For sale: A smaller Chrysler

DaimlerChrysler to cut 13,000 jobs, close plants; eyes possible sale of troubled North American automaker.

By Chris Isidore, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) -- Chrysler Group will be cutting about 13,000 workers over the next three years and the company's German parent, DaimlerChrysler, may be cutting Chrysler itself as it weighs a sale or spin-off the unit - a move that could cast the nine-year old merger that formed the global automaker as a failure.

A German publication, Manager Magazin, reported that DaimlerChrysler Chairman Dieter Zetsche had met with General Motors Chairman Rick Wagoner about a possible sale of Chrysler to the No. 1 U.S. automaker, which has itself been struggling, cutting jobs and closing plants.

The Chrysler assembly line in Newark, Del., which the company announced Wednesday it intends to close by 2009.
The Chrysler assembly line in Newark, Del., which the company announced Wednesday it intends to close by 2009.
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Zetsche and other company executives would not comment specifically on that report, other than to say the company was looking at various options for its troubled American unit.

"Please understand we can not provide you with any more details at this point in time," Zetsche said at a news conference at Chrysler's Auburn Hills, Mich., headquarters.

But he seemed far more open to the idea of a sale of Chrysler than he had been in the past. When questioned whether the company's statement meant it is looking a sale of the unit, he responded "this means all options are on the table."

The Detroit News reported Wednesday that DaimlerChrysler had employed J.P. Morgan & Co. to help the automaker explore strategic options for its Chrysler division, citing unnamed company sources.

Shares of DaimlerChrysler (Charts) jumped nearly 8 percent in afternoon trading in New York, after closing up 4.6 percent in Frankfurt on the possible sale of Chrysler, the jobs cuts and generally positive 2006 results for the parent company despite mounting losses at Chrysler. (More on job cuts) (More on earnings)

The announcements seemed to confirm that the 1998 purchase by DaimlerChrysler has provided little lift to the Chrysler Group brands - Chrysler, Dodge and Jeep. Chrysler Group has seen its sales tumble nearly 19 percent since the merger was completed in 1999, to only 12.9 percent of U.S. sales - putting Chrysler in fourth place in the U.S. market last year. The North American automaker, prior to the latest announcements, had eliminated a third of its jobs, closed 16 plants and facilities and dropped one of its brands - Plymouth, since the merger.

But the merger and all the previous cost-cutting moves could not reverse the long slide in sales that dropped DaimlerChrysler from its traditional No. 3 spot in the U.S. market last year to No. 4 behind Toyota Motor (Charts).

General Motors, which is struggling with its own losses, plant closings and turnaround plans, had no comment on the report out of Germany. Dave Cole, chairman of the Center for Automotive Research, said he would be shocked to see GM and Chrysler get together, although he said they could expand some areas of cooperation, such as an alliance on hybrid vehicles.

"I think the chance of any chance of a GM tie would be absolutely minimal," Cole sale. "If you were GM, would you really want another company that is going through its own turnaround?"

And Cole said that the financially successful global automakers such as Toyota or Honda (Charts) are not likely to buy Chrysler, given the success they're already seeing in North America. But he wouldn't rule out other buyers.

"The challenge is who would be a buyer," said Cole of a possible sale of Chrysler. "Maybe a Chinese company that really wants entrance into U.S. market or Renault-Nissan (Charts) would see it fit with its strategy. But it's tough."

Carlos Ghosn, CEO of both Renault and Nissan, has expressed a desire to have a North American automaker join the alliance between his two companies. His talks with GM about doing so failed last summer, though.

Kevin Tynan, auto analyst at Argus Research, said he believes Chrysler will end up being sold due to pressure from DaimlerChrysler's shareholders, but he thinks a sale to a private equity group is more likely than a combination with another automaker. He said the unit could go for as little as $14 billion to $20 billion.

"There's value to those brands," he said. "I think relative to Ford (Charts), there's less dead weight. Nine years later, it's probably the right thing to do. I think there's a feeling in Germany that it's time to cut bait."

Chrysler cutting about one-sixth of jobs

The job cuts, which had been far more widely expected than the comment on a possible sale of Chrysler, represent 16 percent of the staff at the North American unit of DaimlerChrysler, as it eliminates 9,000 U.S. factory workers and another 2,000 factory workers in Canada over the next three years. In addition, 2,000 salaried staff cuts will be spread over the next two years.

The company also said it will close the SUV Assembly line in Newark, Del., by 2009, after eliminating one of its two shifts later this year. It also plans to eliminate a shift at the Warren, Mich., truck plant later this year and a shift at the St. Louis South assembly plant in 2008.

In addition, the company will close a parts distribution center in Cleveland this December, and it will adjust powertrain, stamping and component operations to reflect reduced capacity. It also will look at outsourcing some of what it referred to as non-core operations.

The factory closings and downsizings will reduce the company's capacity by about 400,000 vehicles a year, or more than 10 percent of current capacity.

Chrysler CEO Tom LaSorda told reporters Wednesday that the turnaround plan should allow the Chrysler division to reduce losses in 2007 and return to profitability in 2008.

That's quicker than rival Ford Motor, which has said it doesn't expect to return to profitability until 2009. GM has yet to say when it expects its core North American auto operations to again be in the black.

LaSorda said that about half the hourly job cuts planned over the next three years will take place by the end of 2007.

The company did not detail how the job cuts will be made, other than to say it would not be offering all of its hourly employees buyout and retirement packages to induce them to leave, as GM and Ford have already done.

GM and Ford made even deeper cuts in their salaried staff by offering a series of buyout and retirement packages worth up to $140,000 per employee, and both got more than 30,000 employees, represented by the United Auto Workers union, to leave the company under those offers.

Although Chrysler's announcement did not include a buyout offer per se, it said "special retirement programs and other termination and attrition programs will be announced separately."

The union-represented workers have job guarantees that pay them nearly full salary if they are laid off, but those guarantees only run until the end of the current labor contract in September.

LaSorda said the company is making a "$3 billion powertrain offensive" to develop more fuel efficient cars. And the Chrysler Group must move away from its traditional emphasis on the North American market and on light trucks such as pickups, minivans and SUVs.

"Those two factors were advantages for Chrysler Group once upon a time," said LaSorda, "but the rules of the global marketplace have changed. High fuel prices and other dramatic shifts in the market have driven a shift in consumer preferences to smaller, more fuel-efficient vehicles."

Among the changes he promised was the introduction of the company's first hybrid vehicle in 2008, when it offers a Dodge Durango SUV with both a gas engine and electric motor to improve mileage, as well as more diesel offerings.

LaSorda promised more than 20 all-new vehicles and 13 refreshed vehicles by 2009. But he said the company will also create savings by reducing the number of different engine offerings, cutting the number of V-6 engine families from six to one, for example, and developing a a common axle program for all vehicles.

Chrysler losses mount

Early Wednesday, the company announced that Chrysler's full-year loss was $1.48 billion. In the prior year, as competitors General Motors (Charts) and Ford Motor (Charts) struggled with losses from their auto operations, Chrysler Group posted a $2.02 billion profit for 2005.

Chrysler was hurt by declining sales, particularly in its pickup trucks and SUVs, as the company lost its long-held position as the No. 3 U.S. automaker to fall behind Toyota Motor (Charts) during the year. Honda Motor (Charts) also made gains at the expense of the traditional Big Three Detroit automakers.

Revenue at Chrysler Group fell to $62.2 billion for 2006 from $66.1 billion a year earlier, as the number of vehicles sold also fell 5 percent to 2.7 million.

Still, even with the loss at Chrysler, parent DaimlerChrysler (Charts) posted 2006 operating income of €5.52 billion in 2006, or $7.28 billion, up from €5.19 billion, or $6.84 billion, in 2005. The company saw substantial earnings improvement at the Mercedes Car Group as well as further earnings gains at its truck group and financial services unit.

Net income for the company after a series of special charges came to €3.2 billion, or $4.3 billion, up from €2.8 billion, or $3.8 billion a year earlier. Based on the reported net income, earnings per share amounted to €3.16, or $4.17 a share, up from €2.80 a share, or $3.70, in 2005.

The company said based on the divisions' projections, DaimlerChrysler should achieve a significant increase in profitability in the planning period of 2007 through 2009. But it did not give any specific earnings targets.

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.