DaimlerChrysler is looking into further strategic options with partners

DaimlerChrysler AG’s Chrysler Group recently announced a three-year Recovery and Transformation Plan that seeks a return to profitability by 2008 while also taking steps to change its business model for the long run. The plan will result in an employee reduction of 13,000 people from 2007 to 2009.

Chrysler Group President and CEO Tom LaSorda outlined the plan at the DaimlerChrysler AG Annual Press Conference, held in Auburn Hills, Michigan.

Dr. Dieter Zetsche, Chairman of the Board of Management of DaimlerChrysler: “The Chrysler Team worked out a comprehensive Recovery and Transformation Plan using all resources within DaimlerChrysler. In addition to that and in order to optimize and accelerate the presented plan, we are looking into further strategic options with partners beyond the business cooperation partners mentioned. In this regard, we do not exclude any option in order to find the best solution for both the Chrysler Group and DaimlerChrysler.”

Overall, the Recovery and Transformation Plan is aimed at a return to profitability with a primary focus on costs. It is structured to over-achieve in order to offset potential unforeseen market headwinds, resulting in a target of euro 3.5 billion ($4.5 billion) of financial improvements – or a return on sales of 2.5 percent – by 2009.

“There are two integrated parts to the plan,” LaSorda said. “First, the Chrysler Group needs to solidify its position in the North American marketplace. In addition, the key to our long-term success will be our ability to transform the organization into a different company to achieve and sustain long-term profitability.”

The program will be supported by a euro 2.3 billion ($3 billion) investment in new engines, transmissions and axles, which will set the table for a product offensive of more than 20 all-new and 13 refreshed vehicles from 2007 to 2009.

RECOVERY

The Recovery plan is aimed at a return to profitability through a combination of revenue programs and by sharply focusing on costs.

The key measures include:

Revenue Management
– Continue the product offensive with eight new and five refreshed
products in 2007. Key products include the new Chrysler Town & Country
and Dodge Grand Caravan minivans, mid-size Dodge Avenger sedan,
Chrysler Sebring convertible and a Jeep(R) Liberty that completes the
revamping and expansion of the Jeep family.
– Improve the retail-to-fleet mix, build momentum with new offerings in
global markets and improve the effectiveness of marketing and incentive
spending.
– Reduce and optimize the dealer network to improve dealer profitability.

Material and Fixed Costs
– Reduce material costs by up to euro 1.15 billion ($1.5 billion) by
2009.
– Explore the sale of support operations, including transportation
services.

Capacity & Efficiency
– Reduce total production capacity by 400,000 units per year.
– In 2007, eliminate a shift at Newark (Delaware) Assembly Plant and the
Warren (Michigan) Truck Plant. In 2008, eliminate a shift at St. Louis
(Missouri) South Assembly Plant.
– Idle Newark Assembly Plant in 2009.
– Idle the Cleveland (Ohio) Parts Distribution Center in December 2007.
– Adjust powertrain, stamping and component operations to reflect reduced
capacity.

Employee Reduction
– Overall, Chrysler Group will reduce the number of employees by 13,000,
or approximately 16 percent.
– Hourly employment will be reduced by 11,000 over three years, with
9,000 in the U.S. and 2,000 in Canada (4,700 in the U.S. and 1,100 in
Canada in 2007 alone).
– Of the U.S. hourly total, 4,000 employees will be impacted by assembly
plant actions; 1,000 by reduced capacity in powertrain, stamping and
other component operations; 1,000 by other actions including the
potential sale of support functions; and 3,000 through technology,
efficiency and productivity.
– Salaried employment will be reduced by 2,000 over the next two years,
with 1,000 each in 2007 and 2008.
– Special retirement programs and other termination and attrition
programs will be announced separately.

LaSorda said these actions complement significant other restructuring measures taken since 2001. Previous to this announcement, the company closed, idled or sold 16 plants (five assembly, 11 component) and reduced its workforce by one-third.

The financial impact of these Recovery measures will be seen beginning in 2007 with a restructuring charge of up to euro 1 billion ($1.3 billion), with the net cash impact for the year of about euro 800 million ($1 billion). The impact of the balance will be in the following two years.

In 2007, the Chrysler Group expects to further reduce dealer inventories to align with market demand, which will result in a reduction in operating profit of approximately euro 230 million ($300 million).

TRANSFORMATION

Key parts of the Transformation will be a greater global footprint and a shift in the product mix to smaller, more fuel-efficient vehicles.

Currently, North America represents some 90 percent of the Chrysler Group’s business, and its product line-up has historically been heavily weighted toward minivans, trucks and sport utility vehicles. “Those two factors were advantages for Chrysler Group once upon a time,” said LaSorda, “but the rules of the global marketplace have changed. High fuel prices and other dramatic shifts in the market have driven a shift in consumer preferences to smaller, more fuel-efficient vehicles. We must make some strategic adjustments to build off our historic strengths, but not rely on them so much so that we are put at a competitive disadvantage” he said.

“That will require a redesigned business model, with three primary areas of strategic focus”, LaSorda said. “First, the Chrysler Group will add a more robust customer and brand focus while continuing to stress product leadership. In addition, we must achieve better global balance and rely more heavily on leveraging partnerships to manage costs while finding growth opportunities.”

Specifically LaSorda pointed to the following initiatives:

Customer and Brand Focus
– Continue the product offensive through 2009, with more than 20 all-new
vehicles and 13 refreshed vehicles.
– Build on its existing product strengths through new entries in the
minivan, pick-up truck and select rear-drive full-size vehicles. At the
same time, the company will learn to do more with less with a plan to
reduce product platforms from the current 12 to seven by the year 2012.
– Expand into new commercial vehicle segments, including entering the
Class 4 & 5 truck segments for the first time.
– Continue the shift to a car/truck mix that is less reliant on trucks.
– Invest in powertrain with euro 2.3 billion ($3 billion) dedicated to
new engines, transmissions and axles, in order to move toward a
portfolio that is more fuel efficient. That will include a common axle
program for all vehicles, plus work on a new transmission technology.
Last week, the company signed a non-binding memorandum of understanding
with Getrag (a German-based supplier) to develop this more fuel
efficient “dual clutch” transmission technology.
– As part of that powertrain offensive, the company has under development
a new V-6 engine platform (dubbed “Phoenix”), which is targeted to
reduce the number of six-cylinder engine families from four to one.
– In addition, Chrysler Group will introduce its first two-mode full
hybrid with the 2008 Dodge Durango, and is also evaluating a mild
hybrid for future applications.
– Finally, it will expand its line-up of diesel engines, including
several BLUETEC-labeled vehicles, a designation emblematic of the
cleanest diesel in its class.

Increase Global Presence
– Avoid nameplate redundancies in North America and develop and introduce
vehicle programs aimed at global markets.
– Use third parties where possible to access regional products and
markets where it makes economic sense.
– Balance supplier purchasing globally by targeting euro 3.8 billion ($5
billion) of additional purchasing to low-cost sources to complement the
company’s global growth.

Partnerships
– Better use of alliances and partnerships around the world, such as the
Chrysler Group does currently with:
– In manufacturing, an agreement with Volkswagen to build minivans in
North America for VW’s dealers.
– In retail, such as in Mexico where it sells a Hyundai-produced
vehicle as the Dodge Atos, and soon will sell a small cargo van
produced in Taiwan
– In import opportunities, such as the recently-announced agreement in
principle with Chery Automobile Company of China (contingent upon
approvals from the DaimlerChrysler Supervisory Board and the Chinese
government) produce a small car for sale in North America and
Europe.
– And in focused partnerships, such as the GEMA World Engine project
with Hyundai and Mitsubishi in Dundee, Michigan, or the
DaimlerChrysler consortium with General Motors and BMW to develop
hybrids.