DaimlerChrysler’s Chrysler group on Wednesday announced a three-year restructuring plan that will cut annual output by 400,000 units by closing an assembly plant within three years and cutting shifts at other plants, with the ultimate loss of 11,000 hourly-paid jobs. Chrysler will also “reduce and optimise” its dealer network and outsource non-core activities, axing a further 2,000 salaried posts.
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Announcing the cuts in Detroit, this morning (US time), Chrysler CEO Tom La Sorda said the goal was a return to profitability by 2008 and a target of $4.5bn in financial improvements, including up to $1.5bn in material savings, to achieve a return on sales of 2.5% by 2009.
The company also plans to spend $3bn developing a more fuel-efficient engine range and is eyeing further strategic options with partners along the lines of its recent deal to build minivans for Volkswagen.
DC earlier on Wednesday announced a group operating profit of $7,281m for 2006 compared with $6,843m in 2005. Net income rose to $4.3bn from $3.8bn the previous year and earnings per share were up to $4.17 from $3.70.
But Chrysler revenues for the year of $62.2bn were significantly lower than in 2005 ($66.1bn) and the US unit posted an operating loss of $1,475m in 2006, compared with an operating profit of $2,024m in 2005.
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By GlobalDataSpeaking in Detroit, DaimlerChrysler chairman Dieter Zetsche said: “In order to optimise and accelerate the [plan detailed by La Sorda], we are looking into further strategic options with partners beyond [current] business cooperation partners. In this regard, we do not exclude any option in order to find the best solution for both the Chrysler Group and DaimlerChrysler.”
Despite repeated questioning at the press conference, Zetsche refused to expand on his comments and say whether DC planned to spin-off Chrysler or had held talks with any interested parties.
Overall, the plan aims to return the US unit to profitability with a primary focus on costs. La Sorda said it was structured to over-achieve in order to offset potential unforeseen market headwinds, resulting in a target of EUR3.5bn ($US4.5bn) of financial improvements – or a return on sales of 2.5% – by 2009.
“There are two integrated parts to the plan,” LaSorda said. “First, the Chrysler Group needs to solidify its position in the North American marketplace. In addition, the key to our long-term success will be our ability to transform the organisation into a different company to achieve and sustain long-term profitability.”
There will be a €2.3bn ($3bn) investment in new engines, transmissions and axles, as part of a product offensive of more than 20 new and 13 updated vehicles from 2007 to 2009.
DC said the recovery plan is aimed at a return to profitability through a combination of revenue programmes and by sharply focusing on costs.
Key revenue boosting measures include:
- Ongoing product offensive with eight new and five refreshed products in 2007, including new minivans, the mid-size Dodge Avenger sedan, Chrysler Sebring convertible and updated Jeep Liberty.
- Improved retail-to-fleet mix, new models for export markets and more effective marketing and incentive spending.
- Reduce and optimise the dealer network to improve dealer profitability.
Material and fixed costs goals include:
- Reduce material costs by up to EUR1.15bn ($1.5bn) by 2009.
- Explore the sale of support operations, including transportation services.
Capacity & efficiency measures include:
- Reduce total production capacity by 400,000 units per year.
- In 2007, eliminate a shift at Newark (Delaware) assembly plant and the Warren (Michigan) truck plant.
- In 2008, eliminate a shift at St. Louis (Missouri) South assembly plant.
- Idle Newark assembly plant in 2009.
- Idle the Cleveland (Ohio) parts distribution centre in December 2007.
- Adjust powertrain, stamping and component operations to reflect reduced capacity.
Overall, Chrysler will reduce employees by 13,000, or approximately 16%.
Hourly employment will be reduced by 11,000 over three years, with 9,000 in the US and 2,000 in Canada (4,700 in the US and 1,100 in Canada in 2007 alone).
Of the US hourly total, 4,000 employees will be impacted by assembly plant actions; 1,000 by reduced capacity in powertrain, stamping and other component operations; 1,000 by other actions including the potential sale of support functions; and 3,000 through technology, efficiency and productivity.
Salaried employment will be reduced by 2,000 over the next two years, with 1,000 each in 2007 and 2008.
Special retirement programmes and other termination and attrition programmes will be announced later.
LaSorda said these actions complement significant other restructuring measures taken since 2001 under which the company closed, idled or sold 16 plants (five assembly, 11 component) and reduced its workforce by a third.
The financial impact of these recovery measures will begin in 2007 with a restructuring charge of up to €1bn ($1.3bn), with the net cash impact for the year of about €800m ($1bn). The impact of the balance will be in the following two years.
In 2007, Chrysler expects to further reduce dealer inventories to align with market demand, which will result in a reduction in operating profit of approximately EUR230m ($300m).
“Key parts of the transformation will be a greater global footprint and a shift in the product mix to smaller, more fuel-efficient vehicles,” La Sorda said.
Currently, North America represents some 90% of the automaker’s business, and its product line-up has historically been heavily weighted toward minivans, trucks and sport utility vehicles.
“Those two factors were advantages for Chrysler Group once upon a time,” said LaSorda, “but the rules of the global marketplace have changed. High fuel prices and other dramatic shifts in the market have driven a shift in consumer preferences to smaller, more fuel-efficient vehicles. We must make some strategic adjustments to build off our historic strengths, but not rely on them so much so that we are put at a competitive disadvantage.
“That will require a redesigned business model, with three primary areas of strategic focus”, LaSorda said. “First, the Chrysler Group will add a more robust customer and brand focus while continuing to stress product leadership. In addition, we must achieve better global balance and rely more heavily on leveraging partnerships to manage costs while finding growth opportunities.”
Future plans include new minivan, pick-up truck and rear-drive full-size vehicle models alongside a plan to reduce the platform count from 12 now to seven by 2012.
Chrysler will also expand into new commercial vehicle segments, including entering the US Class 4 & 5 truck segments for the first time, and continue its shift to a car/truck mix that is less reliant on trucks.
The EUR2.3bn ($3bn) dedicated to new more fuel-efficient engines, transmissions and axles will include a common axle programme for all vehicles, plus work on new transmission technology. The company last week signed a non-binding memorandum of understanding with Getrag to develop this more fuel efficient dual clutch transmission technology.
Chrysler is also developing a new V6 engine platform (Phoenix), which is targeted to reduce the number of six-cylinder engine families from four to one.
It will also introduce its first two-mode full hybrid with the 2008 Dodge Durango, and is also evaluating a mild hybrid for future applications. And it will expand its line-up of diesel engines, including several Bluetec-branded vehicles.
The automaker said it planned new vehicle programmes aimed at global markets and would use third parties where possible to access regional products and markets “where it makes economic sense”. This would be similar to Cadillac’s European distribution operation which is handled by an independent Dutch importer and Europe-wide dealer network.
Chrysler also plans to “balance supplier purchasing globally” by buying an additional EUR3.8bn ($5bn) of materials from “low-cost sources”.
