Chrysler wrestles with high levels of inventory as unsold vehicles sit on lots
 |  | By Carlos Osorio, AP |
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"They're tough to sell," says Allen, whose customers are mostly commuters heading to Boston who have become fuel-conscious in the past year.
"All the good stuff has already been picked through," he says.
The vehicles on the list, including SUVs such as Dodge Durango and Jeep Commander, are Chrysler Group's single-biggest problem right now. The automaker is burdened with what some estimate to be enough unsold cars and trucks to last for four months. Much of it is filling up parking lots in the Midwest as Chrysler waits for orders from dealers.
Adding to the problem: 80% of that inventory is 2006 models, not a good sign this late in the year when other automakers are pushing 2007 models.
Automakers record profit on vehicles when they ship them to dealers. But Chrysler's dealers already have enough cars and trucks on their lots to last 80 to 126 days, compared with an industry average of 63 days. They are reluctant to order more.
So in addition to what's at the dealers, Chrysler admits it has 50,000 vehicles sitting on random storage lots. Those cars and trucks are in what Chrysler calls its "sales bank." It's a practice — abandoned by most automakers more than 25 years ago — by which Chrysler produces cars that no one has ordered and waits until dealers have space on their lots and are willing to take them on.
Sales banks have damaged each domestic automaker sometime in the past. Chrysler's sales bank now isn't as bad as the one it had in 1979. At that time, the automaker, on the verge of bankruptcy, had 110,000 vehicles in the bank.
In his autobiography, Iacocca, former Chrysler CEO Lee Iacocca says parking lots full of Chryslers, Dodges and Plymouths were "vivid evidence of the company's structural weakness. ... At a time when our cash was dwindling anyway and interest rates were high, the costs of carrying the inventory were astronomical. But even worse, the cars were just sitting there in the great outdoors and slowly deteriorating."
Chrysler, now part of Germany's DaimlerChrysler (DCX), has been using the sales bank now to keep its labor force working. Under its contract with the United Auto Workers, it has to pay union workers most of their salary even if they are idle. So the automaker has kept on pumping out cars and trucks even as demand softened. It's a situation that could mean great deals for buyers but little profit for the automaker.
"It's a formula for disaster," says David Cole, chairman of the Center for Automotive Research. The automakers rationalize pumping up production, because, "Labor is a fixed cost, so you might as well use it if it's here. It becomes this self-perpetuating problem."
After realizing sales wouldn't catch up, Chrysler cut fourth-quarter production. And it is relying on a slew of new, smaller cars and crossovers — SUV-like vehicles with the ride and fuel-efficiency of cars — to help boost profit. They include models such as the recently introduced Dodge Caliber and Jeep Compass.
But the automaker, which posted a $1.4 billion loss for the third quarter, still desperately needs its dealers to keep buying the backlog of pickups and SUVs. Dealers, who have to finance vehicles sitting idle on their lots, are pushing back.
Small dealers such as Allen have stopped buying vehicles from Chrysler for months at a time. And now AutoNation, the country's largest dealer owner, has stopped buying all but Chrysler's newest offerings.
"Chrysler is under immense pressure, and their dealers are under immense pressure," says Mike Maroone, AutoNation's president and chief operating officer. "They've had a series of dealer meetings encouraging dealers to buy that inventory. ... They haven't yet right-sized production with demand."
Troubles weren't a surprise
To casual observers, Chrysler's woes might be a surprise. Just a few short years ago, Chrysler was seen as the automaker to emulate. The edgy-looking Chrysler 300 sedan was a hit, and critics praised the company for forging ahead with daring design and for cutting costs while making its plants more efficient.
But insiders have seen Chrysler's problems brewing for months. While much of the media heat was on General Motors and Ford Motor for their poor financial performances, Chrysler's inventories were slowly growing and the automaker was ratcheting up incentives to keep customers buying.
"GM was trying to be public with their problems, while (Ford and Chrysler) were trying to hide from it," Cole says. "This was a problem that was absolutely going to (happen). The only way you can deal with it effectively is if the people in the organization face up to it."
Chrysler CEO Tom LaSorda admits a big part of the problem is a failed summer-selling season. Chrysler was the only domestic automaker to reinstate the "employee pricing for everyone" promotion that set industry sales afire in summer 2005.
This time, consumers didn't bite. Sales were down 34% in July and 3% in August from last year. Chrysler had hoped to match its average summer sales for the past five years but missed by nearly 80,000 vehicles.
"We had a plan, and it didn't work," LaSorda says. "I take responsibility for the plan not working. Obviously ... we could have taken inventory down sooner."
High gas prices and economic weakness this year shifted buyer interest increasingly to smaller vehicles with fuel-efficient, four-cylinder engines and away from bigger pickups and SUVs with bigger engines.
But the latter are Chrysler's bread and butter. Nearly 80% of its sales have been trucks, including pickups, SUVs and minivans. And the once-popular Hemi engine, a powerful eight-cylinder, seems more of a liability now than an asset.
"Chrysler needs to quickly adjust its product mix," says Kevin Reale, an analyst at AMR Research.
LaSorda argues that the automaker is shaking things up, rolling out several smaller crossover SUVs and a totally redesigned Chrysler Sebring midsize sedan this year. The company began developing those products four years ago, before gas prices became an issue.
If Chrysler had managed to produce those cars a year earlier, "We'd be heroes," LaSorda says. But the automaker had to deal with the product plan already in progress. "That's not complaining. That's just fact."
Still, its inventory issue likely won't be enough to send Chrysler into as deep a financial abyss as GM, which has lost $3 billion this year, and Ford, which has lost $7 billion, says John Casesa, managing partner of Casesa Strategic Advisors. "In the near term, Chrysler faces very costly challenges, but longer term, the company has advantages in its speed, flexibility and emphasis on design and creativity," Casesa says.
Chrysler's situation is different from that of GM and Ford, he says. "This company is smaller. ... It can change more quickly than those other companies can."
But even Casesa isn't sure if this year's slate of new products will be enough to resuscitate sales. "It will be difficult to gain share with these new products, because they are going into segments in which the Japanese and Koreans dominate," he says.
For now, the automaker will have to rely on rebates and low-interest loans to attract buyers. Earlier this week, it began offering 0% loans even to customers with some credit problems. And dealers expect rebate offers will heat up in the coming months as the company tries to clear out 2006 models.
Some are skeptical it will work, including Allen, the New Hampshire dealer. "People are burned out on the whole incentive thing," he says. "But, on the other hand, they have to do something."
Labor costs at issue
The other piece of Chrysler's puzzle is labor costs, which are the highest in the industry. Chrysler's costs for active and retired employees come to about $1,000 per car, five times Toyota's costs, according to Reale.
"This will involve some hard negotiations with the union," he says.
The UAW has made it clear it doesn't feel it needs to help trim Chrysler's labor costs. After approving moves to help Ford cut health care costs by $850 million a year and GM cut $1 million annually, the union said it won't do the same for Chrysler. Chrysler says if it could make a deal similar to its competitors, it would save $340 million a year.
The UAW may be eyeing the deep pockets of Chrysler's German parent. DaimlerChrysler is still doing well, posting $686 million in earnings for the third quarter, thanks to $1.3 billion in revenue from its Mercedes Group. "The fact is that the Chrysler Group has to stand on its own," LaSorda says. "The issue really centers on why should we be treated differently from the others? We have to compete and have the same kind of cost structure as the others."
Contract negotiations with the UAW begin in summer. By then, Chrysler might have a hard time convincing the union that it still needs help. LaSorda expects sales to pick up next year as the products being launched now reach full volume.
Until then, industry watchers say, it's critical that Chrysler get its production levels in line with demand.
"The formula for success here is very straightforward: You have to be operating at 100% capacity with highly profitable sales," Cole says. "If you're producing because you have the capacity and not because of demand, you've got a problem."
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