AUBURN HILLS, Michigan (Bloomberg) — DaimlerChrysler AG may cut its five-year plan for developing new U.S. vehicles by 25 percent to $36 billion in an effort to bring Chrysler back to profitability, according to a person familiar with the company.
The carmaker has canceled plans to make a big sport-utility vehicle to compete with General Motors Corp.'s Suburban and ended development of a high-performance convertible called the Chrysler 300 Hemi, the person said. Development of a Neon small car also may end, the person said.
Chief Executive Juergen Schrempp sent a team of German executives led by Dieter Zetsche, former head of commercial trucks, to Auburn Hills, Michigan, last week to fix the U.S. unit, which lost $512 million in the third quarter. The company's U.S. shares have fallen by about half since Daimler-Benz's $35 billion acquisition of Chrysler in 1998, wiping out $38 billion of market value.
"They have to take the bold strategic step," said Chris Will, a Lehman Brothers analyst. He favors "taking an ax to" Chrysler's unprofitable car business to focus on Jeeps, minivans and other profitable trucks.
The company's stock rose today as much as 1.99 euros, or 4.5 percent, to 46 euros in Frankfurt. It's the first increase this week for the shares, which had fallen 8.5 percent from last Friday through yesterday.
The proposed 25 percent cut in new-product development is based on estimates at U.S. headquarters at Auburn Hills of future revenue and still must be approved by Zetsche, the person said. Zetsche would then submit it to Schrempp and the rest of the Stuttgart, Germany-based company's management board.
Analysts said one of three plants might be closed: a Neon car plant in Belvidere, Illinois, which employs 3,347; a Durango truck plant in Newark, Delaware, with 2,998 workers; or a Windsor, Ontario, factory with 2,175 workers.
The company said in a statement Nov. 17 that it would make its restructuring plan public in the first quarter. Spokesmen have declined since then to discuss details.
"It's no secret there will be operational changes in Auburn Hills," said Christoph Walther, DaimlerChrysler's senior vice president of communications. He wouldn't talk about specifics.
The big sport-utility vehicle was to have been built in a $1 billion addition to Chrysler's Ram van plant in Windsor, which the company started building in June. Some of the pale green metal walls are up but there's no roof, no machinery inside and no date for a startup.
Chrysler lost money in the third quarter as sales of Caravan minivans, Ram pickup trucks and Jeep sport utility vehicles fell 14 percent. Newer trucks from Honda Motor Co., Nissan Motor Co., and Bayerische Motoren Werke AG gained sales. Chrysler, which generates half of all DaimlerChrysler sales, won't be profitable until 2002 at the earliest, analysts said.
Kirk Kerkorian, the 83-year-old Las Vegas billionaire, filed a lawsuit this week charging Schrempp lied to him and other investors to win support for the acquisition. He's seeking $9 billion in damages and a breakup of the world's No. 5 carmaker.
In addition, a group of DaimlerChrysler shareholders in Germany have called for Schrempp to resign because of the decline in the stock price and the Chrysler losses. Schrempp fired Chrysler President James Holden, one of the last Americans in senior management.
Zetsche, the new Chrysler president, wrote in an e-mail to employees last week that the company faces "far-reaching structural problems. Some of the actions we will need to take for Chrysler to get back on track will be painful but necessary." He's been meeting with workers, union leaders and car dealers since arriving.
He will continue to cut production, reduce incentives and pressure suppliers for price reductions, analysts said. He also will trim the white collar workforce of 36,000 through voluntary buyouts and, possibly, firings, analysts said. The company is expected to take charges in the fourth quarter and first quarter next year to cover the restructuring.
At least one assembly plant will close among Chrysler's 12 in the U.S., Canada and Mexico, analysts said. There's little overlap in planning, engineering or production among its five vehicle groups that would allow it to lower per-unit costs.
The company also would like to make its plants more flexible, or able to change models more easily. Half of its plants make only one model. Honda, one of the most nimble carmakers, can build eight models at its Suzuka, Japan, factory.
Making Chrysler plants more flexible is likely to be a cornerstone of Zetsche's plans, analysts said. The plants need to share more parts and to use more Mercedes-Benz transmissions and other parts, the company has said.
The new Windsor plant was to replace an older plant that will close. The Belvidere and Newark, Delaware, factories produce vehicles for which demand has waned. Durango sales have fallen 8.7 percent this year to 145,772 trucks, while Neon sales have dropped 10 percent to 144,945 cars. The company loses $1,000 on every Neon it sells, Credit Suisse First Boston estimates.
Ford Motor Co.'s "Focus is a better car than Neon, and the Korean cars are cheaper," said Michael Robinet, an auto industry consultant with CSM Worldwide in Northville, Michigan.
Zetsche isn't shy about cutting jobs. At the commercial trucks business, he oversaw the firing this year of 3,745 U.S. and Canadian Freightliner workers, 19 percent of the unit's total, in Portland, Oregon; Gastonia, North Carolina; St. Thomas, Ontario, and elsewhere. Chrysler employs 125,000 people.
Zetsche met with Stephen Yokich, president of the United Auto Workers union, and Buzz Hargrove, president of the Canadian Auto Workers union, this week. The company wants to revise its current union contract. The only time the UAW ever granted such concessions was in 1982 to Chrysler, which was facing bankruptcy.
The unions might consider relaxing contract rules that require new Chrysler workers to be hired to replace those who quit or retire, said Sean McAlinden, a labor economist with the Center for Auto Research in Ann Arbor, Michigan.
With its U.S. hourly workforce of 76,000 and turnover rate of 5 percent annually, Chrysler could trim its hourly workforce by 3,800 jobs in a year, saving $365 million in labor costs, if the union agreed, McAlinden said.
DaimlerChrysler already has begun cutting production to reduce its inventory of unsold cars—80 days' worth at the end of last month. That's above the 60-day inventory considered ideal. Inventories swelled as the automaker kept up production despite falling sales.
Chrysler reduced output by 13 percent from the year-earlier period in the third quarter to 592,000 cars and trucks, according to IRN Inc. That compares with 838,000 vehicles produced in the second quarter.
DaimlerChrysler's minivan plant in Windsor, for example, worked round-the-clock with heavy overtime during the first half of 1999, building more vans than consumers wanted.
"I never even took the time to check inventories on the (old model)," said Ken Lewenza, president of Canadian Auto Workers Local 444 at the minivan plant. "If I had, I probably would have said, 'Jeez, why are we working so many Saturdays?"'
Last week, DaimlerChrysler said it would idle three North American plants for one week. It also will reduce cash-back offers and other sales incentives that are the highest in the U.S. That worries some dealers who say that without incentives consumers aren't interested.
Chrysler's incentives rose to $2,160 a vehicle on average in October, nearly double the industry average of $1,342 a vehicle last month, according to analysts' estimates.
The marketing costs are behind an expected collapse in Chrysler's per-vehicle operating profit from 1,600 euros in 1999 to 530 euros this year and just 320 euros in 2001, according to a Schroder Salomon Smith Barney estimate.
The company surprised even rivals this month when it added lease incentives on its newly introduced Caravan and Town and Country minivans. Those vehicles are available for as little as $299 a month and $999 down.
Analysts said the company has to figure out a way to continue to make innovative cars and trucks, such as the retro-styled PT Cruiser van, that helped the company grow.
"The last thing they should be doing is cutting product development," said Karl Ludvigsen, an auto industry consultant in London. "They need to have cars and trucks that are more unique and innovative than the next guy's."