Chrylser's Big Problems

I would be remiss if I did not comment on DaimlerChrysler's announcement, earlier this week, that it is embarking on a massive restructuring effort, laying off some 13,000 employees, and entertaining the option of selling or spinning off its American Chrysler unit.

The first thing I would note is that this supports my long-held contention, which I mentioned in a prior post, that no Big Three Detroit auto maker has ever really been "rescued" or "turned around," in the sense of being saved from imminent bankruptcy or serious ownership change, for a lengthy period. Iacoccoa may have fended off dissolution in the 1970s, but only with massive Federal assistance. Then again, he did set the company on the road to independence for another twenty years or so. Still, if not for government intervention, the industry would have probably taken some badly-needed capacity reduction medicine earlier, rather than later.

The 1998 merger of Daimler and Chrysler, only nine years ago, including the subsequent "turnaround" of Chrsyler by Dieter Zetsche earlier in this decade, now seems to have been a colossal mistake.

To provide a little incidental perspective on this story, Senator Tom Carper (how apt a name for a US Senator, eh?), recently-elected Democrat from Delaware, droned on for almost five minutes during Fed Chairman Ben Bernanke's Senate appearance this week about Delaware's Chrysler plant dilemmas. Among the more ill-informed comments he made was that he believed and hoped that we would keep more auto manufacturing (assembly, really) jobs in the US (read: his state), and that the workers at the Delaware Chrysler plants are good workers, and produce good cars.

These are nice sentiments, but indicate why US industrial "policy," such as it is, causes such trouble. Does anyone think Chrysler has much value anymore, or should be "saved?" Or that just because its employees work very hard producing mediocre and unwanted products, that they deserve special treatment?

Despite the many ideas floated about spinoffs, sale of the firm, or merging it with GM, who really would want the Chrysler division now? Is there more value to it than perhaps part of the legendary Jeep brand (oddly, an AMC relic), and perhaps some real estate? Are those two components possessed of sufficient value to offset the firm's pension and health care liabilities?

I don't see GM as being able to afford this one. Nor that it would help that firm. However, I think the very real question is whether any other firm would even bother to bid on Chrysler without Daimler having to pre-fund all the various employee-compensation-related liabilities. For that matter, we don't know what would be considered "safe," from a legal viewpoint, in spinning the unit off to existing DaimlerChrysler shareholders. If it isn't sufficiently capitalized, might the US come back after Daimler for 'looting' Chrysler by failing to sufficiently fund the pension liabilities?

But, back to this week's news. The job cuts will probably hasten the firm's shrinkage. Zetsche's reputation is now tarnished. This unit, and, indeed, the firm, seems somewhat stuck in neutral with a gigantic problem having resurfaced to impair its ability to compete in a sector in which fewer and fewer operational mistakes are being tolerated by the financial markets, and customers. Its hoped-for design integration turned out to be a non-starter. The Daimler engineers balked at it, and their luxury customers may be at risk if it is now intensified as a cost-cutting option.

Once again, inept marketing and a clear focus on customer behavior seems to have led an automotive manufacturer astray.