Wednesday, June 18, 2008

U.S. sales plummeting, Chrysler's chief says

Memo may signal cuts to come


After months of confident talk that Chrysler LLC anticipated the economic downturn better than other automakers, Chairman and Chief Executive Officer Bob Nardelli told employees Tuesday, in a memo obtained by the Free Press, that the last few months -- and this month in particular -- have been even worse than Chrysler anticipated.Industry-wide sales so far in June have been about 20% worse than Chrysler's expectations for the year, according to the memo.

Nardelli didn't indicate or threaten any job or production cuts like those under way at rivals, but experts saw the message as an ominous sign that the privately held automaker may have to do more.

"I don't think he would really address that unless they were getting some pretty dismal signals that said that we're going to have to prepare for the worst," said David Cole, chairman of the Center for Automotive Research.

When Chrysler announced plans to cut 12,000 jobs in November -- on top of 13,000 over three years -- executives were assuming Americans would buy fewer vehicles in 2008 than in any year in a decade, only about 15.5 million. Nardelli said that "conservative estimate" was pretty close for the first three months of the year.

But sales were 7% to 8% below that rate in April and May. And so far in June, he said, J.D. Power and Associates and Citigroup are seeing a sales pace that is almost 20% lower -- only 12.5 million vehicles per year.

"This is the lowest sales level in 16 years and indicates a significant and continued softening of the U.S. automotive market," Nardelli wrote.

A Chrysler spokeswoman declined to comment on the memo.

U.S. car and truck sales are down 8.4% so far this year; sales of Chrysler's three brands are down 19.3%.

In November, the automaker also announced that four models would be cut and production would be scaled back in anticipation of a tough 2008.

Cole added that an annual rate of 12.5 million in June is a major decline. "That's really falling off the cliff. That's going to mean some more cuts," Cole said.

"That is going to hit cash very hard through the industry," he added. "Production cuts, employee cuts -- I think it's going to depend upon the company. That's tough stuff."

Tuesday's e-mail marks a shift in Nardelli's take on the economy.

"We thought we were being extremely aggressive in our conservative view" of 2008, Nardelli said late last month. "As it turns out we may have been spot-on."

At the New York Auto Show in March, he said Chrysler would respond decisively if things got worse. "If we were wrong and the economy worsens enough, we'll be quick to adjust," he said.

Tuesday's e-mail didn't specify what actions -- if any -- Chrysler would take in response to the grim economic outlook it shared with employees. But he asked them to stay committed to Chrysler's turnaround.

"During these turbulent times, I want you to know that your leadership team has a clear and realistic view of the economic conditions and remains committed to our goal of returning Chrysler LLC to profitability and long-term sustainability," Nardelli added. "I ask each of you to keep your attention on the important role you play in our company's success."

Nardelli attributed the dramatic market drop to a number of economic factors, including a plunge in new-home construction, weak consumer confidence, automotive loan defaults and high oil costs.

"We have great vehicles to sell," Nardelli said. "And keep talking up our products to your family, friends and neighbors."

Despite the encouraging words, analysts said the underlying message seems to be that Chrysler will soon make job and production cuts similar to those that are already occurring at GM and Ford.

"You can't rule it out," said Burnham Securities analyst David Healy.

Both GM and Ford are trying to adapt quickly to a U.S. automotive market suffering from declining volumes, as well as rapidly shifting consumer preferences away from profitable trucks in favor of cars and crossovers.

In response, GM announced on June 3 plans to cut production by 700,000 trucks annually, or about 40% of its truck capacity, by idling four North American truck plants by mid-2010, among other cuts.

And Ford, which already planned to build 280,000 to 350,000 fewer vehicles overall in North America this year, is now in the midst of reducing salaried-related costs by 15% by Aug. 1, including job cuts.

Analysts expect Toyota Motor Corp. and Nissan Motor Co. to shift production from trucks to cars at plants that can handle both types of vehicles.

Automakers say they are responding to changes in demand that have come about because of economic instability, the mortgage crisis and gasoline prices that now average more than $4 per gallon.

And while most analysts expect that the truck market will eventually stabilize, the latest memo from Chrysler may portend more serious economic troubles and further automotive production cuts.

If J.D. Power's forecast for June -- an annualized rate of 12.5 million sales -- continues for long, Erich Merkle of IRN Inc. said, it would be "Armageddon. Doomsday."

"I don't think there is anyone out there prepared for 12.5" million annual U.S. sales, he said. "I know it is only one month, but still that would show some signs that there is some real deterioration in the market, that would mean the economy is really slowing down significantly."

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