Monday, August 13, 2007

Cerberus' time frame: Fix it now

The new Chrysler gets a new leader as Bob Nardelli, right, takes over as CEO. Cerberus dropped Tom LaSorda from CEO to COO.

Nardelli choice at Chrysler shows urgency demanded by private equity

Bradford Wernle
Automotive News
August 13, 2007 - 12:01 am ESTWhen Cerberus Capital Management agreed to buy control of Chrysler from DaimlerChrysler, Cerberus Chairman John Snow pledged that the private equity firm would take a long-term approach to running the automaker.

"Our capital is patience," he said when the deal was announced May 14. Snow also professed support for Chrysler management, led by CEO Tom LaSorda.

But Cerberus showed it's in a big hurry by naming controversial former General Electric and Home Depot executive Bob Nardelli as chairman and CEO.

Nardelli made his reputation at GE, where he led the GE power unit to record profits and was in contention to succeed the highly touted Jack Welch.

"Private equity is very impatient money," says auto analyst Maryann Keller. "They don't have 10-year time horizons. They like to take investments out in three to five years.

"The traditional automobile model of investing lots of money and waiting for the turnaround to happen in three to four years time may not be compatible with private equity."

In the teeth of a worsening credit market and pending changes in federal fuel economy regulations, Cerberus changed course swiftly and ruthlessly. In choosing Nardelli instead of former Chrysler COO Wolfgang Bernhard to lead the "new Chrysler," Cerberus shocked dealers, employees and the industry. Bernhard, a hands-on leader, rejected the Cerberus offer of a nonexecutive chairmanship.

By anointing industry outsider Nardelli, Cerberus unceremoniously shoved LaSorda out of his CEO post - and his office - after saying for several months that it fully backed him and his restructuring plan. LaSorda now holds the more junior titles of president and vice chairman and faces the difficult job of negotiating with the UAW.

LaSorda's right-hand man, COO Eric Ridenour, is gone.

Nardelli has numerous critics. But Mike Jackson, chairman of the AutoNation Inc. dealership group, says Nardelli is the right man for the job.

"He did a complex industrial turnaround at General Electric that was unbelievable in size and scale," Jackson says.

Here's a glimpse at how Nardelli might tackle Chrysler's big issues, compared to the way Detroit traditionally has handled them.

Outsourcing, agility

Current approach: Close plants. Chrysler has announced it will shut its Newark, Del., plant in 2009. More plants could be in line.

The new Chrysler: Nardelli could outsource more operations to suppliers, which Chrysler already does at its Toledo Supplier Park Jeep plant in Ohio. For instance, Toledo paint shop operator Magna Steyr is itching to build a contract manufacturing business in North America similar to the one it operates in Graz, Austria.

Nardelli could commission Magna to build a Chrysler-brand flagship vehicle to replace the recently dumped Imperial concept. Companies such as Magna Steyr could help Chrysler manage shifts in market demand by allowing it to expand or contract capacity without spending billions.

Engineering muscle

Current approach: Chrysler has relied on Daimler for much of its basic engineering and now would need to rebuild its engineering staff to remain a full-line carmaker.

The new Chrysler: Rather than restaffing its engineering department, Chrysler could make itself a magnet for suppliers' best ideas and technologies, then combine those ideas with its own by identifying some technologies where it could lead the industry.

Chrysler and General Motors discussed sharing platforms last year and could revive them.

Dealer relations

Current approach: Since the inventory fiasco of 2005-06, Chrysler dealers have been a deeply divided group under intense pressure from the factory.

The new Chrysler: Nardelli also could offer a giant olive branch to dealers by killing the controversial VPA - the Volume Performance Allowance. The incentive program has created friction between dealers because it rewards some and penalizes others.

Says AutoNation's Jackson: "The day VPA was announced, I was against it. I think it's a corrosive program - the longer it's in place, the more cancerous the effect it has on a retail program. The sooner it ends, the better."

The last thing Nardelli needs is a war with dealers.

Dealer count

Current approach: Many dealers think the VPA and other Chrysler policies were conceived to starve them out as the company tries to reduce its store count. In many locations, Chrysler wants dealers to combine Chrysler, Jeep and Dodge under one roof. Some dealers say they've been trying to get these deals done, but Chrysler is not doing enough to help.

The new Chrysler: Nardelli could give unprofitable dealers a way out by creating a fund to buy out those that want to leave the network, just as Chrysler buys out employees. Cash from the Cerberus war chest could help speed negotiations.

State franchise laws protect the dealer network. Chrysler could find itself wasting years and millions of dollars in litigation if it tries to railroad dealers.

International sales

Current approach: Chrysler is working hard to increase international sales - particularly in Europe, where it is establishing the Dodge brand. Chrysler international sales are up 18 percent so far this year. But analysts say Chrysler faces steep challenges establishing itself as a global car company now that it has separated from Daimler.

The new Chrysler: Chrysler also could reap global economies by linking with other companies for product development, powertrains and purchasing. It is already in discussions with Hyundai and Mitsubishi about greater technology sharing.

Christoph Stuermer, an analyst at Global Insight in Frankfurt, questions whether Chrysler needs to play the international game at all: "Who says they need to go global? The U.S. is still the single biggest vehicle market in the world. Getting a decent market share in California is so much more worthwhile than trying to establish yourself in Pakistan or India."

Meanwhile, Carlos Ghosn has made it clear he's looking for a partner in North America to expand the reach of Renault-Nissan. Experts say Cerberus will be looking for somebody to buy Chrysler in five years or so. Perhaps then, the wily Ghosn will still be waiting there. He is a patient man.

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