Chrysler's outlook looks grim

With sluggish sales of minivans and Jeep Grand Cherokees - and no new high-volume vehicles due until 2004 - the Chrysler group's recovery plan is in jeopardy as the U.S. market plunges.

After two days of meetings in Auburn Hills, Mich., last week, DaimlerChrysler issued a sketchy profit warning Friday, Sept. 28. The company said it is "too early to accurately assess the impact" of the terrorist attacks and the subsequent drop in car sales and U.S. consumer confidence.

But financial experts see little chance the Chrysler group will post a small operating profit, as the company predicted, in 2002. The company's options are limited because the recovery program, launched in February, has already made massive cuts.

"The turnaround plan of February 2001 effectively represented the group's "last throw of the dice," said Stephen Reitman, an analyst with Merrill Lynch.

But executives said cost cuts are ahead of schedule. And two new vehicles, the Jeep Liberty and the Dodge Ram, could meet sales targets despite intense competition.

In addition, PT Cruiser demand still is strong. Annual production capacity is being increased from 140,000 units to 260,000 units by the end of 2002.

Nearly a year after DaimlerChrysler management fired James Holden for spending too much on incentives and not meeting sales and profit targets, his replacement, Dieter Zetsche, is in the same situation.

And Zetsche has fewer options. So far, he has let go half of the targeted 26,000 employees, nearly completed all planned plant closures and demanded 5 percent price cuts from parts suppliers.

Vehicle pricing highlights the pressure on the Chrysler group. The company retreated from its highly touted effort to get off the incentive merry-go-round. After resisting for a week, the group matched 0 percent financing from Ford Motor Co. and General Motors.

Opportunities for further cost cutting are mixed. Suppliers will be reluctant to provide the further 10 percent cost reduction targeted by 2003, particularly with production down.

Falling assumptions

The Chrysler group was counting on a stable U.S. market in 2002 with sales of at least 16 million units. It planned to maintain a minimum market share of 14 percent in 2001 and 14.2 percent in 2002.

But predictions for 2002 put the U.S. market at about 15 million light vehicles. Even if Chrysler were able to reach its predicted 2002 market share, its sales would only be 2.13 million units - 142,000 fewer units than the base volume in the turnaround plan.

The Chrysler group was falling short of its targets well before Sept. 11. At the end of August its U.S. market share was 13.5 percent. August sales were down 24.1 percent, and volume is off 11.3 percent through the first eight months. Analysts predict September sales will be down between 20 percent and 25 percent.

Revenues also have been jeopardized by pressure to offer more incentives. The group had cut prices on 2002 models, slashing as much as $2,000 off the Grand Cherokee. When GM and Ford started offering 0 percent loans on 36-month loans two weeks ago, Chrysler group resisted - for a week.

A 0 percent loan for 36 months means Chrysler Financial won't collect $2,200 in interest on a $20,000 sticker price compared with a standard 6.5 percent loan. The cut-rate financing is scheduled to end Oct. 31.

The cut-rate financing is in lieu of rebates. But still, the cheap loans will be offered on top of the reduced 2002 prices.

Pricing not only problem

According to Merrill Lynch estimates, the Chrysler group spent an average of $2,140 per vehicle on incentives in the first quarter and $2,477 in the second quarter compared with $1,847 in the first quarter of 2000 and $2,117 in the second quarter of 2000.

The Chrysler group's problems run deeper than pricing; its bread-and-butter vehicles are not selling.

Sales of minivans were down 14.8 percent through August despite the introduction of lower-priced models and heavy incentives.

The Jeep Grand Cherokee, whose prices for the 2002 model year were lowered by $2,000, is struggling. Sales were down 40.3 percent in August and 22.7 percent for the eight-month period - despite incentives of more than $2,000.

Help from Ram

The Dodge Ram, which was just redesigned, is starting to trickle into dealerships. The 2001 model is in short supply, but Dodge dealers had to heavily discount the pickup to move it off their lots, offering more than $4,000 off in some markets.

The next progress report on the Chrysler group's financial woes will come Oct. 23, when DaimlerChrysler is set to announce third-quarter results.

So far, the only certain thing about Chrysler's future is who will be at the top of the totem pole, even if it doesn't recover by 2003. Last week, the DaimlerChrysler supervisory board extended the contract of Chairman Juergen Schrempp by two years to 2005.

You can reach Diana T. Kurylko at dkurylko@autonews.com

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