There are few events in an industry as storied as the automotive one which could potentially have the same long lasting effect as a buyout or merger. One of those events happened yesterday, as Cerberus (named after the three headed dog which guards hell in Greek mythology) purchased the Chrysler Group from Daimler.
Employees are concerned about their jobs, unions are concerned about plants staying open and upcoming negotiations and the almost certain management requests for concessions. Management has to deal with what is considered a largely irrelevant line-up of cars (save the mini-vans, 300C and Jeep ) and the need to make Chrysler profitable as soon as possible, if not sooner.
While this sale won’t change Chrysler ’s product line-up, it will fundamentally change Detroit and the auto industry. Private equity firms such as Cerberus pick up distressed firms for cheap and are notorious for demanding quick returns on their investments. They will want Chrysler to be profitable tomorrow and as the spiritual successors to the corporate raiders of the 1980′s, they will do anything to minimize their losses and maximize their profits.
Since lead times in the automotive industry are so long (it can take more than 5 years to move a car from design boards, through engineering, through the bean counters, and into production) instant increases in revenue from new products which would cover Chrysler’s losses aren’t likely. The other side of the coin are the company’s expenses which you can bet Cerberus is looking very closely at.
Where would Cerberus look to cut costs?
The Unions: The biggest ticket items at Chrysler, wages and benefits given to employees and retirees will be the hardest to cut. The UAW and CAW have both been resistant to concessions, however they did give just that to GM and Ford in 2005 and 2006 with respect to employee health care coverage and the employee buyouts.
Research and Development
Each of the automakers spends billions of dollars a year on research and development. Cuts here would save the automaker tons of money but would significantly compromise Chrysler’s ability to compete in the future. Without R&D expenditures the company won’t be able to develop new more fuel efficient engines, reduce vehicle weight with new materials, invest in hybrids and diesel powertrains, or in interior materials and components.
Advertising
Again, Chrysler like all other automakers spends a tremendous amount every year on advertising and should continue to do so lest sales suffer and the brand basically disappears from the American collective conscience. Cuts here would be extremely detrimental over the short term to Chrysler.
The effects of such cost cutting would cascade industry wide. If Chrysler manages to receive concessions from the UAW/CAW expect General Motors and Ford to demand reciprocal relief from their contracts. Thus, any cost structure advantage gained by Chrysler from union concessions would be short lived. Cuts by Chrysler in R&D and advertising would be an advantage that GM and Ford would instantly try to exploit in an effort to win over Chrysler’s customers.
If cost cuts from those three areas, combined with a refreshed 300 and new minivans don’t make the automaker very profitable, its will be lights out for Chrysler. Cerberus will start to break up Chrysler Corporation selling off its most profitable divisions and leaving the rest to die. Expect GM, Ford and possible other investors to battle over Chrysler’s most prized possession, Jeep .
Barring Chrysler developing this generation’s K-Car or something as significant as the minivan; this week we probably witnessed the end of Chrysler as we know it and the first of its steps towards irrelevancy and its eventual disappearance. As the company continues to shrink, it will no longer be able to fund the R&D it needs to keep up with the competition and it will no longer be able to afford the advertising needed to maintain its market share. It will no longer be able to compete in every segment of the market.
In life there are two sure things; death and taxes. In the corporate world there is one sure thing; no company ever achieved long term success by shrinking itself down to profitability.
