Chrysler survives. But will it thrive?

By Paul A. Eisenstein
|  Monday, May 10, 2010  |  Updated 4:31 PM EDT
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Chrysler's better-than-expected first-quarter performance was an eye-opener for all the skeptics who thought the automaker would never be able to turn itself around, even with help from Italy's Fiat.

Now it has to keep it up, even in the face of an uncertain economic environment and stiff competition from rivals domestic and foreign.

In the year since Chrysler's emergence from bankruptcy, its chances for a turnaround have remained uncertain, with industry analysts questioning the promises and plans laid out by Sergio Marchionne, CEO of Fiat and now Chrysler.

“People are being skeptical, and justifiably,” said analyst Joe Phillippi of AutoTrends Consulting, who says Marchionne and Chrysler may be encouraging that skepticism.

But several recent developments lend credence to Marchionne and his aggressive turnaround plan for the U.S. maker, including April sales numbers that saw Chrysler's best month-over-month performance since 2005.

After bleeding cash over the past several years — including a $3.8 billion loss for 2009 — Chrysler turned an unexpected first-quarter operating profit of $143 million. Worldwide vehicle shipments rose 3 percent compared with the final quarter of 2009.

Marchionne said Monday Chrysler may raise its financial targets for 2010 in the second half of the year. "It is clear that if we continue to perform at this rate we're going to be in excess of the guidance that was provided in 2009," Marchionne said in a conference call to review Chrysler's first-quarter financial results.

The current quarter has gotten off to a good start. Chrysler reported a solid 25 percent jump in sales volume, its best year-over-year increase since 2005. But the upturn was erratic, with wild variations from model to model, so there’s a bit of a half-empty/half-full debate under way among industry analysts.

Dry pipeline
Coming out of last year’s bankruptcy, there wasn’t much to talk about, at least not if you were trying to paint a positive picture about the smallest of the Detroit Three. Not only were its coffers empty but its product pipeline had largely run dry.

When General Motors was sinking into bankruptcy early in 2009, it was clear the White House thought that company too large to fail, propping the maker up with a huge bailout after its emergence from Chapter 11.

The new Obama administration also decided to bail out Chrysler, but the president himself expressed skepticism about that maker's viability, offering a government handout only when Italian maker Fiat agreed to take control.

Now, with Fiat’s help, the spigot of new models really won’t begin to open up until 2012. The only truly significant launch of this coming year is the Jeep Grand Cherokee, followed by the introduction of a replacement for the unloved Chrysler Sebring, which reportedly is going to be renamed Nassau.

Chrysler officials won’t even confirm that tidbit of news. And they’re pointedly taking pains to keep future product under wraps.

That’s in sharp contrast to the company’s past policies. In earlier downturns, notably in the early 1080s and then again a decade later, the automaker masterfully manipulated public opinion, recalls Phillippi, by teasing the market with concept vehicles and spy shots showing promising new products.

This time, “there aren’t even any spy shots,” laments Phillippi. Other industry observers agree that without an indication of what’s to come, it’s difficult to put faith in the promise that products scheduled for 2012 and 2013 can turn things around at a company struggling to survive in 2010.

The good news is that most tend to see an upside once Chrysler’s top secret product programs start hitting showrooms. Preliminary word is especially strong on the 2011 Jeep Grand Cherokee, while there’s little opportunity for Nassau to go anywhere but up.

The problem is that “They have to market perception as well as product,” warns consultant Jim Hall, of Detroit’s 2953 Analytics. Chrysler’s image has taken a beating, in recent years, and not just because of the bankruptcy. The maker has been trashed, for example, by the influential Consumer Reports magazine, which labeled Chrysler’s products as some of the worst on the market in quality.

At a daylong briefing for media and analysts last November, Marchionne and other Chrysler executives openly acknowledged that but promised that fixing quality and reliability issues will be a top priority.

Getting that message out will only add to what will be a huge incremental increase in Chrysler’s marketing budget once the product pipeline reopens, said Hall.

Overseas sales
As part of the Chrysler bailout, the White House agreed to give Fiat a 20 percent stake in the U.S. maker, but said Fiat would earn more by meeting key targets, such as building up sales overseas. In recent weeks, Fiat has begun to describe its strategy for boosting foreign demand, and Hall is particularly optimistic for the Jeep brand’s global potential.

Jeep, he says, “is the jewel for them,” adding that “Fiat always saw Jeep as a truly global brand that wasn’t being sold globally.”

He predicts that within the next few years, Jeep’s U.S. plants could “spit out” as many as 125,000 to 150,000 vehicles a year for export to markets ranging from Eastern Europe to Australia.

One of the key reasons for Chrysler’s frequent downturns has been its heavy dependence upon North America, which typically has accounted for well over 90 percent of its sales, By comparison, foreign markets now generate nearly two-thirds of GM’s unit volume.

Ironically, that could work to Fiat’s advantage, suggests Hall, especially in light of the worsening economic situation in Europe. With the Euro tumbling under the strain of Greece’s financial woes, “Chrysler may be able to offer something to Fiat,” he says, “as a source of cash.”

That is an optimistic forecast, of course, and depends on some unforeseeable factors, ranging from the health of the U.S. economy to the quality of Chrysler’s upcoming products.

But the simple fact that analysts are beginning to see a future at all for the long-ailing U.S. maker is a significant improvement.

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