To survive the 27 months until Fiat cars are rolling off its assembly lines, Chrysler needs two things to happen--and they're both dicey.
Chrysler has to prove its viability to the federal government in 30 days and has to figure out how to live on revenue from the current product line--which ages every day, since Daimler left the cupboard almost bare.
It's a tall order. And even then: If gasoline stays cheap, will Americans buy those little, fuel-efficient Fiat designs?
Do the math. There is a way for Chrysler to get from here to there. Analysts say Chrysler just might make it, if--and there are a couple of huge ifs--North American auto sales don't plunge even further and Chrysler can wring concessions out of its stakeholders.
That means restructuring its debt and completing concessions on health care, work rules, wages, and benefits with the UAW, as demanded by the Obama administration.
Slow down the cash burn
"If they get all the money they're seeking, and they can reduce the cash burn to less than a couple billion a year, then they've got a good chance of making it through," says analyst John Casesa of Casesa Shapiro in New York. "That will leave them enough money to execute the business plan."
Analysts estimated that Chrysler's cash burn ranges from $750 million to $1 billion a month, or $8 billion to $12 billion a year. Chrysler has cut 1.2 million units of capacity and slashed $3.2 billion in annual fixed costs since February 2007.
So far, the company has received $4 billion from the federal government. And if Chrysler and Fiat can complete their alliance by the April 30 deadline, the Obama administration has said it will consider an additional $6 billion.
Chrysler has asked the government of Canada--where a quarter of its vehicles are produced--for about $1.87 billion. So far the Canadian and Ontario governments have pledged $811 million.
The company also has applied for $8.5 billion in U.S. Department of Energy funds to develop a new generation of battery-powered vehicles. That money can't be used to run Chrysler, but it can be tapped to retool plants for fuel-efficient Fiat vehicles and future battery-powered vehicles being developed by Chrysler's in-house ENVI group.
The combined $20 billion could allow survival if economic conditions don't deteriorate further, said Max Warburton, an analyst for Bernstein Research in London.
"With the U.S. sales rate at 9 million units, it looks tricky," Warburton said. "But at a better level of sales -- and with massive head count and post-retirement savings -- it might be viable."
Patrick Archambault, vice president for U.S. autos and auto parts at Goldman Sachs in New York, estimates Chrysler probably could survive until 2011 with $16 billion in loans.
Little in the pipeline
Chrysler's own product plans are paltry. The 2011 Jeep Grand Cherokee, being shown at the New York auto show this week, is due in late 2010. The Chrysler 300 and Dodge Charger rear-drive sedans arrive a year later.
The first of six Fiat-based vehicles isn't scheduled to arrive until mid-2011. The first could be either a small Jeep or subcompact.
A Chrysler spokesperson Friday declined to comment on Chrysler's chances of surviving until the Fiat products arrive.
Gerald Meyers, a professor at the University of Michigan School of Business, says Chrysler will need to raise much more money to survive the three to five years until Fiat-based products can be fully integrated.
"Since Fiat isn't going to contribute a red cent, Chrysler is either going to have to get to work on some new products or subsidize the ones they've got," he says. That would mean more big incentives, and Chrysler already leads the industry in incentive spending.
But Laurie Harbour-Felax, president of the Harbour-Felax Group, a Detroit area manufacturing consulting firm, says Chrysler and Fiat can afford to invest in tooling for new vehicles because they won't have to pay for it until production begins.
"The benefit of that to Chrysler is that tooling does not show up on the balance sheet until 2012," she says. That frees cash for Chrysler to invest in developing new products.
Such tooling costs manufacturers such as GM and Chrysler $1.5 billion to $2 billion a year, Harbour-Felax says.
Carl Galeana, owner of Van Dyke Dodge in suburban Detroit, knows that the Fiat-Chrysler deal faces major obstacles and that bankruptcy remains a possibility.
Said Galeana: "Some people are scared, but I'm not. I don't think we're going to go away."
(Source: Automotive News)