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Chrysler bankruptcy: What's next?

2009-05-29 10:33

Detroit - Chrysler is on the verge of a Motor City miracle: a make-over in bankruptcy that will bring in new management under Italy's Fiat SpA and its highly touted small car technology.

Rescued from liquidation with $8.6 billion of emergency US government loans and bankruptcy financing, Chrysler has been given a new lease on life.

But what's next?

The new Chrysler will be up against formidable and entrenched competitors in the small vehicle market like Honda Motor Co.

It will also struggle with the aftermath of freezing product development to conserve cash, analysts said.

But in what could be its biggest challenge, the number three US carmaker has to break free of a reliance on aggressive discounting and a reputation for poor quality.

Battle for survival

In the short term, analysts said Chrysler will have to find a way to hang on until early 2011, when Fiat is expected to debut the first of its smaller cars in the US market.

"The big challenge is not getting through this bankruptcy," IHS Global Insight analyst Aaron Bragman said. "The big challenge is what do they do between the end of this bankruptcy and the arrival of the Fiat vehicles?"

"There is still at least 18 months they have to try to survive in a down market with largely the same showroom and really no extra cash to get them through it," Bragman said.

Industry analyst and consultant Maryann Keller said that estimates of the investments required for the new Chrysler after bankruptcy have been way too low.

"They have to be rebuilt, and we don't even know if Chrysler can be rebuilt," Keller said. "There hasn't been any development work done in the last 12 months."

Chrysler, bought by Cerberus Capital Management from Germany's Daimler AG in August 2007, filed for bankruptcy protection on April 30 under the direction of the Obama administration's auto task force.

Based in Auburn Hills, Michigan, Chrysler was seeking bankruptcy court approval for an assets sale, putting it ahead of an aggressive government schedule.

Achieved much in a short period

Chrysler has achieved more to cut costs in a shorter time than most analysts thought possible, including wiping out plants and jobs along with dealerships. Chrysler is due to cut nearly 800 dealerships, or 25% of its network, by early June.

It has used the bankruptcy process to eliminate $6.9 billion in debt and to halve a $4.5 billion payment that was due to a union trust fund by making it part of a note and part equity that could be sold later.

Chrysler's turnaround in the 1980s was partly driven by new cars and the minivan, but a crowded marketplace and dearth of new products could get Chrysler's new incarnation off to a rough start.

Erich Merkle, an independent auto analyst, said Chrysler's market share could drop as low as 5 to 6% from 10.7% in the first four months of 2009, due to a lack of new models and a decline in residual values.

Chrysler's market share was 12.5% in the first four months of 2008.

As a result, of the losses in sales and market share, Chrysler's operations will still be "too bloated" when the automaker emerges from bankruptcy even after the cuts it has made during its reorganisation, Merkle said.

"They will have to look for areas to cut," he said. "They will still be too large, still have too much capacity."

Fiats may not fit

Through April, Chrysler was the fifth best seller in the United States behind General Motors Corp , Toyota Motor Corp, Ford Motor Co and Honda.

In the first four months of 2009, Chrysler's sales were down 46% from a year earlier,

What's more, Merkle said, when the small Fiats arrive, they may not fit the marketplace. He said demand would be focused on mid-size cars and small to mid-size crossovers, areas in which Chrysler has not recently excelled.

US car sales have been at a 27-year low, not adjusting for the sharp rise in population. Some executives have called it the worst market in five decades.

But JP Morgan analyst Himanshu Patel said in a note on Wednesday that Chrysler's sales, which had been well below the industry in May, appear to have returned to about average.

Analysts have asked whether Chrysler's May sales were supported by incentives and dealer liquidation sales, which would mean those sales could be gone from the company's sales figures by early June.

Bragman said that with expectations of delays for new models of Jeep Grand Cherokee, Chrysler 300 and Dodge Charger, Chrysler's turnaround could take years.

"We need to start seeing new product, we need to start seeing something exciting," Bragman said. "We need to start giving people a reason to believe that Chrysler is coming back."

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