Vehicle demand in the U.S. has been so robust that automakers have been increasing production and hiring more workers this year, but when it comes to investing in infrastructure the companies have learned from past mistakes.
This is especially true for Chrysler Group LLC, the Auburn Hills, Mich.-based maker of Jeep, Dodge and Ram, which has learned to avoid the overcapacity trap. It’s easier and cheaper to lay off workers than to shut down facilities that were expensive to build in the first place.
“The industry had been dealing with overcapacity for some time before the crash and that situation led to profit-draining practices, mainly high incentives and overproduction,” Scott Garbering, Chrysler’s head of purchasing, told Wards Auto during the 2013 Michigan Automotive Summit on Tuesday. “Now that the market is recovering, we cannot afford to repeat the mistakes of the past by making huge capital investments.”
Chrysler has closed four U.S. assembly plants between 2008 and 2010: an S-body-minivan-platform assembler and a Dodge Ram pickup truck factory, both in Fenton, Missouri; a metal stamping plant in Twinsberg, Ohio; and an axle differential facility in Detroit.
But since 2009 Chrysler has seen a 77 percent rise in sales, to 1.64 million units in 2012. It has sold 1.21 million cars and trucks in the first eight months of 2013 and is in line to break last year’s numbers by year’s end. In the third quarter ended June 30 Chrysler reported $507 million in net income on $17.9 billion in revenue. It reported $11.9 billion in cash and $22.2 billion in current liabilities. Investing in fixed assets (brick and mortar) depletes the cash and raised current and long term liabilities.
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The trick for Chrysler, the smallest of the Detroit 3 automakers, is to keep its fixed asset expenses down and instead tinker with increasing capacity in its existing 18 U.S. facilities in Michigan, Ohio, Indiana and Illinois. So instead of building factories that might later have to be closed down, Chrysler has invested $5.2 billion in existing factories, created more than 22,000 jobs since 2009, and tinkered with schedules to squeeze as much productivity out of its infrastructure. It came to an agreement with the UAW union, whose retired employee benefits trust owns 41.5 percent of Chrysler, to allow three crews to run two shifts a day. Workers have four 10-hour days a week with no overtime. The work week ends Saturday afternoon and begins late Sunday.
One example of how this has boosted output without additional factory floor space: Chrysler’s transmission plant in Kokomo, Indiana has seen annual output rise 32.5 percent to 520,000 units.
The automaker emerged from 2009 bankruptcy under control by Italy’s Fiat SpA (BIT:F) and its CEO Sergio Marchionne, who widely touted as returning Fiat to profitability in 2006 and Chrysler and ushering Chrysler out of its 2009 doldrums.
A Warning From Fiat
While Chrysler tries to meet demand for its cars and trucks without having to build more fixed assets that would later have to be dismantled in the event of a downturn, over in Italy Fiat Chairman John Elkann is not happy that the UAW trust has exercised its right to demand Chrysler list a 16 percent stake in an initial public offering. It repeats one of the main points made in an initial filing with the U.S. Securities and Exchange Commission: that the relationship between Fiat and Chrysler – two relatively small auto companies compared to their competition that rely on each other to remain competitive – is not set in stone.
"Having two companies is very different than having one,” he told Bloomberg in an interview in Milan on Thursday.
The sub-text is clear: Marchionne and Elkann want to merge Fiat – which owns 58.5 percent of Chrysler – with the U.S. automaker to make a leaner and larger car company. This would also give Fiat access to that $12 billion in cash to help fix its European problems – one being (you guessed it) overcapacity amid historically low sales numbers out of the European auto sector.
The IPO would throw a third group of investors into the mix and could ultimately make it more expensive for Fiat to buy the 31.5 percent stake it would need to launch a merger without a shareholder vote. It could then buy the outstanding 10 percent of shares to complete the merger.
But the UAW trust wants as much cash as possible for selling the 41.5 percent of Chrysler it owns and believes listing the 16 percent it has a right to demand (which was one of the terms of the 2009 bankruptcy proceedings that gave partial ownership of the company to the union trust) will boost the rpice of the stock and allow it to sell its remaining shares to the highest bidder.
Marchionne wants to pay the trust more than a billion dollars less than the trust wants for its stake, and both sides differ greatly in how much they think Chrysler is worth; Marchionne has an interest in low-balling this estimate while the union trust has an interest in inflating it.