5 Reasons Chrysler Could Be Doomed

A recent Edmunds.comauto sales report offers further proof for an already obvious trend: Chrysler is far from recovery, and there is a very real chance the brand could become all but a memory by the end of this year.

The numbers released March 25 showed a continued erosion of the former auto giant’s market share last month. March sales for Chrysler were down more than -10% from last year, the only major automaker that saw a sales decline compared to 2009. By comparison, Ford (F) saw sales up almost 50% and Nissan saw an increase of 43%. Even amid the recall mess, Toyota (TM) saw sales up 32%. General Motors saw sales up about 22%.

Even worse is that Chrysler sales are sliding even as auto sales in general pick up. March’s seasonally adjusted sales rate will be 12.4 million vehicles, up dramatically from 10.3 million in February 2010.

Getting a smaller piece of a bigger pie is a big problem for this ailing Detroit Giant. But weak sales mark only the first many problems for Chrysler right now. Here are the other major hangups:

Dealers Won’t Quit Despite Low Sales: Thanks to the politicization of the bankruptcy process, Chrysler’s previous plans to shutter 789 dealers ran into some roadblocks. Thanks to Congressional mandate, any dealer that doesn’t want to get forced out can file for an arbitration hearing — and more than half have decided to fight for a right to stay open. So far, none of the 418 pending arbitration cases have even been heard and that has really slowed down Chrysler’s efforts to streamline distribution and cut out dead weight from its network of dealerships to save costs.

No New Life in Old Models: Chrysler flopped at the Detroit auto show several weeks ago without a splashy new lineup of cars and sporting only a few mildly interesting new looks for existing brands. This was a horrible move because it failed to generate even a little bit of buzz among consumers, and risks making Chrysler’s cars and trucks an afterthought in an industry where styling and image are so important. Even more telling is the fact that a lack of new offerings has exposed a fundamental flaw in Chrysler’s product pipeline. Any new offerings will just be used to shore up old weaknesses, not to expand and grow profits and market share. Treading water is counter to a growth plan, and opting for the status quo when things are so lackluster is not inspiring.

The Losses Keep Mounting: Chrysler lost $16.8 billion last year and expects to lose another $4.7 billion this year. The earliest forecast for profitability is 2012. Contrast that to Ford (F), which actually swung to a profit at the end of 2009 despite the brutal consumer spending environment, or GM which has predicted posting a profit as early as next quarter. When you’re at the top of the heap you can bleed a little red ink and not panick. But when you’ve just declared bankruptcy and taken a federal lifeline, losing money for another two years is hardly a way to return to market dominance.

Gas Prices Creeping Up Again: The Chrysler brand is hardly fuel efficient, seeing as its bread and butter has been Dodge pickups and its new Pentastar V-6 that is meant to boost its entire fleet’s MPG totals won’t hit the market until its 2011 models roll out. If crude oil prices keep ticking upwards as I expect them to due to a weak dollar and increased economic activity, gas prices could be headed up above $3 very shortly and perhaps $4 by the end of this year. That spells another shock for big gas guzzlers under the Chrysler brand.

All these reasons indicate rough going for Chrysler, and perhaps collectively are too big of a challenge for the company. However, it’s hard to tell the exact impact of all of these factors until Fiat finally makes good on its distribution plans and starts selling smaller vehicles at Chrysler dealerships that are cheaper and more fuel efficient. If Fiat can get its act together, maybe it can help Chrysler weather these difficult times and breathe new life into the vehicle line.

But that’s a big “if.” On the other side of that coin, if dealers continue to delay Chrysler’s restructuring, and if old models continue to be passed over by consumers and result in huge quarterly losses for the automaker, the 85-year-old brand may be dead for good. The March sales report shows that the automaker has yet to level off its steep sales declines, and it has a lot riding on the 2011 model year cars that should hit showrooms this fall. If those get a chilly reception, it may be impossible to reverse Chrysler’s tailspin.

My personal view is that Fiat just sees Chrysler as a cheap way to get distribution for its own cars. This means that executives are very unlikely to just give up on their investment, and it will do their level best to maintain the company simply to capitalize on the existing infrastructure. If Chrysler survives, it gives Fiat a mighty big springboard into new markets.

But at the same time, this focus on distribution should make Chrysler lovers nervous because it means Fiat has no affinity to cars bearing the Chrysler, Jeep or Dodge name that it owns the rights to those nameplates. As GM showed us, bankrolling money-losing brands just to give you showroom space for your best sellers is no way to do business. Fiat leaders surely know this, and won’t be afraid to pull the trigger if part (or all) of Chrysler makes operations more complicated than its worth for their core vehicle line. Dodge trucks have a strong following, but the Chrysler brand doesn’t really move the needle these days.

I am a car nut myself, and it’s sad to think that such an iconic auto brand could just disappear. I graduated college in California about 30 years ago, so the Chrysler Lebaron convertible will always have a soft spot in my heart. But Chrysler cars just don’t have the appeal they once did.

I remain optimistic that things will work out under Fiat’s leadership, and that Chrysler, Jeep and Dodge will have a place in the garage for years to come. But if the restructuring drags on and the profits never materialize, there is a chance that Fiat may cut its losses. And you can be sure if Fiat needs to jettison part (or all) of Chrysler for the good of the broader company, that company probably won’t be keeping the Chrysler nameplate. 

Louis Navellier owned shares of F in personal or client portfolios as of this writing.

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