To Drive Cash Flow
With Key Launch
September 11, 2008; Page B3
DETROIT -- A year ago, Cerberus Capital Management LP made an about $7 billion bet that it could turn around ailing Chrysler LLC. Now, with the auto maker's sales in a deep slump, Cerberus's best chance for salvaging the bet is riding on a single vehicle: the new Dodge Ram pickup.
The fully redesigned truck, which started arriving in dealerships this month, is Chrysler's biggest selling vehicle and its most profitable model. If the new Ram is a hit, it could lift Chrysler's revenue and move the company much closer to ending its operational losses and generating positive cash flow.
|Chrysler is making a big bet on its new 2009 Dodge Ram pickup, which it introduced in January with a herd of 120 long-horn cattle driven by 10 cowboys.|
People familiar with the matter said Cerberus has planned on incoming cash to start exceeding its monthly expenses some time in 2009 -- the Ram's first full year in the market.
After a speech here Wednesday, Chrysler Vice Chairman Jim Press acknowledged the new pickup is a key product and its most important launch this year. But he insisted that Chrysler's chance of generating positive cash flow next year isn't "dependent on one model."
Mr. Press declined to predict when Chrysler's cash flow would turn positive. Cerberus has been slashing the Auburn Hills, Mich., auto maker's costs, cutting production and selling assets in hopes of making Chrysler a smaller and profitable company.
The hedge fund and private-equity firm a year ago acquired an 80.1% stake in Chrysler from Germany's Daimler AG in exchange for a promise to invest $5 billion in the auto maker and more than $1 billion in its financing arm.
But it's facing an uphill climb in Chrysler. The auto maker lost about $1.6 billion in 2007, and this year the auto market has steadily worsened. U.S. auto sales are off about 10% so far this year and 2009 is expected to be flat or weaker as housing woes and a sluggish economy sap demand.
Normally the launch of a redesigned Ram would put a charge into Chrysler's sales but the rise in gasoline prices has only complicated matters. In the past few months Americans have steered away from big trucks in favor of small, fuel-efficient cars. Through August, sales of full-size pickups are down 25%. Ram sales are down 29%, to 175,246 from 246,878 in the first eight months of 2007.
That represents a huge hit to the bottom line. Detroit's Big Three generally make about $8,000 in operating profit on each large truck they sell.
Moreover, the Ram will face tough competition. Ford Motor Co. is launching this fall an updated version of its F-150, the top-selling truck in the market.
If the Ram isn't a home run, Chrysler has few other models immediately behind it in the pipeline to drive new sales. It has no major new-product launches in the works for 2009. Those coming in 2010 mainly include larger vehicles that many customers are now shunning: the Jeep Grand Cherokee and Dodge Durango, both sport-utility vehicles, and the Chrysler 300, a large, family sedan.
Chrysler is also supposed to launch a small car made by Nissan Motor Co., and may offer hybrids or electric vehicles developed by auto makers in 2010. But it's unclear whether these vehicles can generate significant volume or profit for Chrysler. Such rebadged models generally sell in limited numbers and have thin margins, said Michael Robinet, an automotive analyst at CSM Worldwide, which tracks and forecasts auto production.
"A lot of vehicles Chrysler has coming are of the large variety, which aren't selling right now," Mr. Robinet said. "I think it's fair to say Chrysler is going to be very challenged in the short term."
CSM forecasts Chrysler will produce only 1.55 million vehicles in 2009, about 500,000 fewer than this year and half as many as in 2005. Even with the new truck in the market, CSM predicts Chrysler's Ram output will fall in 2009 to 245,000 trucks, down from 280,000 this year.
Earlier this year Mr. Press and Chrysler Chief Executive Officer Robert Nardelli said Chrysler aims to sell roughly two million vehicles a year once its turnaround is complete.
Chrysler dealers believe they have a winner in the new Ram. The truck features a more lavish and comfortable interior and a new type of coil suspension that is supposed to give the vehicle a car-like ride. It will be available with "Rambox" compartments in the bed for storing tools and a rear camera to give drivers a view of what's behind when they are backing up.
"I've never been so excited about a new truck," said Steven Wolf, general manager of Helfman Dodge in Houston. "This thing looks bad -- and when I say bad, I mean it's good."