Chrysler's sorry state revealed

Bankruptcy court filings reveal how complicated the auto business is - and just how much trouble Chrysler is in.

By Alex Taylor III, senior editor

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NEW YORK (Fortune) -- Among the thousands of pages of documents filed in connection with Chrysler's Chapter 11 bankruptcy are affidavits from Chrysler executives that open up a window on the auto business previously closed to outsiders in this intensely competitive business.

They reveal an almost unimaginable complexity in the design, manufacturing, and distribution of new cars.

But what's more revealing is that the affidavits expose Chrysler's inability to successfully compete and the dangers facing the company in a prolonged bankruptcy.

Consider:

  • Chrysler pays its suppliers 45 days after delivery. So if it suspends production - as it has now - for more than 45 days, the suppliers would have to resume manufacturing without their regular source of revenue. According to Scott Garberding, Chrysler's chief procurement officer, this imbalance of expenditures and revenues would be "catastrophic" to these marginally profitable companies.
  • As long as Chrysler remains in bankruptcy, it will suspend development of new models. But it can't simply restart development months from now and expect to pick up where it left off because, in the words of Frank Ewasyshyn, a top engineer, "we lose some of the learning and expertise" about the new model. In the affidavit, he figures that work done after a restart will take one-and-a-half times longer than work done before.
  • The longer Chrysler suspends production, the more it will cost to start back up, according to Ewasyshyn. The fluids that flow through the lines and equipment are perishable and must continue to flow, even when cars aren't being built. Paint is a particular problem. "Paint should be removed and stored after 21 days at a cost of $2 million," he said. "After 69 days, paint would need to be replaced at a cost of $15 million."
  • Chrysler can't start making 2010 models until it finishes building the 2009 models presently sitting on the assembly line. So the longer Chrysler is shut down, the later its 2010 models will be to reach showrooms.
  • Chrysler vehicles are such slugs on the market that 20% to 25% of the wholesale cost goes to dealer incentives, according to Peter Grady, director of dealer operations. Yet not only were there 286,687 2009 models - more than three months supply - sitting on dealer lots at the time of the filing but there were 36,370 2008 models left. In other words, they had been sitting around unsold for more than a year.
  • Dealers depend on cash flow to support their operations, but as Chrysler neared its financing deadline, the checks stopped coming. A West Palm Beach dealer named James Arrigo reported that Chrysler owed him $639,000 in consumer rebates, $426,000 in warranty and parts receivables, $13,000 in new vehicle receivables - in total $1.7 million. The dealer reduced his monthly expenses from $2.1 million to under $1.3 million in an effort to stay afloat.

Chrysler's dire condition explains why vice-chairman Tom LaSorda has been so busy trying to sell the company - and why he has been so unsuccessful. LaSorda revealed in his affidavit that he had spent two-and-a-half years trying to find a partner for Chrysler. He approached most of the world's top auto companies: GM (GM, Fortune 500), Volkswagen, Toyota (TM), Honda (HMC), Nissan, and Hyundai - as well as India's Tata Motors, Russia's GAZ, parts maker Magna, and a number of Chinese companies.

"No party except Fiat emerged as a viable and winning alliance partner for us," LaSorda reported. After reading the affidavits, you begin to understand why.

You also begin to understand why the chances of Chrysler emerging from bankruptcy in any shape that resembles intact looks increasingly unlikely.

(Additional reporting by Doris Burke) To top of page

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