Chrysler's Valentine's Day massacre

The Daimler-Chrysler honeymoon is really over. Is a divorce next? Fortune's Alex Taylor lays out what Wednesday's announcement tells us about the auto business.

By Alex Taylor III, Fortune senior editor

NEW YORK (Fortune) -- Patience with Chrysler at DaimlerChrysler headquarters in Stuttgart seems to have run out. After the U.S. automaker plunged into a billion-dollar loss for the third time since the 1998 merger, Daimler now seems ready to set Chrysler free. Its supervisory board (equivalent to a U.S. board of directors) declared Wednesday that it will "consider other, more far-reaching strategic options with partners in order to support and facilitate" Chrysler's restructuring. Then it added, "No option is being excluded."

How that plays out remains unclear. The world seems to be awash with private equity money seeking undervalued situations, as seen in the rush by Carl Icahn, Wilbur Ross and others to invest in auto parts makers. But buying a company with the public profile and operational complexity of an automaker would entail difficulties of a higher level of magnitude.

Chrysler's Jeep, Dodge and Chrysler brands could lose a good part of their appeal to potential consumers if they look like damaged goods. For many people, car brands represent an extension of their personality. Nobody wants to be associated with a loser. Then there are complexities of coping with a dealer network protected by state franchise laws and union members protected by their contracts.

A merger with another automaker might be a simpler solution. Until it went into its own financial slump, Renault Nissan (Charts) might have been a buyer. CEO Carlos Ghosn has often expressed an interest in a North American automaker. Now a Chinese buyer seems more likely. The Chinese are anxious to move into the U.S. market and a merger with Chrysler would give them instant access to a ready-made distribution system of dealers.

Today's DaimlerChrysler (Charts) announcement and subsequent news conference also dramatically underlined the changing nature of the auto business and the difficulty that companies like Chrysler (as well as General Motors (Charts) and Ford (Charts)) have in coping with it. Less than nimble in the best of times, they seem particularly sluggish in reacting to changes in the marketplace, competitive environment, and outside forces like fuel prices.

Some lessons learned today:

1. Although this is a product business, new product is not enough. Chrysler introduced ten all-new vehicles in 2006 but still lost market share and money, and ended the year with unsold models stacked up all over Detroit. The reason is simple: Everybody is introducing new cars and Chrysler models like the Dodge Caliber, Jeep Compass and Dodge Nitro weren't very strong. The styling was controversial, the interiors plain and the performance lackluster.

2. Shelf space doesn't count. The heck with consumer choices - Chrysler says it will reduce its 32 nameplates by 10 to 20 percent. Among the endangered: the Dodge Durango and Chrysler Aspen SUVs. The reason goes back to Number One above: Mediocre product doesn't cut it. GM is having to face up to that as it contemplates the future of Pontiac and Buick.

3. Even in its weakened state, Chrysler thinks it is better off than Ford. Chrysler expects to break-even by 2008 and report a 2.5 percent profit by 2009. Ford doesn't expect to make money in North America until 2009. And if its new models like the Edge continue to disappoint, it could take longer than that.

4. Industry shibboleths die hard. Once again, industry gurus are ringing their hands over the prospect of Chrysler sharing more parts - and actual vehicle architectures - with Mercedes-Benz. Mercedes buyers, they wail, will flee the brand if it is tainted by any association with Chrysler. Hello? Has anyone looked at Toyota and Lexus lately? Lexus is the largest selling luxury brand in the U.S. and is expanding around the world, yet it shares many of its platforms with Toyota (Charts). The RX 350 SUV is a twin of the Toyota Highlander, the ES 350 shares its genes with the Toyota Camry, and the GX 470 is a Toyota 4Runner in other clothing. The question of whether or not you share parts depends on how well you are able to disguise that fact from customers.

5. Trucks are dead. Looks like the era of the truck-based SUV and the full-size pickup for hobby farmers is coming to a close. Chrysler, which made a higher percentage of trucks than anybody, is cutting the number of its truck platforms from four to two. Going forward, president Tom LaSorda expects the company to be selling 60 percent cars and 40 percent trucks -- a reversal of today's percentages.

6. 2007 is going to be a tough year. The Detroit Three got hammered in 2006 and LaSorda predicts that industry sales will be down "double-digits" in 2007. GM has already taken note of that by introducing cut-rate subsidized loans. Other automakers should take appropriate action.


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