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The One U.S. Automaker Still Stuck in Neutral

Rick Newman
The Exchange

When the latest JD Power quality awards came out, General Motors trumpeted the results to anybody who would listen. All four of GM’s divisions — Chevrolet, Buick, Cadillac and GMC — came in above the industry average, which was vindication for an automaker that declared bankruptcy in 2009, required a huge government bailout to survive and spent most of the past decade explaining away subpar automobiles.

Across town, Chrysler had nothing to say when the Power awards came out, for good reason. Of Chrysler Group’s five divisions, four — Fiat, Ram, Dodge and Jeep — came in below average, with Fiat second from last and Ram fifth from last. The Chrysler brand came in slightly above average, yet that’s for a division that has dwindled to three basic models and hasn’t launched a genuinely new product in years.

This newly redesigned Jeep Grand Cherokee has wowed critics. Chrysler needs more models like it.

Click to see photos of other models discussed in this article

The domestic auto industry has basically recovered from the smashup that occurred in 2009. GM (GM) is smaller and more focused, while Ford (F) has pulled off an impressive turnaround without ever declaring bankruptcy or asking for a bailout. Both companies are nicely profitable, with their stock prices up sharply during the past 12 months. Vehicles such as the Ford Escape and Chevy Traverse now set benchmarks for foreign competitors, instead of the other way around.

Left out of Detroit Renaissance

The Detroit renaissance doesn’t yet include the No. 3 domestic automaker, however. Chrysler was such a jalopy of a company when the wheels came off in 2009 that there’s still debris on the road. The company had been starved of cash, which left the new-product pipeline thin and has forced Chrysler to delay or cancel upgrades on several key models. A grueling recession in Europe has made matters worse by depressing the profitability of Chrysler’s new parent company, Italy’s Fiat. With a relatively old fleet of cars, Chrysler earns the coveted “recommended” ranking from Consumer Reports on just 20% of its vehicles. GM’s recommended rate is 44%; upstart Kia tops the list, at 85%.

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Fiat also remains tangled in a lawsuit with an auto-workers’ trust that still owns 41.5% of Chrysler. Fiat wants to buy out the trust, but the two sides can’t agree on the value of Chrysler shares, which leaves Chrysler with contentious owners and a potential cash-flow problem. Shedding billions in debt has helped Chrysler become profitable, yet the slow launch of new vehicles, amid other problems, has depressed earnings. “We were hoping to be able to do somewhat better than this,” Chrysler CEO Sergio Marchionne said when Chrysler announced a disappointing $166 million first-quarter profit on April 29. “We need to execute flawlessly between now and the end of this year.”

Fiat’s role in the 2009 bailout saved Chrysler, because Obama administration officials felt that, unlike GM, Chrysler was small enough to let fail without wrecking the entire U.S. automotive infrastructure. For Fiat, buying into Chrysler was a way to regain a presence in the U.S. market and attain the global scale that’s really needed for big automakers to succeed these days. Fiat’s initial stake was 20%, with the deal structured in a way that gave Fiat the option to purchase shares owned by the U.S. and Canadian governments and the auto-workers’ trust. Marchionne, also CEO of Fiat, has been clear about his goal to fully merge the two companies, with Fiat now owning 58.5% of Chrysler.

Yet Chrysler, the jilted bride of the auto industry, still suffers from on-and-off dalliances with other firms. Its 9-year marriage to Daimler-Benz ended in 2007, when Daimler sold the division to Cerberus Capital Management, a private-equity firm that basically bled Chrysler of cash as it tried to manage the disastrous auto-industry downturn. Cerberus exited Chrysler as part of the 2009 bailout, with Fiat stepping in. In a way, Chrysler has returned the favor to Fiat, since U.S. auto sales have rebounded while car sales in Europe remain depressed. That has allowed Chrysler to generate cash that’s helping the parent company weather the deep downturn across the pond.

Hints of optimism

Chrysler has managed to introduce a few new models since its bankruptcy reorganization, and they've generally been winners that have generated optimism about Chrysler’s future. The Jeep Grand Cherokee SUV offers the off-road capability and upscale feel of a Land Rover, at a much lower starting price of about $29,000. Many critics rank the new Ram pickup above those from Ford and Chevy. The Fiat 500, imported from Europe, gives the company one of the few bona fide competitors to the popular Mini. “I continue to be impressed every time I see a substantial upgrade,” says Karl Brauer of car-research site KBB.com. “Fiat provided resources Chrysler has long needed to fill the gap.”

The new Jeep Cherokee, coming later this year, will be another pivotal vehicle that tests whether buyers embrace the edgy designs coming out of Chrysler’s studios. After that, a new 200 sedan (formerly known as the blasé Sebring) will take on mid-sized favorites such as the Honda Accord, Toyota Camry and Ford Fusion in a segment where Chrysler has been a perennial also-ran. In 2014, Alfa Romeo (owned by Fiat) will return to U.S. showrooms for the first time since the 1980s, tempting Americans with seductive Italian styling.

Chrysler has been rebuilding market share along with its reputation. The company’s peak years were in the late 1990s, when popular minivans and SUVs drove its U.S. share above 15%. Chrysler’s share fell below 9% the year it declared bankruptcy, and it’s now back above 11%.

Its standing in the brutally competitive U.S. auto market remains fragile, though. When government regulators asked Chrysler to recall 2.7 million Jeep vehicles in June, because of possible fuel-system problems, Chrysler refused and seemed ready for an unusually brash legal showdown with the government. As bad publicity mounted, however, Chrysler reversed course, agreeing to a smaller, less expensive recall. "Chrysler doesn’t have the quality reputation or brand strength that Toyota had to bounce back from its recalls," says Michelle Krebs of car-research site Edmunds.com. "The question is whether Chrysler can withstand bad publicity."

With five brands, Chrysler may suffer from bloat as well. GM had eight brands before declaring bankruptcy, and has now shrunk to four, which may still be too many. Toyota (TM) has three brands, including its Lexus luxury division, which is successful, and its entry-level Scion brand, which is not. Ford, Honda (HCM), and Nissan (NSANY) each have just two brands, and all three automakers are bigger than Chrysler. Since many vehicles from the Dodge and Chrysler divisions are structurally similar — such as the Dodge Charger and Chrysler 300 — it’s possible one of those divisions could end up folded into the other. Dodge may be the most endangered, since the name of the Chrysler division is also the name of the overall U.S. automaker.

Marchionne has promised much bigger profits for Chrysler in 2013 and 2014, and a hoped-for public offering of some of the shares owned by the automakers’ trust could generate billions in cash if the lawsuit over the value of those shares is resolved this year. Yet Marchionne acknowledges the troubles Chrysler faces. “Until we catch up with the deficiency that we inherited, I think it’s going to be painful,” he said during the latest earnings call. “This is not going to be a walk in the park.” For Chrysler, that seems to be the road usually traveled.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.