I told you so: Chrysler will turn profit, Zetsche says

By David Kiley, USA TODAY

DETROIT — Chrysler Group CEO Dieter Zetsche's often-questioned prediction that DaimlerChrysler's ailing U.S. unit will break even this year got a boost Wednesday.

DaimlerChrysler Chairman Jürgen Schrempp announced at the company's annual meeting that Chrysler Group, a year into a restructuring plan, will turn a slight operating profit for the first quarter after seven quarters of losses.

Chrysler lost $1.9 billion for all of last year.

Stockholders approved, sending DaimlerChrysler's share price up $1.65 to $45.81 Wednesday.

But not everyone is so sure. The gloomiest Wall Street estimate, from UBS Warburg, is that Chrysler will lose $1 billion this year.

Warburg analyst Saul Rubin said recently his firm's estimate is based on the expectation that Chrysler's market share will decline this year because of a lack of new products.

"Historically, the only sure tonic for market share losses has been new products ... and there is basically nothing for 2002," Rubin said. He also estimated that Chrysler's break-even point — the number of vehicles it will have to sell to make its first dollar of profit — will be only 2% lower next year.

Although Zetsche won't divulge his break-even number, he said in an interview that it will be 20% to 25% lower at the end of this year than at the end of 2000 when he took over.

In other words, Zetsche is sure cost cutting and focus on profit per vehicle will outrun the market share decline until the new products arrive in 2003 and 2004.

Chrysler's market share was 13.7% for the first quarter, compared with 14.4% last year, according to Autodata.

But, Zetsche said, "Profitability is more important than market share. ... We are getting to our target."

He has to. It was because of Zetsche's confidence that Chrysler was worth turning around that Schrempp didn't spin off DaimlerChrysler's ailing U.S. unit in 2000.

Zetsche, a former Mercedes-Benz engineering and marketing chief, is clearly turning Chrysler upside down in its quest for profitability. He has cut capital spending by $8 billion while adding five more models to his five-year plan.

"I set the targets and make sure they are adhered to. ... It's amazing the creativity that flows when people have 30% less money to work with than they planned."

Much of the annual savings is coming from ending models' duplication:

• Cutting the number of different air compressors for air conditioners from five to two saves $5 million annually.
• Standardizing seat structures and powertrain controls for Chrysler and sibling Mercedes saves $60 million.
• Cutting fog lamps from 18 to nine, saves $15 million. "I must remember to ask why we need more than five," Zetsche said.
• Cutting automatic steering pumps from five to two and sharing with Mercedes saves $12.2 million.
• Making optional instead of standard some content, like a roof rack for the Jeep Grand Cherokee, saves $5 million.

The new vehicles launching next year, the Crossfire and Pacifica, are being produced for hundreds of millions of dollars less than what previous new models cost.

The Pacifica touring wagon was designed to match most of the Chrysler minivans' engineering architecture in the Windsor, Ontario, plant, slashing new tooling costs.

And the Crossfire has nearly 20% Mercedes parts.

"Big money," Zetsche said, is being saved by sharing parts and purchasing with Mercedes. And it also may help sell Chrysler quality.

Quality is a huge issue for Chrysler. Both Dodge and Jeep placed below the industry average in J.D. Power and Associates' initial quality survey last year.

Now Zetsche and COO Wolfgang Bernhard are counting on Mercedes' system of quality checks to head off glitches.

That's good news, says Don Luke, a Phoenix dealer who gripes that Chrysler vehicles require too many fixes after he sells them. He also says the quietest, smoothest vehicle he has to sell is the Grand Cherokee Limited, not the Chrysler Concorde or LHS sedans.

The replacements for those cars arrive in 2004 with as much Mercedes hardware as can be crammed in. "They will be a different world from the current models," Zetsche said.

A pitfall for Zetsche in his cost cutting is a deteriorating relationship with suppliers.

A year ago, Chrysler said it wanted 15% price cuts from its suppliers over three years. That level will be nearly reached by the end of this year.

Bernhard says relations with suppliers are solid. But a survey by Michigan's Oakland University measuring how suppliers get along with automakers shows that Chrysler dropped last year from near the top of the ranking to near the bottom after it publicly announced its 15% price-cutting plan.

John Henke, who directs the survey, says manufacturers at the bottom suffer over time because suppliers offer their best technology to better customers first and may meet just minimum quality requirements for others.

"It means everything you buy from suppliers is not as good as it could be if they trusted you," Henke says. And, he says, "It takes years to reverse" a poor ranking.

Suppliers aside, Zetsche and Bernhard have been popular with Wall Street and dealers.

Luke says his dealership is more profitable than last year.

"Success in this business is all about the right product, and these guys know product. I just wish it were coming a little sooner."