History Keeps Repeating at Chrysler

Inventory issues repeatedly have played a dastardly role in some of Chrysler’s rockiest periods.

When Lee Iacocca assumed leadership at Chrysler in 1978, he cleaned house, including elimination of an insidious sales bank of as many as 100,000 unassigned vehicles, a pool of inventory subject to abuse to pump up production figures.

After sitting outside in parking lots for months, the units were sold to dealers at discount rates and the auto maker incurred heavy losses until Iacocca successfully ended the practice.

The auto maker that needed an act of Congress and the K car to save it from bankruptcy pulled itself back into contention and used the introduction of the minivan to return to profitability.

But history tends to repeat.

Chrysler was in trouble again in 1990, and Iacocca was forced to step down. The ghost of past troubles haunted successor Bob Eaton until he agreed to merge with Daimler-Benz in 1998 for security.

All appeared rosy during the honeymoon. At the end of 1999, Chrysler said it had about $10 billion more cash than debt.

But by October 2000, the cash had dwindled to $5.5 billion and by year’s end the rainy-day fund equaled the auto maker’s debt – net cash was zero.

And then it rained minivans.

Chrysler CEO Jim Holden oversaw a botched launch of the critical all-new ’01 minivan. The auto maker launched the ’01 model in a record 25 days and started shipping to dealers already drowning in older models that had been stockpiled, just in case.

The minivans exacerbated an inventory glut created by a mandate from Stuttgart that Chrysler show strong financials in second-quarter 2000 at any cost. Chrysler responded by building about 15% more vehicles than dealers could handle.

Holden struggled to convince his German bosses of the need for incentives, so while other auto makers were throwing money on the hood to move inventory, Chrysler dealers could not.

Finally, the bubble burst. Chrysler was forced to discount its glut of vehicles and offer large rebates in the year’s second half, especially on minivans. The fiasco essentially drained the cash reserves, contributing to a $512 million third-quarter loss, costing Holden his job.

Dieter Zetsche was sent from Germany to clean up the mess.

But two years into a successful restructuring effort, Zetsche, too, was blindsided in 2003 by the need to revalue half a million vehicles in inventory to reflect the impact of higher-than-expected incentives. The financial hit led to the cancellation of plans for two greenfield plants.

Today, Chrysler again is caught with too much inventory and controversy over its failure to disclose the number of surplus vehicles.

Ward’s data show Chrysler had a pool of about 77,000 unsold and unreported vehicles at the end of August, enough to push the auto maker’s stockpile over 575,000 units when added to its reported inventory.

Chrysler officials acknowledge the bank of unassigned vehicles, held in abeyance until dealer orders prompt their releases, reached a high of 100,000 units in July and August.

The auto maker says it returned to the practice of creating a sales bank about two years ago and insists not reporting these vehicles is common in the industry.

Other auto makers contacted by Ward’s say that is not the case.

While Iacocca must be reaching for the antacid about now, Chrysler says this unreported inventory should be eliminated by year’s end, and the practice is being curtailed because – once again – it is proving disastrous.

Chrysler reports a $1.48 billion loss in the third quarter, and the operation is under review, with everything from further restructuring to sale of its assets being considered.

The latest chapter in its rocky history will be played out into next year – just about the time the latest inventory mess is cleared up.

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