August 5, 2008

EDITORIAL: Will this be Chrysler's last dance?

Sales figures are in for the first half of the year and suffice to say, 2008 is shaping up to be the worst year for US auto sales in nearly two decades.

Judging by the headlines, Chrysler seems to be most at risk of running aground in the turbulent economic tide. Sales at the Pentastar brand are down 23 percent from a year ago, despite a blitz of sales incentives geared toward consumers spooked by soaring gas prices.

Chrysler's leasing arm has shut down and Chase — one of the nation's largest underwriters of auto loans — has followed suit, refusing to cover loans for Chrysler products. Analysts have responded with muted skepticism, noting that any benefit from fewer loan delinquencies will be offset by slower sales.

So the fundamental question remains. In a market that couldn't be more hostile, is Cerberus Capital Management willing to invest in Chrysler for the long haul? Or are they angling to sell the brand for scrap value?

In many ways, it's an impossible question to answer without having all the facts.
But as one reads between the lines, the outlook grows bleak.

Despite loudly trumpeting gross earnings of $1.1 billion in the first half of 2008, CCM did not disclose their net income for the same period, nor are they obligated to. Daimler AG, which owns the remaining 19.9 percent of Chrysler, provides some insight into the real health of the company.

In their own quarterly report released last month, Daimler noted that Chrysler lost about $500 million in the first quarter of 2008. JPMorgan auto analyst Himanshu Patel estimated that Chrysler will burn through nearly $4 billion by years end.

Adding to the gloomy forecast. Chrysler renewed only $24 billion of its $30 billion credit line for the next 12 months. With reduced access to credit, the company's ability to purchase from suppliers and provide loans to dealers will suffer.

In the absence of good news, silence speaks louder than words. With every day that passes without full disclosure of their assets and liabilities, Chrysler draws closer to the day where their credit will no longer be accepted.

When suppliers demand payment in full for wheels, dashboards, computers and belts, the end will be swift and merciless. With no parts to build cars, dealers will stop placing orders. Within weeks, the money dries up and it's all over.

In the second half of 2008, Chrysler will face an intense and exceptionally brutal fight for its life. Compared to their Japanese competitors (who are still having a rough time of it), the Chrysler, Jeep and Dodge brands are ill equipped to sell on fuel economy.

Their corporate average fuel economy of 28.6 miles-per-gallon is weighed down by an abundance of SUVs, luxury sedans and light trucks. By comparison, Honda's average fuel economy topped the list last year at 33.7 miles per gallon.

Honda's class leading economy is in part buoyed by the success of the 45 mile-per-gallon Civic Hybrid. Chrysler has no direct competitor, nor the funds to build one.

In short, Chrysler needs a miracle in a market never known for charity. Or, for that matter, patience.

[Sources: AP,, Chicago Tribune]

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