Special Coverage

Chrysler's Next Chapter

AUBURN HILLS, MI – Critics concerned Chrysler Group LLC will run out of money before it has a chance to execute its recovery plan can relax.

Chrysler will finish a dismal 2009 with $5 billion-$7 billion in cash, and it has no intention of going back to the U.S. and Canadian governments, hat in hand, for more bailout money to fund its ambitious 5-year, $23 billion new-product program, top executives say at a backgrounder here.

Chief Financial Officer Richard Palmer says the auto maker will reach breakeven on an operating basis next year and on a net basis in 2011. It will pay back all government loans by the end of 2014.

Operating profits should reach $4.7 billion to $5.2 billion at the end of the 5-year plan in 2014, Palmer says. Chrysler is targeting a net profit of $3.0 billion in 2014. Breakeven on a net basis will be achieved on a volume of 2 million vehicles, he says.

The forecast is a conservative one, Palmer adds, based on a U.S. market of 14.5 million new-vehicle sales in 2014. Chrysler says the consensus among analysts pegs industry sales at 16.8 million units.

The CFO says Chrysler has stress-tested its plan, and even if the downturn is more prolonged than expected, there’s enough room and flexibility built into the budget to continue limping along.

The $23 billion in spending will finance a complete revamping of Chrysler’s vehicle lineup, launch of several new powertrains and retooling of factories, as the auto maker looks to grow its overall volume by about 1 million units to roughly 2.7 million vehicles worldwide in 2014.

The bulk of the spending will come in 2012, when a bulge in the product plan requires Chrysler to dole out $5.7 billion.

CEO Sergio Marchionne acknowledges the investment plan is aggressive, and there may be unknowns that crop up and force a few detours.

“There’s still a level of concern on what we’ll be able to achieve in 2010, the first year of the new organization,” he says, noting Chrysler won’t have much new product to offer until the year’s second half.

“But we wouldn’t be investing $23 billion if our expectation wasn’t that we can restore these brands,” he adds. “There’s a huge amount of cash being consumed by this business. But if we can’t (gain volume and market share), we won’t spend the money.”

Palmer says Chrysler will boost its advertising outlays significantly in the coming years as it attempts to re-launch the Chrysler, Dodge, Jeep and new Ram truck brands into the market. Spending will rise from an estimated $100 per unit this year to $170 in 2010, peaking at $210 in 2011 before winding back down to $170 in 2014.

What won’t be increasing are incentive costs, which help dealers at the expense of OE profitability, Marchionne says.

“Chasing share in this market is going to be a disaster,” he says. “We will take production out (if we need to). Discounts are triggered by oversupply. Chrysler has no intention of replicating the past.”

The auto maker is targeting a days’ supply below 60 on each vehicle line, Marchionne says.

Chrysler says it will be a board decision, but it is doubtful an initial public offering will occur before 2011. Marchionne says he does not have a timetable for Fiat Automobiles SpA to increase its 20% stake to the 35% holding targeted in its deal with the U.S. government and other Chrysler stakeholders.

Fiat will take an additional 5% if it executes its plan to build the 500 model in North America, he says.

“The (rest) will happen when it happens,” Marchionne says. “I won’t feel any better when Fiat owns 35% of Chrysler. We’ll still be working just as hard.”

Chrysler, which will use Fiat platforms for 56% of its new model lineup (by volume) and tap the Italian auto maker for small engines, engine technology and modern dual-clutch transmissions, hasn’t paid a single dollar to Fiat so far, the CEO says.

Project collaboration is taking place only where it is beneficial to both companies, Marchionne says, pointing out each has a separate board of directors to ensure neither auto maker is disadvantaged in the relationship.