Chrysler Headed for the Scrapheap

Five reasons why this former top automaker’s days are numbered

After the U.S. government bailed out Chrysler and GM in early 2009, many were afraid it was the end of Detroit as the auto capital of the world. But a year and a half later, GM is making big strides — a leaner fleet with fewer brands and a lot of hype behind its innovative Volt electric car is connecting with consumers. GM made a first-quarter profit of $865 million and is expected to post a second-quarter profit Thursday, which is boosting prospects of an IPO in the coming months

On the other hand, Chrysler has failed to stop the bleeding. In its latest earnings report, Chrysler posted a deep quarterly loss of $127 million and continues to suffer from a large debt load. To top it off, the company is way behind the rest of the auto industry when it comes to cost-conscious, fuel efficient automobiles that connect with the current market.

So while it appears the worst for GM has passed, it’s a serious question as to whether Chrysler will ever return to solid ground. In fact, there are five real reasons why Chrysler is still doomed for the scrapheap.

#1 – You Can’t Lose Money Forever. Chrysler lost less money than a quarter ago, a $172 million second-quarter loss versus $197 million the quarter before. Operating profits came to $183 million in the second quarter. Revenue rose 8.2% to $10.48 billion, but again, without profits it’s not much consolation after a steady stream of red ink.

#2 – Debt Cripples Chrysler. Part of the reason the Detroit automaker is still struggling is because it continues to carry a large debt load. The U.S.-taxpayer bailout money has not changed the fact that Chrysler had made a mess of its financing and is still trying to dig out from under payments to old debts before it can worry about financing its future. In an industry where products are routinely reinvented every model year, that may be a critical mistake.

#3 – Fading Brand Power. Out of the entire Chrysler family of cars and trucks, the only real brands that stand out are Jeep and Ram pick-up trucks. But amid all the drama of the bailout and the sharp drop in auto sales, Chrysler has not updated its line of trucks. This is a huge mistake. If there is one thing that will bring back an auto buyer, it is the love of a brand — but Chrysler is doing a poor job of maintaining the few nameplates it has.

#4 – Fiat’s Failure Record. Chrysler is now owned by Fiat of Italy. This is likely to give it an even more difficult time in building a premium brand. Fiat tried to do this overnight with it’s acquisition of Alfa-Romeo, but it turned out to be a big flop. It takes about 30 years to build a premium automobile brand in the U.S., and on the brand front Fiat doesn’t have the clout.

#5 – Fuel Efficiency Bottleneck. The U.S. government’s mandated 35.5 mile per gallon standard only hastens the scrapheap destination for a company like Chrysler. Even though Chrysler is now owned by Fiat, Chrysler has no significant track record in building quality, smaller cars. Will the Obama administration allow Chrysler to get around its mpg mandates in the future? It seems unlikely. And with no ambitious line of new vehicles in the wings, it will be difficult for Chrysler to get the ball rolling to meet that mark even if it wants to.

It’s worth noting that General Motors is still Government Motors to many and is a distant number-two to Ford Motor Co. (NYSE: F). GM may be barely profitable and may be able to hold an IPO in 2010, but that is by no means a sign that the company is stable or even a good investment.

But if that’s the case with GM as it plays second fiddle to Ford, just imagine what that means for Chrysler that is playing third fiddle to GM.

The bottom line is that the future starts with a profitable business that isn’t bleeding cash, and the hopes of an exciting new product line to revitalize existing brands and expand Chrysler’s reach and help spur future growth. As of right now, the company has neither of those things.

And if it doesn’t get them soon, it could be the end of the line for Chrysler.

http://www.investorplace.com/

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