Nardelli calls Chrysler “Operationally bankrupt”
The Wall Street Journal – in an article which may be the most blunt assessment of Chrysler’s financial circumstances yet published - is reporting that Robert Nardelli, the president of Chrysler, is calling the company “operationally bankrupt.” At a meeting in early December between Nardelli and employees, he had been stressing that the company will have a substantial loss this year and will be trying to sell assets in time to cover it. Nardelli was asked, “[a]re we bankrupt?” His answer: “Technically, no. Operationally, yes. The only thing that keeps us from going into bankruptcy is the $10 billion investors entrusted us with.”
Nardelli yesterday confirmed that he had made the remark.
The statement comes a mere four months after Chrysler’s purchase by Cerberus Capital Management, LLP.
Yesterday, as well, Nardelli publicly abandoned any notion that the company could meet the expectations of its “turn around” plan. That plan had called for Chrysler to break even in 2008. Now, Nardelli claims only that Chrysler “will make a pretty significant improvement” over the $1.6 billion it is predicted to lose this year, a prediction revised earlier this month from a $1 billion loss prediction. At a meeting with engineers, Nardelli is quoted as saying, “We need to generate cash to keep this machine running.”
It won’t get it from selling cars or trucks.
Nardelli’s ignorance of the auto industry may have led him to overlook trouble that it may have been way too late to overcome when he took the job. After taking the job, according to the Journal, he discovered that the Pacifica, Crossfire, and Dodge Magnum – all now to be discontinued – were losing money on every vehicle produced. A cost-saving program intended to save $250 million per year was actually saving only $1 million because commodity prices had risen.
Even worse – and this is certainly one of those ‘things never change’ stories – Chrysler had established its plant production levels based on predicting industry sales of over 17 million vehicles annually, even though the industry’s actual sales were clearly going to be closer to 16 million and Chrysler’s own sales were off almost ten percent.
Nardelli has told company employees that this overestimate caused the company to maintain “a cost structure well beyond affordability.”
The story also reveals that former Chrysler CEO Wolfgang Bernhard, who had been expected to accept the position of board chairman at Chrysler when Cerberus purchased it, backed out of the chairman’s job specifically because Nardelli was being selected as president and lacked experience in the industry. That may, however, merely have been a convenient excuse. Bernhard did have experience in the industry and could not possibly have missed seeing, in his review of the company and its books, precisely those things which Nardelli has since discovered.
Cerberus continues to paint a happy face on the whole deal, with a spokesman quoted by the Journal as saying that both it and Chrysler have ample cash supplies – a statement that is self-evidently false on both counts. Cerberus itself is in deep financial trouble, in part because it bought GMAC from General Motors just before the sub-prime mortgage crisis hit. GMAC had made substantial commitments in that market, and is now deeply in the red. Cerberus paid $12 billion for GMAC.
Chrysler’s $10 billion is an appallingly small amount of money for a car manufacturer to have to rely upon. Ford recently hedged its financial bets by selling a new issue of common stock. Chrysler cannot do that, even if Cerberus were willing – no one’s even willing to buy Chrysler’s bonds, a less risky financial instrument than common stock. Cerberus cannot raise further cash.
A sign of just how bad things are can be found in Nardelli’s own actions. He’s begun to pull in executives that previously were part of his inner circle when he was the boss at Home Depot to act as consultants. Like Nardelli himself, none of these are people with the slightest experience in the automobile industry.
Unfortunately for Nardelli, cutting costs may not be enough, even though it may be all he can do. $10 billion is enough to develop a new product or to run the company for a couple of years, but not to do both. The cash needed to keep the doors open makes developing a new product much harder, anyway. As one person quoted by the Journal put it, “[i]f you’re an engineer, you’re beating your head against a wall.”
At the information leaking from inside Chrysler about its financial condition may not be an accident. Nardelli took the job in the hope that it would redeem his reputation as a manager, one that took a hit when he was fired from Home Depot after his cost restructuring at that company resulted in substantially depressed income. In light of that, it would not be surprising if Nardelli has concluded that rescuing Chrysler is impossible and is doing what he can to publicly distance himself from responsibility for the inevitable.
Source: Wall Street Journal