The DaimlerChrysler Predicament

"Those who forget the past are condemned to repeat it." - some smart dead guy

Last year the American auto industry set a new sales record. More than 17.4 million new cars and light trucks rolled out of the nation's showrooms, marking the second consecutive year of banner sales. But something odd occurred in the last half of 2000. As the good times rolled, as car company after car company enjoyed stellar sales results, DaimlerChrysler, one of the domestic Big Three, saw its sales plummet precipitously. Even worse, what sales momentum it did maintain came on the back of rebates and other financial offers that have cost the company gigantic amounts of money. In what seemed like little more than the blink of an eye, DaimlerChrysler transitioned from strong profitability to huge losses. In the third quarter of 2000, the company's reported loss was a staggering $512 million, and financial analysts expect the fourth quarter 2000 loss to be in the neighborhood of $1.5 billion.

How could a company that was so fabulously profitable as recently as 1999 fall into such a black hole of losses?

The answer is multifold, but all have combined to put the relatively new DaimlerChrysler on the ragged edge of the precipice, where Chrysler seems to have reserved a space. It's not like the company hasn't been there before: Recall the federal government bailout of Chrysler after the 1979-80 oil crisis left it teetering on the brink. After that, Chrysler invented the minivan and rolled into good times, only to come perilously close to failing again in the late Eighties. But here they are again at death's door, and they are threatening to take some of their suppliers and tens of thousands of jobs along with them.

The problems that have put them where they are can be summed up in three vital areas: products, quality and costs.

On the product side, much of Chrysler's success in the last two decades has come from the company's invention and subsequent domination of the minivan market. But lately that domination has weakened and the major threat came from an unlikely source, Honda. The Honda Odyssey is now widely regarded by auto journalists as the best in the business, a position formerly held by the Dodge Caravan, Plymouth Voyager, and Chrysler Town & Country minivans. To stay competitive against the Honda and improved products from Ford and General Motors, Chrysler has been forced to rebate heavily to keep minivan sales active. So, minivans are not the cash cow they once were for DaimlerChrysler.

The minivan experience has been echoed in other product lines as well. For instance, the re-designed Jeep Grand Cherokee, once a big success for Chrysler, is now regarded as a failure in the marketplace. The Jeep brand name still has a great deal of power, but consumers look at the Grand Cherokee as too small when compared to other vehicles, like the Chevrolet Tahoe and Ford Expedition, that populate the price class. New additions to the segment, like the high-quality Toyota Sequoia, won't help Chrysler either.

On the quality front, many people find that the mediocre quality of some previous Chrysler products is coming home to roost. For example, the minivans were plagued with notorious automatic transmission ills for years, so when the bulletproof Honda Odyssey came along, many buyers defected.

Finally, though Chrysler products were often regarded as "cheap" in comparison to their domestic competition, reports in trade publications indicate that Chrysler execs were cavalier about cost increases from suppliers. Because of this, Chrysler has largely lost its cost advantage, and the rebates that are required to move its vehicles are doubly expensive.

The question now is: Can DaimlerChrysler's largely German top management solve these problems in the North American market?

Jack R. Nerad, the former editor of Automotive Age magazine, has long been fascinated by the business of automobiles. He is editor of Driving Today.