Automotive Insight
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Chrysler Turnaround
Chrysler: The real story is how to turn the business round – not who is reaching for their checkbook Lansdowne Consulting believes that the roadmap to turn round Chrysler can be constructed by developing a compelling proposition for core customers – and that recent sell-off speculation will likely result with DCX selling a majority stake, but holding onto a minority stake without which survival for Chrysler as a standalone firm would be very difficult. The debate on the future of Chrysler has so far focused on which of the many potential new owners will win the race and how this will change the automotive landscape. These debates will continue, but in this paper – the first of a new Automotive Insight series, we focus not so much on who the next owner is likely to be, but rather on the way forward for Chrysler, and on the key problems that any management team will need to address - while learning the lessons of what went wrong for DCX.
Lansdowne helps automotive firms to tackle business issues on the CEO’s agenda from strategic positioning to operational improvement. We work with the leadership team and frontline managers to develop new capabilities - and then ensure they are applied effectively to create real-world results. Over time we have developed these abilities into a suite of profitimprovement products that have helped some of the largest players in the sector become more successful. Our Automotive Insight papers analyse the forces reshaping the industry and highlight the practical steps businesses can take today to compete more effectively. © 2007 Lansdowne Consulting Limited Page 1
Automotive Insight
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Chrysler Turnaround
The real story at Chrysler is how to turn the business round – not who is reaching for their chequebook The debate on the future of Chrysler has so far focused on which of the many potential new owners will win the race and how this will change the automotive landscape. These debates will continue, but in this paper we focus not so much on who the next owner is likely to be, but rather on the way forward for Chrysler, and on the key problems that any management team will need to address - while learning the lessons of what went wrong for DCX. The most likely outcome of the strategic review in our view is to sell a majority stake in Chrysler but retain a significant minority stake. The unexpectedly sharp rise in the share price to over $80 makes it clear how large a conglomerate discount was being applied. Backing out of a sale now would risk a collapse of the share price back to $50 and invite financial buyers to make a break-up bid for the entire DCX group. Our view is based on the assumption that the biggest driver of DCX thinking has been to get back to basics and remove distractions to allow management to focus on driving the core Mercedes businesses. However avoiding a break-up bid for the group – which would also split the Mercedes truck and car businesses was a major risk which at the late 2006 share price was a distinct possibility. So why did they put it on the block? The process of offering it for sale solved two big problems. It reduced pressure from shareholder groups looking for a more complete break-up, while putting pressure on the UAW to extend the concessions they have already made to Ford and GM. Overall it looked like a shrewd move but one that has now backed them into a difficult corner. So where will they go from here? Selling off a majority stake and so avoid the negative impact of financially consolidating Chrysler with the rest of Daimler’s businesses. However, we believe that a complete retention of Chrysler is also a viable option. With unfunded staff-cost liabilities of an estimated USD 14 billion and a falling market share this is an asset that buyers will struggle to justify an aggressive price for. Of course with current liquidity levels an aggressively priced bid from a private equity consortium is always a possibility. On balance however this is unlikely given the US economic outlook and the further investment needed to support product revamps in coming years. Of the other options, Magna’s approach seems an essentially defensive move with limited strategic rationale. GM’s discussions might produce a broad collaboration but they are too short of management attention and capital to be strong ownership candidates. Finally an emerging markets player makes sense and some could raise the money but ultimately isn’t likely to be approved in the current US political climate. In our opinion a successful turnaround of the business is possible – and with the right management team could be achieved under current ownership. This transformation would be built on the following three pillars: • Customer focus: Finding new customer niches and understanding their needs in far more detail and depth than the competition • Product Refresh: Revitalising product line-up to meet these requirements
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Automotive Insight
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Chrysler Turnaround
World-class cost base: Developing a 21st Century cost-base with DCX looking for partners (like Chery et al) to co-operate on a project by project basis for specific platforms, engines etc.
In the following we address each of these in turn and then consider how to bring these elements together into a realistic roadmap to guide execution.
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Automotive Insight
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Chrysler Turnaround
Customer Focus: Redefining the core customers for the business and understanding their needs in far more detail and depth than the competition Much of the current success in the car business is driven by an ability to successfully target niches, and indeed discover new ones such as the MPV. This capability should be developed into an industrialised new concept capability built on world-class customer insight capabilities and the ability to spot emerging niches within and across geographies. A superior customer insight capability involves combining fact-based analytic and behavioural understanding in a framework which enables you to understand what matters to a group of customers and maps this onto where you can out-perform the competition to find sustainable niches. Over time this becomes part of the corporate DNA in successful companies such as BMW and Toyota. In addition they need to differentiate between the two core brands more clearly by pushing Chrysler more upmarket as the ‘individual’ brand and continue to push Dodge as the “sporty” brand and Jeep as the individualistic / rugged brand. This will require investment but if it is backed up by competitive quality and a distinctive product that fits niche needs better than mainstream alternatives customers should be willing to pay a premium.
Product Refresh: Product mix will need to become bolder and more progressive Chrysler has begun the turnaround in this area – the Chery deal to produce small cars finally recognises that 67% of sales outside the US are in this market segment gives some genuine prospects of increasing foreign market share. Chrysler is also currently replacing and refreshing models faster than its two US rivals. However too many of these models are “me-too” vehicles in competitive segments like CUV and mid-size sedan, not sufficiently differentiated to win significant volume, or worse, lumbering SUV dinosaurs like the Jeep Commander and Chrysler Aspen. A more radical approach to product is required. New ownership will need to make a bold statement and rationalising the portfolio by a ruthless cull of outdated models will achieve this. This is too important to be constrained by manufacturing inertia – if current plants are not flexible enough to affect rapid product overhaul then they will need to be in the future – this hit needs to be taken now. The parallel requirement for R&D spending will be a bitter but necessary pill to swallow and ensure the longer-term success of the group. The recently announced $3bn investment in engines, transmissions and axles is a positive first step. Revenue benefits will need to be better realised Gaining access to high-growth emerging markets needs to be a priority – at present 90% of sales are in the mature NAFTA markets. Chery programme will be an important first step but further programs need to be developed at pace if Chrysler is not to fall behind others who are already developing serious emerging market presence. Increased European sales are also key to ensuring stability by providing a counter to cyclical downturns in the NAFTA markets.
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Automotive Insight
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Chrysler Turnaround
World-class cost-base: Future partnerships are needed to realise the cost opportunities DCX failed to exploit An aggressive and synergetic platform strategy is needed to catch up with the major OEMs. The Chrysler 300C and Dodge Magnum based on the previous generation Mercedes E-Class platform (W210) are an example of successful design/manufacture co-operation, but this is not enough. At manufacturing level this needs to be vastly improved. For Dodge’s lower end models partnerships such as the one with Mitsubishi to have access to the new Lancer platform and talks with Chery for a low cost car product need to be aggressively pursued. Chrysler has plans to rationalise its platforms from 12 now to 7 by 2012, but this is still too high and will not close the gap with today’s scale leaders who push over 70% of their volume through major platforms of 400,000 units or more. Any future management will need to buy into platform integration fully if it is to succeed, and complement this with a sourcing programme to cut costs. Head-office rationalisation was a disaster for DCX – many of Chrysler’s top executives were replaced or resigned, but a coherent management model was never established. Imposing a German culture on the organisation didn’t work, and as the people responsible for Chrysler’s success in the 1990s were shown the door, so creativity and leadership deteriorated. Today, Chrysler needs to rediscover the flair and agility which enabled it to produce the right product at the right time in the 90s while creating a cost structure that allow it to compete in a globalised world.
The Turnaround Roadmap • • •
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Rationalise product line up and push polarizing product design that made a success of 300C, Magnum and Caliber Continue and accelerate the search for technologies and features that meet customer needs such as stow-and-go seating, cooled glove box, etc. Develop partnership strategy by brand and segment: o Mercedes for 300C / Magnum successor and joint SUV development o Mitsubishi / others for mid-range cars e.g. new Lancer platform o Low cost manufacturer e.g. Chery for low cost car offering Initialise wide scale sourcing opportunity assessment Push emerging markets sales
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Automotive Insight
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Chrysler Turnaround
Lansdowne Consulting is an independent strategy and management consulting firm with offices in London and Los Angeles. We help our clients deliver significant and lasting improvements in their performance through a unique combination of strategic insights and collaborative working style.
The majority of our projects are repeat engagements with satisfied clients – a testament to the success of our results-oriented approach. Over the years we have advised the top management of some of the world’s bestknown companies on the issues that most impact their performance and long-term value. The companies we work with operate across a variety of industries, including Retail & Consumer, Media & Telecom, Automotive, Energy & Utilities and Financial Services.
Lansdowne combines in one team the ability to work with both the board to develop the strategy and the line management to deliver it. This enables us to reconcile strategic objectives with real-world constraints to produce implementation plans that are both commercially-astute and achievable. Our aim is to deliver not recommendations but bottom-line results.
What sets Lansdowne apart is our ability to integrate ourselves seamlessly into clients’ dayto-day activities and become highly effective members of the team. We bring challenge to our clients while seeking to understand their unique obstacles to change. We customize our approach to our clients’ specific needs and provide unbiased advice and world-class execution leading to measurable results.
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