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Friday, October 20, 2006

The Infection Spread To Chrysler (DCX)(F)(GM)(TM)(HMC)

Chrysler will go through a major restructuring due to declining sales. The company's plan is extraordinarily ambitious. It plans to cut the costs of producing every vehicle it manufacturers by $1,000. The company may seek longer-term relationships with suppliers in exchange for better pricing. A plant may be closed.

Chrysler's parent, DaimlerChysler, will also send a hit team of senior officials from Germany to review marketing, production, and purchasing practices. These must be things that the Germans do better than their American counterparts.

Chrysler has now caught the flu that has been spreading around Detroit and has caused Ford to work on cutting $5 billion in costs a year while GM is targeting $9 billion. GM, Ford, and Chysler sales have been poor this year despite a reasonable September. But Toyota and Honda have continued to pour on the coals as they raise share almost every month.

As Jerry Flint, the venerable car writer from Forbes, has pointed out, costs are not Detroit's problem. The Big Three simply don't make enough cars that buyers want.

Maybe the Germans know how to solve that.

In 1999, Ford's US market share was almost 25%. It now sits just above 17% and the company says it should bottom around 14%. Flint also points out that Ford may not be able to retool most of its product line until 2010. Not good.

Chrysler may need help from the UAW to meet it ambitious cost reduction goals. But, unline Ford and GM, the unions can point to DaimlerChrysler, the rich parent, and say that they can give no more.

The same holds true of parts suppliers. Collins & Aikman recently refused to ship parts to Ford. There was a dispute over what Ford would pay. Suppliers, like the UAW, believe that they have been squeezed enough. Since many of the major parts companies are in Chapter 11, the do not have to play by the same economic rules that the Big Three do.

Can Chysler cut $1,000 in costs from each vehicle? Probably not. But, if it comes close, it does not matter if sales don't improve.

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