Hyundai Is Monday's Chrysler Suitor
February 19, 2007

If it's Monday, it must be Hyundai.

Friday the frenzied buzz was that General Motors was in talks to buy Chrysler. By Monday, South Korea’s Hyundai was rumored to be interested.

And by the end of the week, even more names are likely to emerge as suitors. One could be from China – maybe Chery or Shanghai Automotive Industries Corp. (SAIC) –  or some private equity firms from virtually anywhere.

Of the two automakers rumored to be interested in Chrysler so far, Hyundai makes more sense. Hyundai lacks much of what Chrysler has; GM already has too much of what Chrysler's got.

Why Hyundai-Chrysler makes some sense

The Sunday Times of London reported, though very thin on details, that Hyundai is eyeing Chrysler. That’s not surprising, especially considering Hyundai’s extremely – arguably overly – ambitious goals for the U.S. market.

A couple years ago, Hyundai declared it would sell a million vehicles a year in the U.S. by 2010, a giant stretch under current circumstances. A union with Chrysler, however, more than doubles its goal.

In 2006, Hyundai sold less than half of its 2010 goal – 455,012 vehicles, for 2.8% market share. Chrysler’s Dodge division alone sold more than 1 million vehicles last year. In total, Chrysler divisions – Chrysler, Dodge and Jeep – sold 2.1 million vehicles in 2006 for 13% market share.

The Sunday Times of London said Hyundai was particularly interested in Chrysler’s dealer network. Chrysler actually has too many dealers and is in the process of thinning the ranks. Chrysler also has an initiative to consolidate its franchises – Chrysler, Dodge and Jeep – under one dealership.

Hyundai and Chrysler have history. Chrysler owned a 10.5-percent stake in Hyundai but sold it in 2004. The two said they no longer needed each other; Hyundai complained Chrysler wasn’t supporting it. The two currently are linked in a three-way manufacturing alliance with Japan’s Mitsubishi, in which Chrysler once owned a stake. The trio developed and are producing a family of four-cylinder engines for world markets. Chrysler builds its engines in Michigan. They are used in its new crossovers like the Dodge Caliber. Chrysler’s Dodge network in Mexico markets a Hyundai-produced vehicle sold as the Dodge Altos. The network also sells a small cargo van provided by China Motor Corp., in Taiwan.

Hyundai has only one factory in the U.S.; it's in Alabama. The acquisition of Chrysler would give it more plants than it probably wants. Part of Chrysler’s recovery plan is to cut 400,000 units a year of capacity by closing one assembly plant and trimming back production at others.

Hyundai has no body-on-frame pickup trucks, though it has talked about adding a pickup truck for some time. Chrysler has a full and expanding range of trucks, from the redesigned Dodge Dakota to the full-size Dodge Ram, a line to which Chrysler is adding medium- and heavy-duty versions so it can compete in the profitable commercial segment it has been out of for years.

Hyundai has no V8 engines here. Chrysler has the Hemi.

Hyundai has only two sport utilities, which are car-based crossovers not rugged SUVS: the Santa Fe and the new three-row Veracruz. Chrysler has a gem: Jeep, one of the world’s most recognized global brands. The Veracruz, designed to compete head-on with the Honda Pilot and General Motors’ new crossovers sold as the Saturn Outlook, GMC Acadia and Buick Envoy, would be a welcome addition to Chrysler’s line.

Hyundai has been trying to move upscale into the entry luxury market. It failed  with the XG, then replaced it with the current Azera, which competes with the Toyota Avalon. Chrysler, meantime, has the Chrysler 300 that shares its rear-drive architecture with the Dodge Magnum and Charger.

Hyundai has talked about a flagship sports car; Chrysler has the Dodge Viper. Chrysler has a performance heritage that Hyundai does not and another treasure in its SRT performance division.

Chrysler has no small cars. Its smallest, least-expensive vehicle is the Dodge Caliber, considered a C Class size vehicle, not a B Class, and starts at more than $13,000.  Hyundai’s expertise is small cars, ranging from the sporty Tiburon coupe to the Accent, which starts at under $13,000, and Elantra. (Hyundai’s affiliate, Kia, with which Hyundai shares platforms, offers even less expensive, smaller cars.)

Hyundai has done well in the midsize segment as well with its Sonata, now built in the U.S. Chrysler has struggled in midsize cars, recently taking another stab at it with the redesigned Chrysler Sebring and the upcoming Dodge Avenger to replace the Stratus.

The most notable area of product overlap is with minivans, but could be overcome. Hyundai just introduced the Entourage, based on the Kia Sedona. Chrysler invented the minivan and introduces a redesigned Chrysler Town & Country and Dodge Grand Caravan as 2008 models. However, Chrysler drops its short wheelbase version for 2008; Hyundai added one in 2006. The two could cover the minivan segment, with Hyundai at the small, lower-priced end and Chrysler at the upper end.

The global footprint the two would create is even more intriguing. Chrysler has a truly global brand with Jeep, but not much else. It is looking to expand overseas sales. Hyundai is a market leader in its home market as well as China and has a strong presence in Europe, particularly Eastern Europe. The two companies' lines complement each other well with Hyundai at the small end; Chrysler with Jeep and larger cars.

The downside of a Chrysler-Hyundai

Despite the potential fits, a Chrysler-Hyundai deal faces challenges.

For starters, Hyundai Chairman Chung Mong-koo has been convicted of embezzling more than $100 million from the company. He’s running Hyundai as he appeals his three-year jail sentence.

Chrysler has huge legacy costs from retired workers and a fat and growing annual health care tab. Analysts put Chrysler's unfunded pensions and health care liabilities, estimated at about $18 billion, an amount a buyer would want financed in full upfront by DaimlerChrysler. Hyundai has no such bill since its U.S. plant is new and its workers young.

Hyundai has had its share of labor union problems at home; Chrysler's union works may put up roadblocks to such a sale.

And then there’s the cultural divide. If the Chrysler Group thought the Germans at Daimler, wait until they work with the Koreans. Both Hyundai and Kia in the U.S. have been a revolving door of American executives who have found it extraordinarily difficult to work with the Koreans.

A Hyundai spokesman said Sunday’s report of Hyundai’s interest in Chrysler was “groundless speculation.” There will be much of that as the Chrysler sale story unfolds.

Why GM-Chrysler makes no sense

Newspapers in Germany, which first broke the news of GM’s purported interested in Chrysler, have dialed it back. The latest word is a GM-Chrysler alliance is more likely than an all-out purchase. The Sundy Times of London reported that the GM-Chrysler talks are in the same vein as those failed ones last year between GM and Renault-Nissan.

That makes more sense than GM’s purchase of Chrysler, which makes virtually no sense.

Virtually everything Chrysler has, GM already has too much of as well. Both Chrysler and GM have too much production capacity, too many brands and nameplates, too many dealers, and sky-high pension and health care costs.

Indeed, some aspects of a merger are intriguing to imagine – Jeep under the GM umbrella, the Chrysler 300 sedan as a Buick, truly worthy minivans with GM badges, a Chevy Aveo or Opel Astra with a Dodge nameplate.

But beyond that, alliances for projects such as small cars, minivans and high-tech propulsion systems make more sense for GM.

About the only thing GM would gain from buying Chrysler is the No. 1 title. The purchase would ensure GM remains the No. 1 global automaker over Toyota. But the price would be high and merely an ego move. GM Chairman and CEO Rick Wagoner is pragmatist, not an egomaniac.

Other suitors expected

Other possible suitors for Chrysler being hinted at could be ones in China with global ambitions. One possible bidder is China’s Chery, best known for imitating a Chevy small car design with its QQ, though China’s ruled otherwise, and its affiliation with entrepreneur Malcolm Bricklin. Chrysler has an agreement in principle with Chery to build a small car in China for export to North American and Europe, an agreement set to go before DaimlerChrysler’s supervisory board by month’s end.

Don’t rule out SAIC, China’s largest automaker that builds cars for GM and Volkswagen, to name only two of its partners. SAIC intends to sell cars in Europe first and North America shortly thereafter. It picked up pieces of MG Rover, and recently introduced a Rover-based luxury sedan.

Nor can private equity firms, like those buying failing U.S. auto suppliers, be counted out. The United Auto Workers union isn’t fond of that idea. The union doesn’t see the purchase of suppliers by equity firms as a success, as managers have received huge bonuses and premiums while workers have watched their jobs go to low-cost countries like Mexico and China. The UAW, with its contract with the Big Three expiring in September, could put up roadblocks to such a purchase.

Chrysler-Daimler could stay hitched

Interesting that the news about who is interested in Chrysler is coming not from the U.S. or Korea, where the supposed suitors so far are based, but coming out of Europe, specifically Germany, where DaimlerChrysler headquarters. That leads industry insiders to think DaimlerChrysler is purposely leaking tips to specific media outlets in order to arouse interest in the company and push up the bidding price. Last week, DaimlerChrysler confirmed the investment banking JP Morgan had been hired to review options for Chrysler.

Meantime, Chrysler will continue trying to get its house in order. And it may well be that it remains married to Daimler. For one, a European analyst has put the cost of unraveling the two companies at $34 billion. To put that in perspective, Daimler paid $38 billion for Chrysler in 1998.

Making the marriage work would be a win for DaimlerChrysler CEO Dieter Zetsche, who has always firmly believed in the pairing. Some suspect he’s exploring all options only under pressure from other members of DaimlerChrysler supervisory board and German shareholders.

It may turn out that the best option – or the only option -  is to stay hitched.

Posted by Michelle Krebs at 5:37 AM under Analysis , Commentary , Companies , News , Rumors | Comments (3) | digg this | Seed Newsvine