Chrysler in Trouble free essay sample

The automobile market is one of the most lucrative markets in the world. They have focused on international expansion since the late 1900s. This market has very successful international companies such as Mercedes-Benz, Lexis, Hyundai, Chrysler, Camry, Fiat, etc. All of these firms have held a position in the automobile industry. Even in economic hardships when demand for automobiles was decreased, the market did not faze them. Two firms prominent in this industry are Chrysler and Fiat which have both held successful positions in the late 1900s. Due to decreased market demand and lackluster products both firms have drastically diminished their market appeal. This has led to decreased profits which have led to European based company Fiat leaving the United States in the 1980s. American based firm Chrysler had to deal with sales drops and lack of demand. An alliance between both firms could potentially increase their customer base and future profits. We will write a custom essay sample on Chrysler in Trouble or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page This could be a very lucrative business venture for both firms if successful. Chrysler an American corporation has held a strong position in the automobile industry in the earlier 1900s. Fiat an Italian corporation has one of the strongest corporations in Italy. Among the three most substantial United States automobile makers, Chrysler is the smallest one. This means that Chrysler’s stand in the automobile market needs much improvement. With the vast growing nature of the United States and international automakers, Chrysler has to improve their performance and appeal to even compete at their level. Chrysler filed for bankruptcy protection under section 364 of chapter 11 of the US bankruptcy code. Chrysler announced that it would establish a global strategic alliance with Fiat. CEO of Fiat Sergio Marchionne will take over as presidency of Chrysler as well. People want to know how the new management will not only affect the corporation but also the stakeholders that have invested in both companies. Introduction The Chrysler Corporation was founded by Walter Chrysler in 1924 out of what remained of the Maxwell Motor Company. Chrysler greatly expanded in 1928 when it acquired the Dodge Brothers Company and began selling vehicles under those brands; that same year it also established the Plymouth and DeSoto automobile brands. In the 1970s a number of factors including the 1973 oil crisis impacted Chryslers sales, and by the late 1970s, Chrysler was on the verge of bankruptcy. Lee Iacocca was brought in as CEO and is credited with returning the company to profitability in the 1980s. In 1987, Chrysler acquired American Motors Corporation, which brought the profitable Jeep brand under the Chrysler umbrella. In 1998 Chrysler merged with German automaker Daimler-Benz AG to form DaimlerChrysler; the merger proved contentious with investors and Chrysler was sold to Cerberus Capital Management and renamed Chrysler LLC in 2007. Like the other Big Three automobile manufacturers, Chrysler was hit hard by the automotive industry crisis of 2008. Chrysler received billions of dollars in loans from the United States government in late 2008 and early 2009 to prevent it from shutting down. Chrysler filed for Chapter 11 bankruptcy reorganization on April 30, 2009. Chrysler should create a new company with Fiat in which Fiat would initially have a 20% stake, which would later be increased up to 35%. The Voluntary Employees Benefit Association (VEBA) would have a 55% stake in it, the US Treasury department an 8% stake. The Canadian and Ontario governments would have a combined 2% stake, with the Canadian government holding 1. 33%, and the Ontario government holding the remaining 0. 67% stake. Chapter One Situation Analysis 1. 1 Industry Overview The U. S. motor vehicle manufacturing industry employs 880,000 workers, or approximately 6. 6% of the U. S. manufacturing workforce, including those who work in the large motor vehicle parts manufacturing sector, as well as those who assemble motor vehicles. Since the beginning of the decade, the nations automotive manufacturing sector has eliminated more than 435,000 automotive manufacturing jobs (or an amount equal to about 3. 3% of all manufacturing jobs in 2008). The employment level first dipped below one million in 2007 and fell to 880,000 workers last year. With the restructuring and bankruptcy of Chrysler and General Motors, and the ongoing recession in the auto sector, employment in the nations automotive manufacturing industry will most likely shrink in 2009 and 2010 as additional assembly, powertrain, and auto parts plants close. Economically the automobile industry is an oligopoly. This is why the Big 3 remains the Big 3. The nature of building cars makes it difficult for small players to enter the market. The cost of entry is high. As an oligopoly, the Big 3 also tend to pay more attention to one another than to customers or competitors. If GM adds airbags, Chrysler and Ford add airbags. Being the smallest, Chrysler tends to follow rather than lead. Ideas generated outside the Big 3 tend to be ignored. When times are good, automakers can sell anything they can produce. That includes bad cars. But during recessions, automakers lose billions of dollars just maintaining operations. This is basically due to the high fixed costs. And those costs are getting higher as tight union contracts make labor a â€Å"fixed† cost. The industry consists of six segments: three mature markets (North America, Japan and Western Europe) and three emerging markets (Asia-Pacific, Eastern Europe and Latin America). The leading competitors in the industry are the Big Three (GM, Chrysler and Ford) and the Japanese Manufacturers (Toyota, Honda, and Nissan). To gain market shares companies are concentrating towards continuous improvement, innovation and cost control. 1. 2 Strategic Group Mapping Fig. 1: Strategic Group Mapping 1. 3 Key Success Factors The automotive industry is one of the largest business sectors in America, employing thousands and creating products that affect the way people spend money in a major way. Though there are many ways for an automotive company to achieve success, every strong company in the industry must possess some key critical success factors to ensure long-term profitability. 1. 3. 1 Positive Image One critical factor that often defines an automotive company is its public image. Because buyers entrust their safety, along with a sizable portion of their income, to a car company, the perception of the company figures greatly in the buying decision. Factors influencing an automotive companys image include advertising, word of mouth and expert reviews and opinions. 1. 3. 2 Distribution Network A more practical critical success factor for any automotive company is a strong network for distribution. Because cars and trucks are not sold directly to customers, auto manufacturers rely on franchised dealerships to provide local showrooms. These dealers must be knowledgeable and reputable to sell cars, which is essential for the automaker. Like auto corporations, dealers are reliant on a positive image that may be influenced by, or influence in turn, the image of the automaker. 1. 3. 3 Cash Flow A healthy cash flow is another practical critical success factor. When an automaker provides incentives or lowers prices, it almost always sells more cars, but the profit margin may not be a healthy one. At the same time, an automaker needs to keep costs under control, including line items that are prone to fluctuation such as the price of raw materials and outsourced components. Achieving a sustainable cash flow is central to the frequent discussions between automakers and employee unions. 1. 3. 4 Compliance Automakers must also ensure that the vehicles they sell are in compliance with various federal and local regulations. These include emissions standards, fuel efficiency and safety standards. While it may cost less to produce vehicles that perform marginally in these areas, the cost of a safety recall or government-mandated repairs are often much higher and difficult to anticipate. . 3. 5 Flexibility An elusive critical success factor for the automotive industry is the ability to be flexible. American car buyers may change their buying habits quickly in response to factors like the state of the economy, the price of fuel and new automotive technologies. It is essential that automakers remain attentive to these trends and keep in place a system that can adapt quickly to create new products that meet the current and near-future needs of customers. 1. Indust ry Wide Strategic Issues 1. 4. 1 Globalization Hardly a new phenomenon, globalization in the automotive industry accelerated in the 1980s when Japanese automakers made significant headway in penetrating the U. S. market. Today, however, the pace of globalization has intensified and global sourcing has become a competitive imperative. At the same time, automotive companies see great potential in developing regions such as China and India as their consumer markets begin to emerge. Squeezed by intense competition — increasingly from new competitors in low-cost countries — as well as industry overcapacity, high labor costs in mature markets and customer resistance to price increases, automotive companies must establish sustainable and flexible cost structures, driving them to relocate global sourcing to â€Å"low-cost† regions, Asia, in particular. In addition, as they establish optimal global manufacturing capabilities, automotive companies also must refine their product development strategies to respond to the demands of these emerging markets. . 4. 2 Innovation with Limited Financial Resources Automotive companies face another dilemma: how to maintain innovation when financing is tight. The need to develop new technologies and innovative products able to lure consumers and provide a competitive edge has never been more important for maintaining profitability over the long term. Car buyers are looking for new features such as navigation to ols, entertainment options and safety improvements, but resist paying premiums for these advancements. Yet, given the cost and pricing pressures, automotive companies are finding it difficult to free internal financial resources for investment in research and development. At the same time, securing external funding also is more challenging as the industry has become less attractive for investors compared to other sectors, particularly in the short term. With financing tighter, automotive companies must pursue creative product solutions, leverage their internal strengths and, more often, make acquisitions and cement partnerships with companies that can help enhance and expand product offerings and spread investments over more units. . 4. 3 Leadership in the Automotive Industry Automotive companies also must be looking continually for new opportunities in the market. Every four to five years, you need to move on, either by making acquisitions or finding new market niches, otherwise your profitability drops. 1. 4. 4 Flexible Production and Cost Structure In response to the forces of glob alization, competition and pricing constraints, a key priority for nearly half of the automotive companies is establishing and maintaining a more variable cost structure. Another strategic priority, is maintaining a flexible production system to position the company to respond quickly to shifts in global demand. Automotive leaders must be able to manage cash and make costs more variable in order to adjust quickly to volatility in demand and respond to new opportunities. They do this through outsourcing, partnerships, technology innovation and new production methods. When 350 automotive executives were globally surveyed to get their views on the primary challenges facing the industry, the results were as follows: Fig. 2: Automotive Industry Challenges . 5 Competitive Situation Analysis 1. 5. 1 Porter Five-Force Model * Bargaining Power of Buyers is considered to be high due to the fact that there are competitive brands * Competitor Rivalry is high as the consumer considers cars as a commodity and hence there is surplus * Bargaining Power of Suppliers is high as they have some kind of control over the industry * Threat of New Entrants is low due to the huge investment required in capital, technologic, marketing * Threat of Substitutes is low as owning a car has always been a necessity . 6 Competitor Analysis Competitor| Strategy Used| Reason| Japanese Companies (Honda, Toyota) | Best Cost| Japanese automakers tried so hard to always stick to competitive prices with high quality | German Companies (Mercedes, BMW) | Focus Differentiation| German automakers have always been known by focusing on the best quality for the engine despite the cost | American Companies (Chrysler, Chevrolet, Ford, GM) | Broad Differentiation| Focused on differentiation themselves for the majority of the American consumer | . 7 Firm – Self Analysis 1. 7. 1 SWOT Strengths * Third largest automobile manufacturer in the US ever since 1928; domination of the minivan market * In 2008, there was 8% growth in sales outside the US * Chrysler Mexican, Canadian and other international operations were not part of the bankruptcy filing * Chrysler started a global corporate advertising campaign to restore confidence in the company Weaknesses * Declining sales made it difficult for Chrysler to continue * Chrysler idn’t benefit from the merger with Daimler and kept focusing on avoiding clashes * Poor Management resulted in drop in the market share during early 2000s * In the Fiat – Chrysler alliance, the company is to be owned by multiple owners Opportunities * Establishing a global strategic alliance with Fiat * The American government tried to position the bankruptcy as NOT a sign of weakness * Fiat would make available its entire product portfolio, along with its powertrain technology Threats * The fierce competition with the Japanese high performing, lower price cars * U. S economy is struggling and consumers aren’t spending as much money as they used 1. 7. 2 Firm Strategic Issues and Problems Poor Business Strategy Analysts attributed Chrysler’s financial problems to its poor business management. In the early 1970s, when fuel prices were going up and consumers in the United States started preferring fuel-efficient vehicles, Japanese companies like Toyota and Honda began coming out with compact and fuel-efficient cars to cater to these needs. However, Chrysler’s focus remained more on SUVs and trucks, leaving the Asian carmakers to capitalize on this change in consumer preferences. Other analysts criticized Chrysler’s decision to merge with Daimler. According to Iacocca, â€Å"Eaton50 panicked. We were making $1 billion a quarter and had $12 billion in cash, and while he said it was a merger of equals, he sold Chrysler to Daimler-Benz, when we should have bought them. †51 Similar analysts also criticized Daimler’s decision to run Chrysler as a stand-alone division. They opined that Daimler wanted to keep Chrysler separate from its luxury Mercedes-Benz marquee. By doing this, it did not take advantage of the benefits of developing vehicles together. Lack of Innovation According to analysts, Chrysler’s sluggishness in launching innovative models when its Japanese competitors kept coming out with new designs resulted in the company’s declining sales. Japanese companies continued to offer fuel-efficient vehicles, while Chrysler continued to produce fuel-guzzling trucks. Chrysler, which had been the innovator of automatic transmission, power steering, and brakes, just did not live up to the consumer’s expectations. Although it came up with some innovative products in the early 1980s, quality-related issues dented the brand image of its cars. After the merger with Daimler, Chrysler introduced some new models. However, those models did not get much consumer attention. Even after Cerberus bought a majority stake in Chrysler, the company could not invest enough money in research and development because of the declining sales of Chrysler’s vehicles. The U. S. Auto Task Force also commented in March 2009 that â€Å"Chrysler’s products have also historically underperformed in terms of quality, which remains a significant challenge. Unlike GM, which has had a number of successful recent product introductions and has developed a new global product development process that has promise, there are few tangible signs that Chrysler can reverse its share erosion. The Global Financial Crisis In 2008, the tight credit situation, volatility in the stock markets, problems in the U. S. housing market, increases in unemployment, and declines in incomes started affecting consumer spending. As a result, the U. S. car market was also badly affected. Those who wanted to purchase vehicles found it difficult to get loans or found the available financing too expensive. In 2008, the U. S. auto industry experienced its worst year since 1992. The total sales of cars and light trucks were 13. million, a decline of 18% compared to 2007. The United States was the largest market for Chrysler. As of November 2008, 73 percent of its sales were from the U. S. , 61 percent of its vehicles were produced in the country, 78 percent of its materials were purchased in the U. S. and 62 percent of its dealers were based in the U. S. As Chrysler’s market was restricted to the United States alone, the global financial crisis which originated in the country affected it s sales badly, leaving the company struggling to carry on its business.