Auto analyst Dennis Desrosiers has spent “39 years and 7 months” studying the auto industry and his first reaction to the Chrysler news this afternoon is less than enthusiastic. Notably, he concludes that Chrysler/Fiat's success will depend on their ability to make a profit selling small cars to Americans. Two problems there: Americans have never bought small cars and no one, including the Japanese, have figured out how to make a profit on small cars. (The big profits for the Detroit 3 have always come from their pickups and SUVs)
Here's some excerpts from a note Desrosiers just published:
I listened to Obama and he was talking very tough. This is dangerous since the money at stake is very large and the bondholders are in a more powerful position now than before and they could really mess this up. Rarely do these proceed as planned and on any sort of schedule. We are entering a very dangerous time for Chrysler.
[Still] If everything goes as planned Chrysler could emerge a much leaner, smaller and more cost competitive company and be in a good position to pick up market share. This will depend on their product offerings on a go forward basis and this is one of their weak spots. New product offerings are very thin compared to their competitors … Quite frankly a lot of the import success has been due to the D-3's failure … quality, product cadence, ignoring key segments of the buying public, diverting scarce resources to stupid initiatives and away from their core business, iffy investments, ineffective restructurings over and over again etc.
…
Be careful to not read too much into the Fiat deal. The issue isn't whether the deal can be done or not. This is fait accompli. The real issue is whether it will work. To work there has to be three near miracles … first Americans have to embrace small cars .. they never have … second they have to buy Italian small cars … they never have and third Fiat/Chrysler has to find a way to make small cars profitable in North America when nobody including the Japanese have found a way to make small cars profitable in North America. So the Fiat deal is great but a lot has to happen for it to make a financial difference for Chrysler. And this is attempt number 4 for Chrysler … the dream team of Lutz/Stallkamp/Eaton didn't do the job … Daimler failed miserably with Chrysler … the wizz kids on Wall street ( Cerberus ) failed … there is no guarantee that who ever takes over can make this successful.
We are officially in “limp along mode” which I think is good. Chrysler can now restructure and with billions in taxpayer money limp along for 2 or 3 years in the hope that all this comes together and they can survive long term.
After 39 years and 7 months of studying this industry my intuition says it is going to be a challenge but at least there is an opportunity. Without this there would have been no hope.
Maybe if commentators like those I hear on the local radio talk shows could cut back on some of their negativity, people might start considering buying North American cars again.
As well, if some of the strident alarmism from environmentalists trying to convince people that a personal vehicle is a crime against humanity could be turned down a notch … maybe car companies could return to some profitability.
Oh yes, and cutting down on the number of models.
But then, what do I know. I use the BMW model – Bus, Metro, Walk.