The board of the newly formed Chrysler Group is starting from scratch, and must base its initial decisions based on covenants dictated by the U.S. and Canadian governments.
The new Chrysler Group board of directors is scheduled to meet for the first time today, working on an unspecified agenda. While boards traditionally set overall strategic direction, and approve management’s capital spending requirements from previously approved product development plans, the board of the newly formed Chrysler Group is starting from scratch, and must make its initial decisions based on loan covenants dictated by the U.S. and Canadian governments.
Complicating things, it’s not at all clear if the new board understands the products currently in production, let alone has any basis for making the billions of dollars in product decisions required to refresh the aging — and slow selling — lineups of the Chrysler, Dodge and Jeep brands. The new board appointments have experience in finance, corporate restructurings and modifying union contracts in the airline industry. Auto industry experience is, well, scarce, to put it politely.
The board also faces an immediate tactical issue regarding Chrysler’s extremely weak vehicle sales. The smallest of Detroit’s once so-called “Big Three” has been hardest hit by consumer concerns and the Great Recession, with U.S. June sales plunging 42%, the worst of all major manufacturers, but its new head has repeatedly stated that Chrysler needs to move away from the huge sales incentives that put it in — and keep it in — red-ink results.
Chrysler Group is now offering to double the U.S. government’s Cash-for-Clunkers subsidy, which translates for incentives of up to $9,000 on “eligible” Chrysler, Dodge and Jeep products, which include most. This “Double CA$H for Your Old Car” program is the first big incentive campaign since Chrysler emerged from Chapter 11 protection, in June.
No Board Meeting Needed!
The severe challenges the Chrysler Board faces come with Fiat’s own troubles as a backdrop. Both companies are headed by Sergio Marchionne as CEO, although Marchionne said he is spending less than half his time on Chrysler, as he spoke about Fiat’s losses on a conference call with analysts and reporters last week. If you’re looking for a precedent here, think of Carlos Ghosn, the head of both Nissan and Renault, whose alliance is loss-making, as are both the individual car companies he runs.
During the second quarter of 2009 Fiat posted a net loss of $254 million, compared with profits of $918 million a year ago, as the Milan-based conglomerate lost money in its industrial operations, which include Fiat, Alfa Romeo, and Lancia automobiles. Ferrari and Maserati are held in separate companies.
Fiat also issued new three-year notes worth $1.8 billion that pay 9.25%. While Fiat is relatively well-positioned with its line-up of small, inexpensive cars in Europe, it is still not immune to the ongoing depression in global auto markets, which resulted in Chrysler’s bankruptcy. Fiat’s debt is a major concern among investors, although it decreased from $9.4 billion to $8.1 billion during the quarter. Fiat’s debt is rated by Standard & Poors as junk bonds, a company under attack for its overly optimistic ratings. The offering was not available to U.S. investors since it did not comply with SEC regulations.
In a phone call with reporters, Sergio Marchionne said that he planned to ride out the ongoing Great Recession through his previous stated strategy of alliances, although, for the moment, he has dropped his bid for Adam Opel, AG, which General Motors is in the process of selling, because it is not vital to Fiat’s future.
During the Chrysler negotiations, Marchionne took a similar hard line with the UAW and creditors by saying the deal wasn’t needed by Fiat. The Opel withdrawal could simply be an understanding of the realities of European politics, the dynamics of which would never allow a German company to come under Italian control, based on German taxpayer financing, and the stretched resources of Fiat.
At the beginning of June, when Fiat formed a “strategic alliance” with Chrysler, which effectively gives it control of the new company called Chrysler Group, some auto executives were still predicting that global markets would recover this year. With the exception of trade-restricted Asian markets, those hopes have now been dashed as first half earnings and predictions for the second half of 2009 come forth.
Both Fiat and Chrysler Group are challenged to deliver profitability this year, and must make crucial future product decisions at a time when cash is scarce.
The alliance, with 4.5 million vehicle sales annually, makes Fiat the world’s sixth largest car maker, behind number five Ford Motor Company, and is part of Fiat’s longer term strategy to survive by growing bigger. From a scale point of view — Fiat needs to be larger to survive, according to Marchionne — it might make more sense for the Italian company to pursue other companies rather than putting more money into Chrysler now that it has agreements in place.
What that means to American taxpayers who are holding 10% of Chrysler’s debt is unclear, but the company must become profitable to repay its loans and go through a successful public offering that Marchionne envisions sometime during the next couple of years.
Fiat can increase its stake in Chrysler Group from 20% to 35%, and ultimately to majority control once taxpayers are paid back under terms of the bankruptcy sale dictated by the U.S. Treasury Department, which has advanced about $15 billion in money to keep Chrysler alive.
One sign that more link-ups are desirable, rather than more involvement with Chrysler, was given earlier this month when Fiat Group and Guangzhou Automobile Group Company Ltd. (GAC Group) signed a “Framework Agreement” establishing a 50/50 joint-venture for the production of cars and engines for the Chinese market. The first model to be launched will be the C-size Fiat Linea sedan, with 1.4-liter 120 horsepower and 150 horsepower engines.
In theory, it is possible that such a car could be imported into the U.S., but Fiat still has not announced production locations or product decisions in North America that are required by the loan agreements. It is widely expected that a small Fiat car for Chrysler will be built in Mexico and imported into the U.S. under the North American Free trade agreement.
Things will become clearer later this week after the board meets and, presumably, announces some decisions.