The Chrysler steamroller
The troubled automaker's new CEO, Bob Nardelli, is reinventing the car business faster than anyone thought possible.
(Fortune) -- Everyone figured changes were coming when Cerberus bought Chrysler and put former GE executive Bob Nardelli in charge last August. But no one could have guessed how many - and how fast.
In the past few days, Nardelli has taken on two of his most powerful business partners - his suppliers and his dealers. And while his bold moves rattled traditionalists, he likely was assembling more of the pieces in an entirely new - and hopefully more profitable - business model.
Step one was putting the supplier community on notice that Chrysler isn't willing to subsidize failing companies. After it and other automakers were burned by the bankruptcy of parts supplier Collins & Aikman last year to the tune - according to some estimates - of a hundred million dollars, Nardelli said enough is enough.
So when plastic parts make Plastech came to him asking for yet another subsidy - as well as a price increase - Nardelli terminated all of Chrysler's purchase orders and tried to pull his tools out of Plastech's plants. Although a bankruptcy judge intervened to blockade Chrysler's trucks, Nardelli had made his point. Chrysler's other troubled suppliers - and there may be two dozen or more - have been put on notice. Either they perform as they have contracted to do, or Chrysler will move the business.
For his second act, Nardelli is slashing Chrysler's model lineup along with its dealer network to get it to profitable size. From the National Automotive Dealers Association conference in San Francisco came word that Chrysler is cutting its lineup of models about in half - from 30 to 15 nameplates - and plans to offer them all in one facility. The handwriting has been on the wall for a long time but that effectively spells the end of standalone Jeep, Dodge, and Chrysler outlets. They simply won't be able to survive on their own, selling five or so models.
By moving as quickly he has, Nardelli reduces the financial pain. As the product lines whither away, dealers will be forced to merge into three-brand outlets or go out of business, and Nardelli won't be stuck with a lot of termination payments. By contrast, General Motors (GM, Fortune 500) rang up huge and unexpected bills when it pulled the plug on Oldsmobile.
Nardelli is also taking advantage of a market bottom to make his consolidation. Chrysler sales tanked in January, so any dealers who were still on the fence now see that their financial alternatives are limited. New car sales are likely to be dismal for at least the next six months. If the dealers want to get out of the business, now is the time.
Doubtless there will be pain. But it is better to have a few healthy survivors than an army of walking wounded. It is noteworthy that the head of nation's largest auto dealer, Mike Jackson of AutoNation, instead of bashing Nardelli, praised his moves as "brilliant, powerful, and controversial." Added Jackson: "With the market at a bottom, now is the time to shrink the product lineup and dealer network." Chrysler stores have been among the worst performing in the industry but Jackson says the new streamlined structure will make the company more efficient and competitive.
Jackson speaks from experience. While running North American sales for Mercedes-Benz, he reduced the number of dealers by 40% over five years. Said Jackson, "It cost us some money but was well worth it as we had a stronger dealer network."
Chrysler's New York-based owners should also be pleased. Nardelli's unspoken mission all along has been to get Chrysler in shape for sale to another buyer - likely another auto company. With its strongest brands and models all for sale under one roof - and hopefully profitable - Chrysler will look a lot more attractive to potential suitors. Are you listening, Carlos Ghosn?