Thursday, 28 May 2009

Everyday People: Why Is Bigger Still Better?

Mike Smitka

Everyday People: Why Is Bigger Still Better? But in order to serve small towns and the many users with different "needs" a car company itself can't be small. Economies of scale in design, engineering and production are large, at this level partially offset by the ability to spin products off of a common "platform". Unlike Europe, the US is spread out – though most people live in suburbs & cities, in the aggregate rural areas remain a big market. Small dealerships are indeed integral to that! Mea culpa: I live in a rural small town.

Downsizing = Exiting the Business: Where Lie Economies of Scale?

Mike Smitka
Jerry Flint, the long-standing auto industry person and later senior editor at Forbes, has a short article in arguing that it's bizarre to think downsizing will work. He writes better than I do; see the link below.
Basically, the OEMs are in a high fixed-cost business. But unlike steel, where the costs tend to be at the plant level, in autos they are at the firm level. Fiat's Marchionne is explicit that that is why wants Chrysler (and even more, Opel, GM's European operations). Without sheer scale, Fiat cannot undertake the R&D on new powertrains (such as plugins) and materials (a unibody car is a complex mix of steel and aluminum alloys, made using newish technologies such as hydroforming and with all sorts of complexities in welding or otherwise joining dissimilar metals). Without such clout, Fiat will have a restricted dealer network, in a narrow set of markets, limiting its pallet of vehicles types, and reducing the chance that a bit of sales here and a bit there of niche products will make the underlying vehicle platform a profitable proposition.
This is not to say that GM didn't have excess manufacturing capacity for any near-term volume of sales. This is not to say that GM didn't have unsustainable legacy costs. This is not to say that multiple model lines hadn't been muddied, and that cutting one might be the only way to clean up the mess. [See my earlier post on downsizing.] Some pruning is appropriate. Jerry Flint's argument is that what we see is not pruning, and will kill the tree.

Link to Go Ask Alice About Plans to Save GM, Chrysler and to the auto industry reporting at by Jerry Flint. I corresponded with him years (decades?) ago, and always found his writing based on insightful analytics (even if he spells his models out in less detail than I as an academic do). Time for me to look up and read through his last couple years of work. I stopped doing that, involved in Japan projects unrelated to the auto industry. Events have pulled me back...

Tuesday, 26 May 2009

Chrysler dies; bailout a success

Mike Smitka
Quite frankly, I don't expect Chrysler to last the year. Indeed, I would be surprised if the "new" Chrysler, to be announced before the end of June, will be successful in relaunching production. Too many of its suppliers are on the wrong side of the brink. At the low volumes of production that will prevail while 100 days of inventory remains in the system, it won't pay for them to keep the parts flowing to Chrysler's assembly plants. All it takes is one crucial supplier to say "no" – or to be unable to finance restarting production – and it's the end of the line. In several senses.
Nevertheless, I judge the Chrysler "bailout" to have already been a success.
Why? Well, let's think of the timing. Back in December 2008 the financial system was still close to implosion, as was General Motors. Confidence across the economy lay somewhere between gloom and doom. At the time Chrysler clearly was not viable – not that that has changed, with or without Fiat. The "rescue" is in that sense a bit of a misnomer, because the patient will never be resuscitated. With the final denouement, billions in government funds will vanish (I don't want to count, but remember there is indirect lending via the government-owned GMAC, not just the direct "bailout" money).
But given the timing, a Chrysler collapse Christmas 2008 would have been a present worse than a lump of coal in a child's stocking. It would have been fat on the fire of prevailing fear, marginal financial institutions burned critically. GM would have seen suppliers shut their doors, and once that happened, Toyota and the other new entrants ("Detroit South") would likewise have had to shut their assembly lines. Three-quarters of a million workers would get the post-Christmas message that for the time being they had no job to return to. The spin-on from that ("multiplier effect" in economist's lingo) would have been horrendous; unemployment would have jumped almost overnight to double-digit levels.
Now the economy can handle Chrysler's liquidation, and (with less assurance) that of numbers of key suppliers. GM will not collapse; financial panic has been quelled, and that Chrysler was expiring would not be news. Detroit would be in mourning; even I might shed a tear, since I paid college tuition with summer jobs at Chrysler plants. But the economy would not be pushed over the brink.
And I might be wrong. Chrysler has lived from crisis to crisis. But this time around I don't think they'll make it.
PS: David Ruggles, who sometimes posts here, makes a parallel argument from the "downstream" dealer side: no responsible financial institution will make loans to a Chrysler dealer to finance their inventory (offer "floorplan" in industry jargon). Nor should they finance consumers at more than (say) 50% of purchase price, given the uncertain value of Chrysler products as collateral. If indeed banks behave as banks (GMAC, under government ownership, isn't), then Chrysler will have no dealers left to whom they can sell vehicles. End of story.
I made this point in a forum at the Auto Finance Risk Summit in Miami on 20 May 2009, organized by Royal Media Group. Thanks to a discussion forum there for stimulating me to make various "devil's advocate" arguments. I've concluded that this line of argument is (sadly) more than just a good debating point.

Thursday, 14 May 2009

Dealers: The Industry's Lifeline

Retailers are still the Detroit 3’s most valuable asset. Forget over dealering. It’s a dead-end debate. It’s almost impossible to find two people who agree on what is the right number of dealers in any given market. The market itself determines the correct number.
And it should be up to the individual dealer, as an independent business owner, to decide if and when it’s time to get out of the business. Nevertheless, an extraordinary amount of media attention has been focused recently on the number of auto dealers that sell the brands of the Detroit 3 (GM, Ford and Chrysler). There’s nothing wrong with that – except when assertions are made and studies are cited that are flat inaccurate. Consider this. The Detroit Free Press cited a CNW Marketing Research study, which has not been made public, that claims the cost of “excess dealers” to the Detroit 3 is nearly $4 billion. Now that’s a number that gets your attention. But is it right?
It certainly doesn’t appear to be. For example, the first item that’s listed as an additional expense to the manufacturer is “the cost of delivery of the vehicle to the dealership.” Dealers everywhere must have shaken their heads in disbelief when they read that, and everyone else who knows this business must have done the same thing. I’ve been a dealer for more than 30 years. I’ve paid the delivery costs for every vehicle delivered to my dealership. Every vehicle. So has every other dealer in this country. And we’re not talking about a small amount; the average freight charge per vehicle these days is around $700.
Let’s take a look at some of the other costs that the dealer pays:
  • Delivery of parts
  • Communications
  • Training
  • Special tools and diagnostic equipment
  • Land, showrooms, service bays, dealer lots, etc.
  • Advertising. Dealers contribute hundreds of millions of dollars each year toward advertising controlled by the manufacturer.

I could go on and on. Dealers, for example, often use a manufacturer’s captive finance company for floor plan loans and retail customer credit; both are profitable enterprises for the manufacturer. And let’s not forget that it is the dealer who buys the vehicles from the manufacturer in the first place. Without the revenue that dealers provide to the manufacturer, the factories’ assembly lines would fall silent. This is why manufacturers describe their dealer networks as their most valuable asset. Each dealer location that a manufacturer loses could also result in a loss of market share. That’s what happened to General Motors when it eliminated Oldsmobile and more than 2,700 Olds dealers.
So, the real question is whether the Detroit 3 will drastically lose market share if they drastically reduce the number of their dealers. Dealers are the entrepreneurs, the risk-takers. They provide good jobs to 1.3 million Americans, the kind of jobs that can’t be outsourced overseas. They are at the forefront of child passenger safety and are active in almost every charitable endeavor. The value that they bring to their manufacturers and to their communities is priceless. And some dealer families have been at it for more than 100 years.
The current automotive retail distribution network in the United States is the most efficient the world has ever seen. It provides competition and convenience, which benefit millions of car buyers every year. Given the fact that the dealer pays for just about everything he or she gets from the manufacturer, it’s easy to see why the cost to the manufacturer for its retail dealer network is minimal. In fact, research at GM found that a dealership only needs to sell 10 new vehicles a year to pay for the cost of supporting that dealership.
Profitability counts. The National Automobile Dealers Association represents more than 93 percent of the dealers in the country, both domestic and import. Anti-trust laws impose restrictions on trade associations advocating actions that would reduce competition, so it is inappropriate for NADA to take sides in the debate over dealer numbers.
What’s important is to take the long view. The industry is inevitably and notoriously cyclical; the manufacturer that’s up today can be down tomorrow. In other words, the marketplace is constantly changing. It’s not just the number of dealerships that counts; it’s whether a dealership is profitable. And that’s where our focus is: making dealers more profitable, so they can survive the good and bad times and be in a stronger position to service the customer that much better.

The preceding commentary by GM Dealer and 2007 National Automotive Dealers Association Chairman Dale Willey is available on the here on the NADA web site and was also published in Automotive News on July 30, 2007.

Tuesday, 12 May 2009

Is there a GM without Opel?

Can GM sell off assets such as Opel and remain a going concern? I have my doubts.
At one time, while GM assembled cars in most major markets, these operations were largely autonomous. After all, GM expanded outside the US more by acquisition than by organic growth. For example, it entered the UK market through the 1925 acquisition of Vauxhall, which had started producing cars over two decades before, in 1903. Similarly the core of its continental operations is Opel, which began producing cars in 1900 but was not purchased by GM until 1929, while it acquired the Australian firm Holden in 1931. The most recent such acquisition was in 2002, when GM took over the core operations of the Korean-based firm, Daewoo (which turned out its first motor vehicle in 1937, during the Japanese colonial era).
That is no longer the case; GM is now a global firm, rather than a collection of national operations. Beginning in the mid-1990s it began to focus more carefully on developing a set of core platforms to serve as the basis for the vehicles it manufactured around the world. The next step was to lessen duplication, reducing the number of platforms, and then creating engineering centers that concentrated on specific products. Holden in Australia worked on rear-wheel-drive cars (though those programs are currently in abeyance); Opel in Germany worked on compact and mid-sized cars. The US focused on light trucks and larger front-wheel-drive vehicles. Finally, Daewoo focused on subcompacts. And consistent with that, Vauxhall in the UK no longer develops its own product; instead its vehicles are all engineered in Germany.
The geographic lines reflect in part the nature of the markets in which the engineering takes place; Europe, not the US, is the core market for compact cars, while subcompacts are more important Asia, Eastern Europe and the developing world, where Daewoo's strengths lie. In the current global structure each of these design centers then works with the various regional and national operations (such as North America) to develop vehicles specific to those markets. In the US the new Aveo is from Daewoo, which now handles the Gamma II platform, while in 2005 the engineering of GM's Delta platforms (e.g., the Malibu) was centralized in Germany. Paralleling this development of "world" platforms is the globalization of GM's supply chain; companies that wish to sell parts to GM need to be able to work with the relevant engineering centers, and to be able to produce their parts in multiple regions.
So, can GM then sell off Opel, and remain an ongoing operation? GM will be beholden to the new owners for core vehicles, as it will lose all independent ability to engineer small and mid-sized cars. Opel's products are a real strength to GM; they are one core of its surge in China, where sales jumped 50% in April 2009, and are essential in the US as well if (when!) high gasoline prices return. Unless the purchaser of Opel cooperates wholeheartedly with GM — grudging fulfillment of a contractual obligation won't do the trick — then, sooner rather than later, GM will collapse.
Now such cooperation is not impossible. Fiat's revival under Marchionne was dependent on product engineered jointly with GM's Opel subsidiary. They can and have worked together successfully, culture clashes or no. Second, Fiat has no presence in North America, and so can only gain from continuing to develop vehicles for GM in its home market; Fiat is also weak in China, where GM is the market leader. (They do compete head-to-head in Brazil, where Fiat is the market leader.) Should Magna, the other bidder for Opel end up carrying the day, there in fact are no such conflicts, as it has no independent OEM operations.
Losing Opel does not necessarily spell the end of GM as an ongoing business. But any car company that ceases developing new product has in effect declared that sooner rather than later it intends to close its doors. GM truly is a global business, and splitting itself up puts all of the pieces at risk — including Opel — because they are no longer standalone operations. The German government is nervous contemplating Fiat as the new owner of Opel. It should in fact be nervous about anyone other than GM owning Opel — and Obama's car czars should be as well.

In Defense of Dealers

A few years back Michael Dell was quoted as saying he thought the auto industry should adopt elements of his “build to order” PC business model. He predicted that consumers would someday purchase new vehicles directly from the Manufacturer. Obviously, he didn’t put much value on what the Dealer adds to the Consumer / Manufacturer equation. But after making a pass at Asbury Group Mr. Dell is now a Dealer himself, having partnered with a former head of Sonic to buy dealerships. While we haven’t heard much about that venture recently, we do recall Mr. Dell’s comments about Dealers being an unnecessary and expensive link in the distribution chain. Not long after, Mr. J. D. Power made a similarly negative comment in an interview with the Wall Street Journal and was greeted with tremendous blowback. He was rumored to be a pariah at his company’s own hospitality suite at that year’s National Auto Dealer Association convention. It was not long thereafter J. D. Power and Associates came to be owned by the McGraw Hill Companies.
It seems it has become common for self appointed experts to lecture the industry on how to best retail and service new vehicles. We recall Ford Motor Company’s ill-fated attempt at being a Retailer. Ford purchased all the Ford Dealerships in a number of markets, including Tulsa and Oklahoma City. This experiment took place under the Jacque Nassar regime and provided additional evidence that manufacturers probably don’t know how to retail new vehicles profitably. Ford couldn’t make the venture work even as they owned all the Ford stores in the market! The Ford Auto Collection experiment, and the Saturn experiment at GM, didn’t burnish the concept of “One Price Selling” either. After their short and costly experiment, Ford decided it was better to sell their Dealerships back to genuine Retailers.
People outside the business typically think the secret to success in auto sales is to keep cutting the price and make it up in volume. Real Dealers know they have to make gross profit wherever they can. During their time as Dealers, Ford focused on selling new vehicles. After all, Ford is a Manufacturer. A Dealer knows that selling new vehicles is likely to be a losing proposition at times, especially Detroit 3 Dealers.
They structure their business accordingly. For that reason they learn to make up profit in their other departments. This allows them to sell new vehicles at a net loss when necessary, but still maintain overall profitability. Ford thought they could increase volume with “One Price” and regarded the pre-owned business as a necessary evil. The result? They actually achieved lower new vehicle sales at lower gross profits than before, and gave their pre-owned business away. It’s no wonder they didn’t make money!
Now the “authorities” in charge of the economy assert that GM and Chrysler would be better off with fewer Dealers, as if Dealers add significantly to a Manufacturer’s costs. This is not to say there hasn’t been significant “over-dealering”, especially in metro markets. But “over-dealering” impacts Dealer’s profitability, not the Manufacturer’s.

The Other Side
Let’s look at it from a Dealer’s perspective. Dealers these days have typically been pressured by their Manufacturers into ever more expensive and expansive facilities, despite the fact that a consumer’s Internet screen is now their “showroom” of choice. More and more consumers go to the “brick and mortar” Dealership to view inventory, acquire information, take a test drive, and perhaps get a price quote. The consumer then goes back to their PC to obtain price quotes on their desired vehicle. A Dealer’s conventional sales staff is often competing against its own Internet department, as well as other Dealers, when it comes to price! Moreover, new vehicles are pretty much a commodity these days. An excellent book on the subject is Dale Pollak’s Velocity. He points out that the new vehicle business has been an “efficient market” for years. To economists, an “efficient market” is one where both buyers and sellers have equal information and neither has any significant advantage. According to Wikipedia, “The efficient-market hypothesis states that it is impossible to consistently outperform the market by using any information that the market already knows, except through luck.” In other words, there is significant downward pressure on Dealers’ new vehicle gross profits and they are often a loss leader. Velocity is primarily about the pre-owned market, but the principles of market efficiency have applied to new vehicles even longer than to pre-owned.
The current discussion in Washington includes forcing GM and Chrysler to shed Dealers as a condition of receiving “tax payer backed” loans. For some reason, some members of Congress think getting rid of Dealers will save money for GM and Chrysler. They obviously don’t know that once established, there is very little, if any, cost to the Manufacturers for their Dealer networks. As a matter of fact, Dealers are the Manufacturer’s customers, not the buying public. The buying public is the customer of Dealers! Is it logical to try to increase sales by reducing customers?
In addition to selling new vehicles and parts to their Dealers, the Manufacturers also sell them special tools, equipment, furniture and numerous other expensive programs. The Manufacturers have transferred immense costs and risk to their Dealers. The risk of real estate, receivables, inventory and inventory financing is all born by Dealers, not by Manufacturers. In fact, a recent study commissioned by NADA stated, “Far from being a burden to the Manufacturer it represents, the Automobile Dealer supports the Manufacturer’s efforts by providing a vast distribution channel that allows for efficient flow of the Manufacturer’s product to the public at virtually no cost to the Manufacturer. The independently owned and independently financed franchised Automobile Dealer network is a critical asset to the Auto Manufacturers. U.S. Auto Dealers have $233.5 billion invested in their businesses. This capital is supplied by 20,700 independent dealerships that employ and train over 1.1 million people.” According to Dr. Michael Smitka, Professor of Economics at Washington and Lee University and an auto industry expert, “Dealer profitability based on their $233 billion dollar investment and a reasonable 8% return should equate to an 18 billion dollar return for Dealers in aggregate. We’ve seen no evidence that target has been met over the years.”
Further, Dealers provide the resources to stock inventory. They take trade-ins. They arrange financing. They collect and pay billions of dollars per year in taxes. Combined, they represent 20% of all retail sales in the U.S. Unknown to the general public, Dealers collectively have more money invested in their business than their Manufacturers have invested in theirs! Someone needs to explain to me how a Manufacturer can morally and/or legally push major investment and risk on their Dealers/Franchisees and then arbitrarily stop supplying them with product, outside of bankruptcy.
GM killed Oldsmobile by first starving it for product. What was once GM’s most profitable division received “me too,” “badge engineered” vehicles to sell, at a higher price than the same vehicle from other GM divisions. At the same time they backed these less than wonderful vehicles with a marketing campaign that stated, “It’s Not Your Father’s Oldsmobile.” This only further alienated their already aging customer base but failed to turn on younger buyers to their “me too” vehicles.
The money that should have been invested to bolster Oldsmobile was spent on a revolutionary new idea named Saturn. Saturn NEVER made money and Oldsmobile died a slow death. But at least Oldsmobile Dealers received a measure of compensation from GM. It is reported to have cost GM over a billion dollars to shed Oldsmobile, in yesterday’s dollars.

The Upside to Saturn
The best thing to come out of Roger Smith’s Saturn experiment is the Saturn Dealer network and their franchise agreement. This franchise agreement is unique in the U.S, but common in other some other countries, including Japan. It grants distribution rights for an area or region, rather than an individual market. GM has refused to allow Saturn Dealers to dual with other makes. A Dealer friend once said, “When you can’t pay the rent, you have to take in boarders!” But GM has denied this option to Saturn dealers despite the fact they haven’t provided vehicles to Saturn Dealers that the market wants in enough volume to allow its Dealers to be viable. From the beginning they were provided a line of mostly “tepid” vehicles to sell. While the recent Aura and Sky are great vehicles they haven’t been enough to save Saturn!
Besides, the Detroit 3 have never been able to consistently make money selling small vehicles. Consumers had some renewed interest in Saturn’s offerings when fuel prices spiked but that quickly waned. Imagine the result if the Detroit 3 were to design and build only smaller fuel efficient vehicles, as mandated by Congress, and the price of fuel stays low.
Nevertheless, Saturn Dealers are a resourceful bunch and have learned to survive by being excellent operators, focusing on the pre-owned and service ends of the business. They “kill their customers with kindness!” Now they have officially been notified that they will be starved for new products and will soon be phased out. Let’s hope their innovative franchise setup and professional Dealer body attracts a buyer that gives them the opportunity to represent a line of compelling vehicles, whether they be from China, India, Italy, or wherever. I wonder what might happen if Fiat decides they are better off buying Saturn instead of partnering with Chrysler? Saturn Dealers all have substantial investments in facilities that have little value if a successful automotive franchise isn’t operating in them.

Beyond Suburbia
We should also have a special appreciation for “country” Dealers. These Dealers are also resourceful and have learned how to make money in the pre-owned and service business. This has been out of necessity as they typically have not had access to any real quantity of their Manufacturer’s “hot merchandise” when their OEM produced a “winner.” Many have become dependent on their Manufacturer’s Certified Pre-Owned (CPO) offerings. Without a franchise that allows them to buy CPO caliber “program vehicles,” their futures are in doubt.
What does an Auto Dealer do for a community? Aside from local employment, local service, safety recalls, warranty repairs, local charitable work, etc., Dealers collect Sales Tax! A portion of that Sales Tax goes to local government. If a Dealer goes out of business in a community and vehicle buyers are forced to drive out of the locale to make their purchase, the local tax revenue stays where the vehicle is purchased, depriving the previous municipality of its tax revenue. This is a major issue! There are many circumstances where local government has provided financing and other support to maintain a local Dealer and its associated tax base. Imagine a municipality guaranteeing a loan for a local Dealer and the Dealer’s Manufacturer arbitrarily cancels or terminates the franchise agreement or stops supplying product. In this case the Manufacturer probably forced the Dealer to make substantial investments before shutting off product. I can hear the attorneys licking their chops.

What’s Next for the GM & Chrysler?
GM and Chrysler are between a rock and a hard place! They are afraid of Chapter 11 (re-organizational) bankruptcy. They feel few consumers will buy a vehicle from a bankrupt Manufacturer with no real assurance of warranty or resale value. If they don’t go Chapter 11, they are obligated to honor their contractual agreements, including their franchise agreements.

On a macro level, a Manufacturer bankruptcy would drop billions of dollars of pension and health care obligations on the federal government. The United Airlines bankruptcy dropped 6.6 billion dollars on the Pension Benefit Guaranty Corporation! (read that Federal Government.) Imagine GM, Chrysler, and a slew of suppliers hitting that system at the same time. The PBGC was already 23 billion dollars in deficit BEFORE the record UAL bankruptcy. It’s no wonder the government is proving fairly easy to work with for two of the Detroit 3.

On the Bright Side
Fortunately Auto Dealers do have some “aces in the hole!” They have protection from state AND federal laws protecting Dealers and/or Franchisees from their suppliers. These laws are based on “fairness” and cannot be merely swept away by mandate from Congress, a Car Czar, or a committee. Auto Dealers have effective lobbying groups in the form of their state trade associations, Political Action Committees, and most importantly the National Auto Dealer Association. Dealers are victims of many of the circumstances that led to the demise of their Manufacturers, but Dealers had nothing to do with the melt down of the U.S. financial system that dramatically impacted them. They had nothing to do with the sudden spike in fuel prices that rendered much of their inventory “sale proof” and decimated the value of their used vehicle inventories.
Dealers don’t dictate to their Manufacturers what to design and build. Many are currently victimized by Manufacturer sales incentive programs that require the Dealer to order additional vehicles for inventory as a price of admission to the program. These programs may serve the Manufacturer’s purpose but are catastrophic to a Dealer who is sitting on a 150 days (or greater) supply of inventory.
At the same time, the same Dealer is probably facing the prospect of having to “curtail” floor planned vehicles as a result of frequently arbitrary and frivolous mandates from lenders - often the Manufacturer’s captive. This comes at a time when working capital is a most precious commodity. This practice often puts the dealer in the position of having to decline program participation and face the market with a serious cost penalty versus other Dealers selling the same brand. Many of these Dealers are already on “finance hold” due to too much inventory and/or deterioration of their balance sheet. So now they face having a serious cost penalty in selling the inventory they purchased in good faith from their Manufacturer months ago.
Many Manufacturer programs are frequently designed to give the OEM a “free float” on the Dealer’s working capital while at the same time demanding immediate payment from the Dealer for the monthly parts statement.
In summary, Dealers are not only important, but absolutely necessary to a Manufacturer’s survival and ongoing success. Shutting down an entire division may make economic sense to a Manufacturer, if they cannot afford to design and build vehicles to supply that Division’s Dealers. But it will be quite expensive to do so. Merely thinning out Dealers as a method of increasing Manufacturer profitability is a totally flawed concept and strategies designed to force Dealers out of business should be dealt with sternly.

A reprint of the Ruggles Report February 2009

Friday, 1 May 2009

Fiat to the Rescue?

Chrysler, heavily dependent on light trucks (jeeps, minivans, pickups), was whipsawed by the spike in gasoline prices in summer 2008. Then came the credit crunch; when its access to lease financing disappeared, it lost 20% of sales overnight. As cash drained, it attempted to work out a deal with its many creditors, and failed. Assuming the firm emerges from Chapter 11 – rather than collapsing into liquidation as dealers and other creditors play "chicken" in hopes of a bigger slice of a rapidly shrinking pie – what will it need to survive?
First, Chrysler has neither the cash – nor after a mass of white-collar buyouts, the people – to develop new cars. It strikes me as unlikely that it will receive an infusion of cash and the stability to rebuild its famous design and engineering capabilities. Fiat doesn't have the money. Nor does it have the people, because it has no expertise in large cars, SUVs and light trucks to supplement whatever remains of Chrysler's historically famous but leanly staffed product development organization. Chrysler thus faces a long 2 years, until new product arrives via Fiat.
It will then face the challenge of selling Fiats. The new product will consist almost entirely of small cars, because as a company firmly rooted in southern Europe and strong in Brazil and other developing markets, that is Fiat's core strength. But neither Chrysler, nor any other company operating in the US, has been able to make a go of that on a consistent basis.
On paper we have policies to encourage a domestic market for small, fuel-efficient vehicles: CAFE, or Corporate Average Fuel Efficiency requirements, in place since 1977. Under CAFE, in order to sell a large car, firms must sell small cars, or they will exceed the average "mpg" standards that legislation imposes. The problem Americans have not bought into that policy: they want power. Given separate, less stringent standards for trucks, the entire market shifted towards light trucks (which for CAFE includes jeeps and minivans, and not just pickups). Small cars remain a small slice of the market, but in 2012 Chrysler's jeeps and minivans and pickups will be dated; small cars will be the only "new" product they will have on offer.
Absent a polar shift in American politics, to enable a stiff gas tax, Chrysler will not survive to 2015.
Now in the longer haul they need to not just survive, they need to gain back at least a modicum of market share. To stay in the auto business will require the cash to continue funding new product develop. That is in itself not an insuperable barrier. But in the background firms also need to be able to fund supporting research and development so that they can bring a range of new technologies to market, particularly electric vehicles (whether they run off of batteries, small "hybrid" engines or fuel cells). At present Chrysler is wholly incapable of doing that by itself. Fiat is probably too small as well. A beefy combination of the two might be another story, particularly as a smaller company has greater leeway to buy technology from independent suppliers. (Larger companies want to withhold core technologies from larger rivals, but Fiat-Chrysler may be viewed as a way to leverage their own investment, rather than as a threat.)
That too appears unlikely. Over the past 15 years vast improvements in engineering tools -- computer design and simulation, specifically -- have enabled car companies to spin off vehicles from their core platforms more quickly and at lower cost than ever before. And the U.S. market is so large that it supports a plethora of firms -- 14 at last count. From how many varieties does a consumer need to choose a minivan? Or mid-size car? Or whatever type of vehicle? Hundreds of models are on offer. There is no reason to assume Chrysler cars will improve so markedly that they will be able to pull away from the field and secure more sales than the company does today. Or that they will make money: given the competition, profits were falling across the industry even as sales boomed. There's no reason to think they'll recover.
And no sales pitch from President Obama will change that.

Thanks to JJ and DR for the back-and-forth behind this.