn’t go the same way. Magna certainly is positioning itself to be to the auto industry what Flextronics and others are to the electronics industry.
One thing’s for sure: Walter P. Chrysler would have wanted his company in the hands of a strong central despot who knows his way around the factory floor
He’s long been sated, then. Chrysler had exactly that in K. T. Keller, who led Chrysler after Walter P. Chrysler’s death (1937?) and during the early post-war years. The direct consequence was that the company never regained the momentum it had under Walter P, and the familiar decennial Chrysler existential crisis became the norm starting circa 1960.
GM and Ford, in contrast, prospered under modern, decentralized, postwar “scientific” management and bean-counter control systems.
Just got to throw in here and say what an interesting article, Frank.
Please update us if you see more dots appearing!
Before the union contract Chrysler/Cerberus had three major problems making long term growth diffacult. They were:
1. A huge liability in retiree health care
2. Restrictive union contract
3. A bloated and under performing dealer network.
This emphasis on cost has been widely touted by the mainstream press, but is overblown.
The three major problems that Chrysler faces are this:
1. Americans don’t like their products
2. Americans don’t like their products
3. Americans don’t like their products
I would add two more crisis points, namely that (4) Americans don’t like their products and (5) Americans don’t like their products.
When you have a lemonade stand and people don’t like your lemonade, then you have a problem. It won’t matter whether you buy cheaper lemons (cheaper parts), get your mom to work the stand for free (cheaper labor) or post a bigger sign in front of your lemonade stand (better marketing) if nobody likes your lemonade. Instead, you’ll end up with a pile of bad unused fruit, a tired angry mother, and as much revenue as you would have had otherwise (not enough to deliver a profit.)
There are no profitable operations for Chrysler Group to sell — if there were, Daimler would have already sold them at a price commensurate with this profitability. There is no design team, etc. worth parting out and selling — again, Daimler already did that, and what little it could for its relatively worthless investment.
What Chrysler does have is a distribution network in North America and unexploited brand potential both here and elsewhere. Meanwhile, the American car market is appealing because of its enormous size, but it is fairly mature and highly competitive, so Chrysler has little chance of gaining substantial market share here. Its real potential, if it has any, is abroad in emerging markets such as China and Russia that have growing economies and, accordingly, growing appetites for cars. I’ll bet that’s what Cerberus sees as the path to the future.
Private equity companies such as Cerberus look for growth opportunities and brands that can be salvaged. Their typical tactic is to replace the old management with a leaner-and-meaner team and to implement changes that make the company appealing to a new owner 3-5 years hence who will like the new, improved company AND sees an opportunity to make it even more profitable.
Outsourcing makes sense in this scenario because it reduces overhead and passes on some of the investment risk to the JV partner, which makes it a safer play (at least in theory — I personally still think that quality could be an issue here.) Offshoring makes sense, not just because the labor costs are lower, but also because those cheap labor markets also happen to be the same places where the car market is growing fastest and where Chrysler brands have the most potential to grow without the stigma that they have acquired in the US market.
That’s why I predict a North American lineup with fewer vehicles (the worst performers will be jettisoned), more outsourcing (leave the headaches to someone else, plus the economies of scale available from in-sourcing will potentially be appealing to the next owners) and more offshoring (get into these emerging markets.) The labor costs, as high as they are, are the least of their problems. Building a mid-sized sedan and compact cars that Americans will want in large volumes is their real challenge.
When has unprofitable necessarily meant valueless?
They could and likely will sell any part they can if they can get more then they paid for it or still value it.
While your 3-5 year method sounds good, I have to wonder if Cerberus was bold enough to think that they could make Chrysler profitable in 3 to 5 years. I don’t think so. I think they have plans to sell some or all of it off before then. Time will tell.
Back in the eighties, raiders figured out how to identify public companies that had hidden asset value, buy them up and strip them apart.
Those days are largely long gone. Very rarely today will you find a company whose greatest value is hidden in its assets. (For one, corporate managers have figured out how to manage their businesses in ways that make them less appealing to break-up raiders.) Companies are typically valued on a multiplier of their earnings, with the market value of their assets being worth only a fraction of their total value.
Strip away the brand equity, both current and unrealized, and the only things that Chrysler have left are some unwanted inventories and some parts and factories that aren’t worth much. (A used factory is likely to be worth a fraction of its value on the balance sheet.) Private equity groups want to earn yields over the life of an investment in the range of 25-35% IRR, and Cerberus wouldn’t get anything close to that just by selling off plant and equipment.
Of course, the end game is to sell the company, and I would imagine that the likelihood is that if successful, Jeep will become a separate prize from Chrysler/Dodge. And if there are bits and pieces that can be sold in the interim, particularly bits that are peripheral to the overall plan, then they will certainly do that.
Still, in the case of Chrysler, there just isn’t much to sell as of today, so Cerberus’ return requirements can’t be met now simply by parting things out. They will certainly sell the deadwood for what little they can, as soon as they can — they might as well — but the overall long-term goal is to groom the company for the next owner. And that means building the enterprise into something worth buying at a price high enough to have had made the effort worthwhile.
What makes a good music? a good singer? only the vocal and melody, the rest is secondary. and no matter, how hard you try to put a good outfit, good advertisement, good moves,( bold moves) or media awareness, you get credit for what you deserve.
Ditto the car industry, what makes a good car company? good pricing strategy? model range that doesn`t overlap? good ads? perfect slogan? NO!
A CONTINUOUS REAL PRODUCT IMPROVEMENT COMPARATIVE TO ITS COMPETITION.
If american product-makers( sounds akin to `evil-doers`) were dying so hard for REAL high quality products, as they are dying for easy profits, they would have already skyrocketed into bliss of car heaven. outsorcing, rebadging, dealer networking, cash anorexiing, etc won`t cut it!
You think americans will buy your rebadged cherrys instead of pure Accords? If customers can`t get good american products, they go for good products, meaning, whoever makes them. Should they trust a japanese Accordima or a american sounding- cheapest-bidder-made mutant breed?
Obese, overdebted, junk statused. Gues what i am talking about? american cars, people or country herself? Sadly, you can`t make a wrong choice in this multiple choice.
I’m a newcomer here, sorry for grammar faults, English isn’t my 1st language.
I read the comments and it could be tempting to add some more dots like dot 12: Russian billionaire Oleg Deripaska who recently buyed a 5% stake of GM
Dote 13: he also invested in Magna International.
Could be only the tip of the iceberg and we might see more future links and dots between GM, Magna and Chrysler? Unless Carlos Ghosn decided to join the party to step ahead and said then Chrysler will be the 3rd partner of his alliance that could give “CNR” (Chrysler-Nissan-Renault) or “CRN” (Chrysler-Renault-Nissan). Then Volkswagen ambitions to be the #1 automaker for 2015-2020, I doubt they currently check an eye on Chrysler but who knows? They could buy Chrysler later when the opportunity will arrive.