How Chrysler's gains turned to pain

Just a year ago Chrysler seemed immune to the problems at GM and Ford. Now the automaker is set to slash thousands of jobs.

By Chris Isidore, senior writer

NEW YORK ( -- Chrysler Group is set to join its Detroit-based rivals in the breakdown lane of the nation's auto industry, just a year after it was racing past those competitors in most measures of success.

As General Motors and Ford Motor were announcing huge losses, tumbling sales and cutting thousands of jobs in 2005 and early 2006, Chrysler was reporting profits and improved sales.

Chrysler's Newark, Del., assembly line could be one of the plants closed under a turnaround plan due Feb. 14.
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But the problems plaguing its rivals - waning popularity of pickup trucks and SUVs, labor cost disadvantages and plants not as flexible as those of its Japanese competitors - have caught up with the North American unit of DaimlerChrysler.

Last year, Chrysler and its corporate parent lost their longstanding spot as No. 3 automaker in the United States, falling behind Toyota. And when Chrysler details its turnaround plans on Valentine's Day, it will be a day of thorns, not roses, for what is now the No. 4 U.S. automaker.

"They've got a few poison arrows in that quiver," said Erich Merkle, director of forecasting for IRN Inc., an automotive consulting firm, about what he's expecting to see as part of Chrysler's turnaround plans.

Merkle and other industry experts are looking for Chrysler to announce plans to cut up to 10,000 jobs through buyouts and retirement packages and close at least two assembly lines, with Newark, Del., and North St. Louis the most likely candidates.

A reduction of 10,000 jobs, or 20 percent of its U.S. factory workers, is smaller than the cuts at GM and Ford.

The United Auto Workers union has won job guarantees from the Big Three automakers that keep union members at nearly full salary if they are laid off, making plant closings difficult and costly. GM and Ford had to offer workers up to $140,000 apiece to give up some benefits and leave the company.

Look for a similar offer from Chrysler, said Merkle. "I don't think they're going to have to pay more, but I don't think they'll be able to pay less," he said.

Chrysler officials wouldn't comment, other than to say that a turnaround plan will be unveiled at the company's Auburn Hills, Mich., headquarters on Wednesday morning. DaimlerChrysler will also hold its conference detailing its full-year financial results there, the first time since the 1998 merger that it will do so in Auburn Hills rather than Germany.

The company may cushion the bad news by announcing plans for investment in its Jefferson North Assembly Plant in Detroit, the last auto assembly line operating within city limits. The announced investment is anticipated to top $1 billion and could give the plant the ability to make cars that share more components and design with DaimlerChrysler's luxury Mercedes-Benz unit.

Some German shareholders have been pushing DaimlerChrysler to sell Chrysler, which Daimler-Benz bought in 1998. A decision to more fully integrate Chrysler Group and Mercedes could essentially close off that option. That in itself could delay an announcement on new investment and coordination across brands.

"DaimlerChrysler faces a decision. It either needs to much more aggressively integrate Chrysler and Mercedes or separate the business. The management has a fundamental decision at hand," said John Casesa, managing partner of consulting firm Casesa Strategic Advisors. "I think it's still an open question."

But some other experts say that current DaimlerChrysler management is committed to keeping the merger together. DaimlerChrysler CEO Dieter Zetsche, who ran the Chrysler Group until he was promoted last year, is seen both inside and outside the company as being a firm advocate of keeping the two parts of the company together.

"Separating the two companies would not be easy," said Michael Robinet, vice president of global vehicle forecasts for industry consultant CSM Worldwide. "Behind the scenes there's a lot of interaction between the brands. Separating the two is detrimental to the economies of scale of the companies. That would leave Mercedes with less than 1 million vehicles a year worldwide - that would put them at a disadvantage."

Robinet and other experts say more needs to be done to link Chrysler and Mercedes but their largely separate operations are a glaring sign of how difficult that would be.

"Historically you have high costs on the Chrysler side and you potentially lose prestige" at Mercedes, said David Cole, chairman of the Center for Automotive Research. "Anything like this has to be done very carefully."

Chrysler Group posted a loss of $1.5 billion in the third quarter, compared to a profit of $374 million a year earlier, and a fourth-quarter loss is virtually certain after it was forced to slash production due to a glut of unsold trucks at dealers and parking lots around Detroit.

While the company won't discuss its turnaround plans, it is on record as saying it needs to win changes in its health care coverage for active and retired workers that the UAW already approved at GM and Ford.

The Center for Automotive Research estimates that the additional health care spending at Chrysler is costing the automaker about $600 a car, or more than $1.6 billion a year, compared to its U.S. competitors.

The health care costs are a particularly serious competitive problem for all the Big Three. Even at their U.S. factories, Asian automakers such as Toyota, Honda and Nissan do not have nearly the health care costs as GM, Ford or Chrysler, mostly since they don't have to worry about health care costs for a large population of retired workers. And at their Japanese plants, health care is a government-provided benefit.

Chrysler spent $2.2 billion on U.S. health care in 2006, with fully two-thirds of that going to cover retirees and their families.

But Chrysler is also burdened by a much older product lineup in many key products, especially the Dodge Ram pickup truck, which has required Chrysler to offer larger incentives than GM and Ford to maintain sales.

"As a rule, these automotive restructuring plans built on capacity reduction are never enough," said Casesa. He said the 83-year old automaker must recapture the lost sales momentum it had only a year ago when the Chrysler 300 sedan was one of the top-selling cars in the United States.

"They must regain exciting styling and much more aggressively take advantage of Mercedes," said Casesa.

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