Thursday, December 13, 2007

Chrysler: We’ll Meet New Mileage Rule

2008 Chrysler Aspen
2008 Chrysler Aspen

Despite deep losses, automaker ups product spending.

With Washington lawmakers moving forward on proposals to increase federal fuel economy requirements, at least one of Detroit's Big Three is ready to meet the likely new measures, even if it means significant new investments and a shift in its product lineup.

"We will" cooperate rather than fight the anticipated increase in the Corporate Average Fuel Economy, or CAFE, standard, Chrysler CEO Robert Nardelli told during an exclusive interview, on Wednesday. What many expect to be a jump to 35 miles per gallon will be costly, Nardelli made clear, but doable. And the savings from the automaker's new contract with the United Auto Workers should help Chrysler afford the anticipated costs.

"We'll have to obviously accelerate significantly our investment in technology to get there," said Nardelli, the former Home Depot chief executive who joined Chrysler in August.

Among the technologies Nardelli believes will help is Chrysler's new two-mode hybrid system. Developed as part of a joint venture with General Motors, BMW, and Chrysler's former German owner, Daimler AG, it is an alternative approach to the hybrid-electric powertrain technology used by Toyota. Set to appear in several Chrysler models, including the Aspen SUV next year, the two-mode technology is designed to boost fuel economy on the highway, as well as during around-town driving.

On GM's Chevrolet Tahoe, for example, it increases the city-cycle mileage rating by about 50 percent, to 20 mpg. Chrysler has not released final fuel economy ratings for its two-mode products, but the system will likely prove even more critical once Senate and House lawmakers agree on a final fuel economy increase.

Chrysler is particularly vulnerable to the proposed CAFE hike because nearly two-thirds of its lineup consists of the low-mileage minivans, pickups, and SUVs that have propped up its balance sheet over the last several decades.

"We certainly aren't going to abandon these, the most successful products in our portfolio," Nardelli emphasized. "You don't abandon success, but you do look at opportunities to infill where the customer is going."

The automaker has already begun "infilling" its lineup, expanding and evolving into more fuel-efficient niches, especially the crossovers that are now the fastest-growing segment in the U.S. new car market. It will soon add the Dodge division's first crossover, the Journey.

Considering the worsening financial situation at Chrysler - analysts expect it to post 2007 losses of around $1.8 billion, though as a privately held company, it's unclear how much financial data the maker will now provide - new mileage standards and shifting market conditions will be a heavy burden.

On the other hand, Chrysler was recently given a helping hand by its union workers. As it did for General Motors Corp. and Ford Motor Co., the UAW approved a variety of cost reductions, including a two-tier wage structure and a program that takes much of Chrysler's hefty healthcare costs off its books.

"We won't really see the benefits from the contract," Nardelli cautioned, "until year two and three" of the contract.

But by various industry estimates, the savings will ultimately add up to $1000 or more per vehicle, and will close about two-thirds or more of the labor gap between the Big Three and the foreign-owned "transplant" assembly lines.

While some of that money will likely flow back to stockholders - or, in Chrysler's case, its owner, Cerberus Capital Management - analysts expect to see most of the savings support product programs, either in the form of better-equipped products or new models.

Nardelli told that since the approval of the Chrysler/UAW agreement, he has approved another $500 million investment into the company's product development efforts.

Though upbeat, overall, Nardelli appeared clearly concerned about the worsening shape of the U.S. auto market. He said he hopes the company's "pretty conservative" plan for production, in 2008, which calls for sharp cuts, "will be aggressive enough."

But with so many of his competitors predicting a sharp decline in sales - some to barely 15 million units, from the recent trendline of more than 17 million - Nardelli admitted the situation is simply "unsettling."

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