Chrysler Sale to Cerberus: Just What the Doctor Ordered?
May 14, 2007

The private ownership of Chrysler may be just what the doctor ordered for the American automobile industry since it will force its long overdue restructuring.

For the past couple of decades, experts have predicted a major downsizing of the U.S. auto industry because it has too much plant capacity, too many employees for its shrinking sales and market share and too high costs, notably health care, pensions and union wages.

Automakers have tried to ward off this inevitable transformation by attempting what now can be looked back upon as merely a nip and tuck here and there. But cosmetic surgery is no longer enough as a Cerberus-owned Chrysler will put increased pressure on General Motors and Ford.

Cerberus undoubtedly will slash every bit of excess, money-losing fat from Chrysler as it seeks to build a successful car company, possibly to sell at a profit in the future.

What’s more, Chrysler could really benefit from private ownership. As Cerberus chairman John Snow said in this morning's press conference, now Chrysler leaders can focus on the day-to-day business of running a car company without analysts looking over their shoulders scrutinizing quarterly reports and shareholders fretting over daily ups and downs of the stock price.

One of the reasons the Japanese automakers, particularly Toyota and Honda, are so successful is that they focus on the long term. Look at Toyota’s launch and future plans for hybrid technology –- every vehicle with a hybrid version in the future -– regardless of the immediate profit return. Consider Honda spending millions over the past decade on developing its humanlike Asimo robot that has yet to be commercialized but in which Honda sees promise.

This kind of long-term view is something American automakers have been unable to do because of the short-term pressures of the stock market.

Cerberus’ ownership of Chrysler will put increased pressure on GM and Ford to cut fat and move faster. The recovery from this major surgery will be painful, but may be worth it in the end if the three U.S. automakers become financially healthier, albeit inevitably smaller.

At the same time, GM and Ford can use Chrysler's situation to their advantage, leveraging what Cerberus is doing at Chrysler with their own employees, suppliers, dealers and unions. (Coincidentally, news reports say Ford family members are considering what to do with their stock in the automaker, opening the door to changes in Ford’s ownership and shareholder makeup. Those reports have been persistent though denied through a family attorney this morning.)

Analysts told Dow Jones this morning that Cerberus’ purchase of Chrysler and Cerberus’ approach could be a catalyst to major industry change, especially in regards to automotive unions, that could also benefit GM and Ford.

Morgan Stanley auto analyst Jonathan Steinmetz told Dow Jones: "The threat of an independent Chrysler majority owned by Cerberus at the negotiating table is likely to bring about broader change than having DaimlerChrysler AG negotiating with the union again," Steinmetz said. "We believe both GM (and) Ford can benefit from this."

Similarly, Cerberus "will probably aggressively push the UAW and the Chrysler dealers for concessions, which GM and Ford will try to emulate," RT Capital Group analyst Kirk Ludtke told Dow Jones.

The stock market seemed to think what’s good for Chrysler is good for GM and Ford as the shares of both jumped more than 5 percent in early trading after the Chrysler announcement. And not surprisingly, DaimlerChrysler shares continued their rise, as shareholders gave their nod of approval for ditching Chrysler.

Analysts also speculate that GM may benefit from Cerberus’ ownership of Chrysler Financial. Cerberus recently purchased a majority stake in GMAC Financial Services. The two companies might have cost-cutting and profit-enhancing synergies that Cerberus can exploit.

Posted by Michelle Krebs at 8:21 AM under Chrysler , Commentary , Ford , GM | Comments (0) | digg this | Seed Newsvine