The ‘Detroit disease’ spreads to Chrysler

Roland Jones Business news editor • Profile • E-mail

Once revered as an example of how a North American automaker can reverse its slumping fortunes and build cars that Americans want to buy, Chrysler has succumbed to the “Detroit disease.”

The stark diagnosis came last week when its German-based parent said Chrysler would lose $1.5 billion in the third quarter — more than twice what it had previously anticipated — due to slow sales of gas-guzzling trucks and sport utility vehicles. Chrysler also said it would slash second-half production to pare its backlog of vehicles. And this week the firm lowered its vehicle sales outlook for the rest of the year.

Chrysler is suffering from the same malady that has already infected Ford and GM — both have seen high gasoline prices decimate sales of their onetime cash cows, big SUVs and trucks. The two companies have together shuttered more than two dozen plants and cut more than 75,000 jobs in an effort to stem their multibillion-dollar losses, caught in a vicious cycle of shrinking market share and tough competition from Asia-based automakers, which dominates the more fuel-efficient car segment.

It remains to be seen whether production cuts will bring the same massive restructuring at Chrysler. The cuts do mean some of Chrysler’s plants will see temporary shutdowns between now and the end of the year. Chrysler executives have said there are no immediate plans to slash jobs or close plants permanently, as Ford and General Motors have done recently, but they didn’t rule anything out.

Many had thought Chrysler was immune from Detroit’s troubles. A restructuring restored Chrysler’s financial fortunes after initial difficulties following its union with Germany’s Daimler-Benz to form DaimlerChrysler in 1998. And more recently Chrysler has basked in the success of a series of popular muscle cars, including the burly and stylish Chrysler 300 and Dodge Charger sedans, which had bulked up the company’s bottom line.

But in truth Chrysler failed to learn from Ford and GM’s mistakes. Like Ford and GM, Chrysler relied far too long on America’s desire for big trucks and SUVs, sales of which are falling due in part to high gasoline prices.

Trucks and large SUVs historically have accounted for more than 70 percent of Chrysler’s U.S. sales, compared with about 60 percent at Ford and GM. Even DaimlerChrysler Chairman Dieter Zetsche admitted the company failed to act quickly when sales of trucks and SUVs slowed earlier this year.

The company has been hit especially hard by the public’s growing desire for smaller, fuel-efficient cars, according to Tom Appel, editor of Consumer Guide Automotive, a service for automotive buying advice. But the issue may be more one of a perception than a reality, he added.

“I think Chrysler’s being hurt by a general impression that its large and hitherto well-received cars like the Chrysler 300 and the Charger are not very fuel-efficient, and so there’s a bit of a backlash,” said Appel. He said Consumer Guide’s in-house tests show the cars, which feature an updated version of the company’s trademark Hemi engine, do about 20 miles per gallon.

Chrysler President and CEO Tom LaSorda said recently the company intends to become more  competitive internationally with a portfolio of smaller cars.

“We’re addressing those issues and moving our product portfolio to a mix that’s more in line with the recent realities and market trends,” LaSorda said in a speech.

Chrysler’s product lineup has other problems, Appel said. Sales of the Dodge Durango midsize SUV have dropped off precipitously, while many consumers are turning away from minivans and instead buying crossover vehicles. Another problem for Chrysler is the company has little to offer in the midsize SUV market, he added.

“Dodge is about to launch the mid-size Nitro SUV, so that will help them in the fuel economy perception area, but when it comes to minivans someone has to come up with something new,” Appel said. “The expectation is that the new Dodge Caravan and Chrysler Town & Country minivans will be that new thing, but their release is still some time away — they’re not supposed to come out until mid-2008.”

Chrysler has a number of new products coming out this year, including the redesigned Chrysler Sebring sedan, the compact Dodge Caliber, the Jeep Compass and the new Jeep Patriot compact SUV, which boasts of up to 30 miles per gallon.

But while new products are important, Chrysler, like Ford and GM, needs to do a better job of managing its car and truck inventories with flexible manufacturing processes like those used by Asian manufacturers, said Kevin Reale, research director for AMR Research, an industry consulting company.

“This is a major problem for the Big Three — if there’s no real demand for your products, why can’t you just turn down the volume on production?” he said. “Now, if an automaker has demand for say 3,000 cars, what they’re doing is they’re making 10,000 vehicles because they’ve planned to make that many. And then when they have a bloated inventory they try to resolve the situation with incentive programs. And we know that the public is becoming inured to incentives.”

Indeed, Chrysler’s latest summer incentives campaign, dubbed “Ask Dr. Z,” failed to move the sales needle much. It featured a rather wooden Dieter Zetsche as pitchman for the company’s products. Trucks and SUVs made up 84 percent of Chrysler’s inventory at the end of August. Not even the good doctor could breathe new life into Chrysler’s sales.

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