The 2008 Collapse of Chrysler
Melinda A. Dobson
MGT 435 Organizational Change
Robert Hamamoto
November 18, 2011

The 2008 Collapse of Chrysler Beginning in the late half of 2008, a global recession hit the economy of the United States. With a combination of several years of declining automobile sales and the limited availability of credit led to a more widespread crisis in the United States auto industry in 2008 and 2009. Soon after the dramatic decline in sales, the U.S automaker, Chrysler, requested emergency loans from the government in order to stay afloat. In 2009, Chrysler’s situation had gotten worse and was faced with imminent bankruptcy and liquidation. With that being said, I would like to discuss the changes that have been implemented to Chrysler, identify new changes that still need to be implemented and assess the effectiveness of the change and the potential benefits of the new changes. Chrysler is an American automobile manufacturer that has built automobiles since 1925 and was the second largest automaker between 1936 and 1949. After a merger with Daimler-Benz Corporation in 1998, Chrysler was part of the German based DaimlerChrysler now known as Daimler AG. Chrysler suffered from poor management and lack of investment until 2007 when the company was sold to Cerberus Capital Management. Under DaimlerChrysler, the company went by the name of “DaimlerChrysler Motors Company LLC,” with its U.S operations referred to as the “Chrysler Group.” Then Daimler-Benz CEO promised a “marriage made in heaven and huge synergies.” However, it was a disaster for Daimler, who poured billions into Chrysler, draining management and resources, and continuously dragging down its Mercedes-Benz subsidiary. Chrysler’s President was responsible for misjudging the launch of the company’s all new 2001 minivan that resulted in an expensive surplus of 2000 models, losing considerable market share to rivals, and underestimating demand for the PT Cruiser, resulting in a $512 million loss in 2000 that led to his firing that year. In 2007 DaimlerChrysler announced the sale of 80.1% of Chrysler Group and its subsidiaries to a private American equity firm named Cerberus Capital Management, L.P, for $7.4 million and Daimler continue to hold 19.9% of the company. This began the company’s new name Chrysler LLC. From there the company soon revealed a new company logo and new websites were launched. In 2008, Daimler announced that its shares in Chrysler had no book value after write offs and charges. Since, Cerberus has accused Daimler of giving misleading information during sale negotiations in 2007. In October of 2008, Cerberus and General Motors (GM) discussed exchanging 49% of GM’s stake in GMAC for Chrysler, merging Detroit’s two of the “Big Three” automakers. But the following month the plans did not go into play. Afterwards, Chrysler announced a 25% cut in its salaried and contract workforce in November 2008, 5,000 jobs were lost. The fallout from Chrysler’s downsizing will hit eight plants, in Michigan, Ohio and Indiana that make components that go into weakest selling mid-sized sport utility vehicles, pickup trucks and other large vehicles on which Chrysler plans to cut production in 2009. The company had an operating loss of $1.475 billion in 2006 and expects to see even more losses through 2007. From this the company would eliminate 13,000 positions, including 11,000 production jobs and 2,000 white collar positions. Of the production jobs cuts, 9,000 are in the U.S and 2,000 are in Canada. Chrysler plans to close the Newark, Delaware, assembly plant within the next two years and cut shifts at plants in Michigan and St. Louis. The company also announced that a parts distribution center located near Cleveland will close this year which employs 100 workers. Company officials said that much of the impact would be in Michigan, where 5,300 people will lose their jobs by 2009. An estimated total of 38,000 job losses if Chrysler closes operation centers and stops all functioning completely. November 2008, Chrysler announced that sales in the US market had fallen 34.9 percent in 12 months and a week later announced that the only way for the company to remain is by forming an alliance with another automobile maker as well as receiving help from the government. Days later, Chrysler sought out financial aid from Congress and was unsuccessful in this attempt but, was invited to devise a new action plan for stability of the industry. By December, the company announced that they were dangerously low on cash and may not survive past 2009. Chrysler then stated, after the turndown in the Senate, they would shut down all operations permanently and file for bankruptcy. Chrysler filed for chapter 11 bankruptcy protection from its current creditors April 30, 2009. And as such, will be able to operate while renegotiating its debt structure and other obligations. The US government describes Chrysler’s action as a “surgical bankruptcy” lasting 30 to 60 days, “Chrysler entered and exited bankruptcy in 42 days, making it one of the fastest major industrial bankruptcies in memory. It entered as a company widely thought to be ripe for liquidation if left on its own, obtained massive funding from the United States Treasury, and exited via a pseudo sale of its main assets to a new government-funded entity” (Roe & Skeel, 2010) with hopes of reducing the company’s liabilities and post-bankruptcy emergence in stronger financial shape. If the company can do this, it will emerge with an Italy based partnership with Fiat. Fiat will provide billions of dollars in research and investment related investments for 35% stake in Chrysler. However, many believe that Chrysler will not get out of bankruptcy that easily and so quickly to make this happen. Chrysler filed for bankruptcy in May of 2009 with President and Vice Chairman LaSorda stepping down and going into retirement. The company requested that the court terminate the dealership agreements with 25 % of its dealerships. “Detroit’s woes are hitting Main Street with a vengeance. Chrysler moved Thursday to eliminate 789 of its dealer, using its bankruptcy status to break their franchise contracts” (Bensinger & Puzzanghera, 2009). On June 1, 2009 the court approved a plan which spells out the new Chrysler Company. The agreement formed by the United Auto Workers Union is to provide a 55% employee retirement plan, “The United Auto Workers union would eventually own 55% of the stock in a restructured Chrysler LLC under the deal reached by the union and the auto maker, according to a summary of the agreement that was reviewed by the Wall Street Journal” (Kellogg & Maher, 2009) minority stakes will be held by Fait which is 20% and the US Treasury will hold 8% and Canadian (2%) government. Fiat stated its plans to increase shares to 35% if Chrysler meets certain goals by a deadline. Chrysler, in January, had announced that it was in merger talk with Fiat, had asked for a $5 billion loan. Federal officials responded saying that they would consider a $6 billion loan if the company strikes a deal with Fiat. Soon after, Fiat and Chrysler have confirmed that a merger deal has been reached and as a result a comprehensive reconstructing plan agreed to by many of its stakeholder, has reached an agreement in principle to establish a global strategic alliance with Fiat SpA. The two companies will enter into an alliance in which Fiat will take an initial 35 percent stake with an option to raise its ownership stake to 55 percent at a later date. The terms of the agreement do not require Fiat to pay any money upfront. Instead, Fiat will receive equity in Chrysler for investments it will make retooling Chrysler plants to produce Fiat models for the US market. “The agreement doesn’t require Fiat to sink any cash into the Chrysler. Nevertheless, the Italian industrial group would get the initial 35% stake along with access to Chrysler’s assembly plants and its distribution network, which stretches across North America” (Szczesny, 2009). Fiat has expressed interest in eventually purchasing a majority stake in Chrysler. That would not be permitted until the company repays the government loans. The government added a stipulation that Fiat would have to build fuel-efficient vehicles in the U.S., the first model due sometime in 2011. Meanwhile, the government was glad to lend trillions of dollars to bailout financial institutions, politicians demanded that President Bush, and then President Obama, allow the embattled automakers go into unassisted bankruptcy. During a brief statement, President Bush said in normal times he would have not been in favor of preventing a bankruptcy of the automakers. But with the current state of the economy and credit markets left him no choice but to act. Obama added that today’s loan was “a necessary step to help avoid a collapse in our auto industry that would have devastating consequences for our economy and our workers.” December 2009, President George W. Bush announced a $13.4 billion rescue loan for American automobile makers, including Chrysler. The money will come from the $700 billion fund set aside to bailout Wall Street firms and banks. With these loans, the US Treasury will have committed virtually all of the $350 billion of the fund that it can hand out without prior authorization from Congress. When Congress releases the other $350 billion, the automakers will be able to borrow more, an additional $4 billion. GM will receive $9.4 billion from the first allocation of the funds and Chrysler will receive $4 billion. The agreement for each loan is that they will be paid back in three years, but if the firms do not show themselves to be viable by the 31st of March, the money will have to be repaid in 30 days. Executives must agree to limits on their compensation and eliminate perks such as corporate jets. The company also must issue warrants, which convert into non-voting stock, to the government. The government requires the automaker to reduce their debt load by two-thirds via a debt for equity exchange with current bondholder and get the United Auto Workers union to agree to wage and work rules competitive with non-union plants by the end of next year. Chrysler was able to repay the government loan given to them to bail them out of trouble. Chrysler auto company’s repayment of a final $5.1 billion in bailout funds was a “significant milestone” and an indication that the American automobile industry is recovering. Chrysler had repaid, six years ahead of time, the bailout loans and $865 million in interest and fees to the US Treasury. The company also repaid another $1.7 billion in principle, interest, and fees to the government owned Export Development Canada. Chrysler retreated to a loss for the second quarter, but only due to the expense of shedding its debt with the government. The company, just two years out of bankruptcy protection, maintained that there are healthy signs for the company despite the loss. The company reported a $370 million net loss from April through June, but said it is because of a $551 million one-time accounting charge for refinancing bailout debts to the US and Canada. Without the expense, the company would have earned $181 million. Revenue for the quarter jumped 30 percent to $13.7 billion as U.S sales climbed more than 20 percent. The company expects to earn $200 million to $500 million this year, excluding the debt repayment expenses. The company predicted revenue of $55 billion. Chrysler’s revenue gains came largely because of increased sales at higher prices. The company’s average vehicle selling price rose nearly 5 percent in the quarter to $29,964, compared to a year prior. Compared to the $197 million loss from the same time period last year, Chrysler reported a net income of $116 million for the first quarter. Its modified operating profit grew $334 million from 2010 to $477 million, and net revenue were up to $13.1 billion – a 35 percent gain from the first quarter of 2010. The company’s level of available cash on hand grew by $2.5 billion from the end of 2010 to $9.9 billion at the end of March 2011. Fiat paid $560 million for the U.S government’s remaining 98,000 shares of Chrysler, and it also brought a small stake held by Canada. Fiat now owns 53.5 percent of Chrysler. That will rise to 58.5 percent when Chrysler begins making a 40 mpg compact car in the U.S later this year. Still, that is a quick turnaround for a company that came extremely close to closing its doors forever. The turnaround starts with the revamping of the company’s powertrain lineup with technology that will contribute to an overall fuel-efficiency improvement of more than 25 percent during the 2010-2014 period. As a result the company’s five-year business plan has an uncompromising powertrain offensive, including a progressive vehicle electrification strategy. The company continues to plan with the Department of Energy to build a small test fleet of plug-in hybrids Ram 1500 pickup trucks and minivans. The company has a significant amount of resources allocated toward vehicle electrification and affirms that a commitment by continuing to add new talent in this leading edge technology arena. The turnaround continues with a new lineup of cars and trucks that is drawing consumers into the showrooms. One success story is Chrysler’s redesigned Jeep Grand Cherokee, which has gotten an incredible amount of support from media reviews. The new Grand Cherokee had sales of 23,000 units in the third quarter – about double the pace of its predecessor vehicle. Chrysler’s other big sellers included the Ram pickup (53,000 units were sold), Jeep Liberty and Jeep Patriot. The company updated 16 of their vehicles in an attempt to win back consumers who have written off its products. If Chrysler stages a full recovery in the next few years, it would mark an incredible turnaround from near collapse in 2008. Despite the progress, this company still has some big challenges ahead. Its market share is 9.5 percent of all U.S sales last October, is almost half of General Motors, and is smaller than Ford’s. It will take time for the company to prove its strategy of blending U.S design with those of Italian partner Fiat. The debt owed to a trust fund set up to pay health care benefits to retired worker is another burden on the company. (The trust fund became a major owner of Chrysler’s equity when the company restructured.) Another key test for Chrysler will be to make an initial public offering of stock to raise money in the U.S capital markets. With the last collapse stockholders may be reluctant to purchase Chrysler stock. Another problem that might occur is finding consumers with good credit to finance their product. With the economy still in bad shape not to many financial institutions are willing to extend credit to consumers. And the new engines Chrysler is going to put into some of their vehicles will the new engines stand up to consumers’ expectations? Only time will tell. In conclusion, beginning in the late 2008, a global recession hit the economy of the United States. With a combination of several years of declining automobile sales and limited credit available, it led to a much greater crisis in the U.S auto industry in 2008 and 2009. After the dramatic sales decline, Chrysler sought out emergency financing from the U.S government in order to stay in business. In 2009, the situation had gotten harder and the company was forced with filing bankruptcy and liquidation of company assets. With that being said, I have discussed the changes that have been implemented to the company, I have identified new changes that still need to be implemented in order for the company to stay competitive and I have assess the effectiveness of the changes and all the potential benefits of the new changes. References
Bensinger, K. & Puzzanghera, J., (May, 2009). Chrysler spreads the pain with move to drop dealers. Los Angeles Times. Retrieved on November 19, 2011, from http://articles.latimes.com/keyword/chrysler-corp Kellogg, A.P., & Maher, K., (2009). UAW to get 55% stake in Chrysler for concessions. Printed by The Wall Street Journal, p. A8B. Retrieved on November 19, 2011, from http://online.wsj.com/article/SB124087751929461535.html
Roe, M.J., & Skeel, D. A., (2010). Assessing the Chrysler bankruptcy. Michigan Law Review, Vol. 108, pp. 727. Retrieved on November 19, 2011, from www.googlescholar.com
Szczesny, J.R., (2009). So who owns Chrysler now? Retrieved on November 19, 2011, from http://www.time.com/time/business/article/0,8599,1873531,00.html