Chrysler Targets Higher Margins; Posts $619 Q2 Profit

Chrysler CEO Sergio Marchionne says his blood pressure rises as he enviously looks at the double-digit profit margins of some automotive suppliers, and he wants to share in some of that good fortune.

“We will approach our supplier base in a constructive way to find a way to at least participate in their wellbeing and rub off some of their newfound wealth on to us,” he says in a conference call with analysts and reporters to discuss Chrysler’s second-quarter results. “We’re grossly unsatisfied with our margin positon.”

Marchionne says the automaker will not strong-arm suppliers for cost concessions, noting that was done in the past and the outcome was poor supplier relations and a drop in quality levels. A study by consultants Planning Perspectives says poor supplier relations cost Chrysler $24 billion in 2000-2012.

“It’s an incredibly sensitive issue in the U.S. and globally,” he says of supply chain relations. “We’re not going to push them over the edge. We’re so far behind where we need to be, we need to go back to all sources of margin enhancements and get this thing leveled off.”

Profit margins vary for individual vehicles depending on the segment and incentive spends typically are not disclosed by automakers. However, for Q2, Chrysler’s operating margin was 4.8%, erased in part by higher incentives on some of its older vehicles.

“The margins we have would imply the need to be diligent on all aspects of the margin equation,” says Chief Financial Officer Richard Palmer. “The fact is, per-unit incentive spend has gone up, and we have to keep an eye on that going forward. It’s not out of whack with the competition, but it’s something we need to control in the second half.”

Palmer says strong Chrysler sales, particularly by the Jeep brand, offer an opportunity to grow margins.

Chrysler in Q2 reported net income of $619 million, up 22% from year-ago. Net revenue was $20.5 billion, up 14% from like-2013.

Global Chrysler deliveries in the quarter jumped 12% to 723,000, a result of a 16% increase in U.S. retail sales and a 25% hike in international deliveries.

The increase in Chrysler’s international business could not have been accomplished without Fiat ownership, Marchionne says.

“As much as I love this place, (there was) a haphazard approach to global expansion associated with previous ownership schemes,” he says. “Fiat helped it grow outside of North America. China expansion was only possible because of Fiat’s presence (there). Every other attempt Chrysler made in the past was aborted.”

In Q2, Chrysler’s U.S. market share was 12.1%, up from 11.4% year-ago. Its Canadian market share rose to 15.3% from 15.1% year-ago.

The automaker has committed to build the next-generation Chrysler Town & Country minivan at its Windsor, ON, Canada, assembly plant. Beyond that, no decisions have been made regarding its other Canadian facilities, where labor costs exceed U.S. levels.

“The electorate of Canada is smart enough to make the right choices,” Marchionne says. “At the end of the day, we can’t wait for the political winds to change. If in fact the federal government or Ontario has proposals of interest to Chrysler, we’d discuss them. But today that horse has left the barn and the investment is going into Windsor.”

The executive says there are no plans to expand capacity in the U.S. despite production constraints on key products, including the Ram fullsize pickup and the Jeep Grand Cherokee, Cherokee and Wrangler.

“We’re reluctant to engage in wholesale capacity expansion in the U.S.,” he says. “There is more downside than upside. The numbers will go up due to efforts (in the plants), but there will be nothing structural.”

Last week shareholders of parent Fiat voted to merge with Fiat Investments, which would result in a new global entity named Fiat Chrysler Automobiles N.V. The automaker now awaits a decision by investors who voted against the merger. Those investors have until Aug. 20 to sell their shares to Fiat, but if that amount exceeds €500 million ($668 million) the merger could fail.

If the merger goes through, FCA would be able to list its stock on the New York Stock Exchange as an international entity, which would allow Chrysler access to U.S. capital.

“Having access to capital markets in the U.S. is a desirable thing to do in the medium to long term, but it doesn’t impact one iota on our operational stance or impact plans,” Marchionne says. “Even if a merger were not to happen the plan is in place.”

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