Think it will work?

CEO Marchionne believes he can make $5 billion in operating profit in 2012 -- and double Chrysler's sales by 2014

After five months of near silence, Chrysler CEO Sergio Marchionne finally delivered his plan to fix the struggling automaker. It's a bold one.

Marchionne, who is also the CEO of Chrysler's controlling shareholder Fiat Group (FIA.MI), projected that Chrysler will break even in 2010 and will make $5 billion in operating profit in 2012. He expects Chrysler to more than double its sales, from 1.3 million vehicles this year to 2.8 million in 2014.

If he pulls it off, Marchionne will not just have orchestrated the miracle of saving Chrysler, he will have created a global power that combines Fiat and Chrysler into a moneymaking player. He might also be paraded down Detroit's Woodward Avenue. "This is a new day for Chrysler," Marchionne said in his customary guttural monotone. "This plan is comprehensive and it's ambitious."

That's an understatement. To come back, Chrysler needs its American brands -- which have had waning success in the past and few victories lately, selling mostly SUVs, minivans, and pickup trucks -- to win over passenger-car buyers. Marchionne also needs a healthy comeback in the U.S. economy. And Chrysler must become successful overseas, where it has never been a major player.

Recovering U.S. Market Share

First, Marchionne's plan requires the U.S. market to grow from today's levels of about 10 million cars sold this year to 14.5 million in 2014. That doesn't seem unreasonable given that the U.S. market sold more than 17 million cars and trucks in 2000. But the economy is still weak and the job market keeps getting worse.

That could easily undercut Marchionne's plan. "Their targets are higher than their sales will be," says James N. Hall, principal of Detroit-area consulting firm 2953 Analytics. "There is no such thing as a jobless recovery for car sales."

Marchionne is counting on stealing major market share from his rivals. He thinks Chrysler can grow from less than 9% of the U.S. market to more than 13%. That means he will double U.S. sales volume to 2 million. "We are going to recover some of the market share we lost in the past. It reflects an increase in market share and an increase in volume in the U.S. market," Marchionne said. "The U.S. is too big of a place to maintain volumes of this [low] level."

How on earth will he get there? Give Marchionne credit for one thing -- he is investing in this business. He plans to double what the company spends, per car, on marketing. He has also jacked up Chrysler's capital budget to add new models. Under the control of its previous owner, Cerberus Capital Management, Chrysler spent less than $3 billion a year to engineer new cars. Marchionne will increase that level to $4.1 billion next year and $5.7 billion in 2012. Between now and 2014, Marchionne says he will spend $23 billion on new models. "There's a huge amount of cash being consumed by this business," Marchionne said. "It's being done with the objective of gaining market share."

Jeep's Export Potential

Chrysler's plan calls for about 16 new or heavily freshened models for Dodge, Chrysler, and Jeep by 2014. There are also some new commercial trucks and new pickups coming for the Ram brand. Says Hall: "Their market share targets are probably pretty reasonable."

But make no mistake, Chrysler faces a monumental task. The company wants to grow exports from 144,000 vehicles this year to 500,000 in five years. That's largely on the strength of Jeep, says Michael Manley, CEO of the Jeep brand and the executive in charge of the company's overseas expansion.

Jeep does have potential overseas. In many markets, it is a distinctly American name that stands for rugged SUVs and has a fun image. "It's an iconic brand on a global level that has been hugely squandered," says IHS Global Insight analyst John Wolkonowicz. "They need to develop products that are worthy of the brand."

That's the trick. Chrysler plans to build three new Jeep-brand vehicles using passenger-car platforms from Fiat. That means compact and subcompact Jeeps. Chrysler recently has failed with small, car-based Jeeps like the Compass and Patriot. "The Fiat-based Jeeps could water down the brand," Wolkonowicz says. "The sales targets look optimistic."

Upscale Chrysler Models

Chrysler needs to improve its other brands, too. The namesake Chrysler brand will get the most aggressive overhaul. Olivier Francois, the president and CEO of the Chrysler brand, a suave Frenchman who helped fix Fiat's upscale Lancia brand, is trying to add a heavy dose of sex appeal to Chrysler.

First, Chrysler will get six new models over the next five years that will be pushed upscale. They will be styled to give their owners "comfort and glamour." With the advertising, Francois has a brand commercial featuring tattooed, leggy models. The cars appear to be coming off a runway. The commercial has lines such as "Looking like $1 million was a birthright" and "Let's design cars people want to make out in."

The campaign is quite powerful, says Hall of 2953 Analytics. The imagery is striking. It's also a turn of the head for a brand that currently sells the Sebring, a basement bargain among midsize cars, and the low-priced retro PT Cruiser, which will go away in late 2010.

Marchionne may have trouble convincing the world Chrysler will hit its lofty sales targets. But his CFO, Richard Palmer, made a firm case that the company has enough money to get through the current tough times. He said Chrysler will break even in 2010 as the car market recovers. Sales will rise from 1.3 million vehicles this year to 1.65 million next year. Revenue is projected to grow from $42.5 billion this year to $67.5 billion next year.

Fast Start Needed from Fiat-Engineered Cars

Even if vehicle sales fall 20% below 2011 targets, Palmer said, Chrysler will still have a cash balance of $3 billion. That's the bare minimum Chrysler would need to survive, but the company could be able to pay its bills. The company borrowed $5.7 billion from the U.S. government, $1.5 billion from Canada, and has another credit line for $2.3 billion. Says Palmer: "We are confident we could weather another storm."

One big risk to Marchionne's plan is it depends on a fast start and success selling those Fiat-engineered models. Fiat's engineering works will help bring Chrysler its first new car models, but they have to hit sales targets and generate enough cash flow to boost new-product spending from $3 billion a year on average to about $4.5 billion a year.

If the new vehicles don't hit targets, "we'd rationalize capital spending," Marchionne says. "The whole thing about us being able to spend $23 billion depends on us being able to generate the cash flow."

That's the trick. Meeting his bold targets for both sales and profits will generate the cash to add to the model lineup and grow sales as quickly as Marchionne demands. If he does all of that, he will pay off the U.S. government's $5.7 billion loan by 2014 and make upwards of $5.2 billion in operating profits. If not, Chrysler won't escape its crisis. Says Marchionne: "This thing needs to earn its right to survive as a competitive American carmaker."
Author: quietdad