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Driving It Home

Chrysler may be a 2011 success story Add to ...

Last week Morgan Stanley analyst Stuart Pearson told investors, "Chrysler may prove to be one of 2011's most surprising success stories." Yesterday, the Chrysler Group posted an operating profit of $239-million in the third quarter (all figures in U.S. dollars).


And Chrysler raised its outlook for the balance of the year. The company expects stronger sales and even better operating results. Not bad when you think Chrysler emerged from bankruptcy 17 months ago.

This week we're learning a lot about where Chrysler is going under CEO Sergio Marchionne, one of Canada's most important automotive exports. We're also learning quite a bit about what the Auburn Hills, Mich., car company has been doing these past few months.

Chrysler, in fact, has stayed largely mum for a long time. Company officials say they're going to let the new products do the talking. This is in sharp contrast to General Motors, which has been relentlessly trumpeting its impending initial public offering (IPO).

Chrysler is a far different case than GM, however. The taxpayer's role has been far smaller and the exposure of the public purse far less.

Here's why. Chrysler got a government bailout, but not the same one as GM. Governments in Canada and the U.S. took equity, or stock, in GM (more than 60 per cent), while in Chrysler they took less than 10 per cent equity.

Chrysler's aid came in the form of more than $8-billion in loans that carry crushing interest rates of more than 10 per cent. Fiat has been promised an equity stake of up to 30 per cent for taking management control and Chrysler unions have also taken a large ownership stake.

The bailout has left Chrysler with massive interest costs. They are the reason the company on a net basis lost $453-million on revenues of $31-billion during the first three quarters of the year. If Chrysler's bailout had been interest-free, if it had been more like GM's, the company would have made about $450-million in net profit this year.

During a recent visit to Auburn Hills, senior Chrysler officials told me they are anxious to renegotiate some of the costly debt because it's preventing Chrysler from showing decent net income. Ultimately, the company will come to market with its own IPO, but not until it's been profitable on an operating basis for a year or so. At least that's what the sharp auto analysts think.

The profits will come (or not come) from the 16 all-new or redesigned models Chrysler will launch in the next few months. Among the more interesting offerings will be an all-new Dodge Durango and Charger. The Durango SUV shares its platform with the Jeep Grand Cherokee and traces its roots to a new Mercedes-Benz M-Class. The Charger looks like a real, well-considered performance sedan, not the thrown together car it replaces.

If Chrysler manages to steer the course of a full turnaround, it will be a far more impressive business story than a GM return to profitability and investor-grade status. Chrysler will have done it paying its way using loans with exorbitant interest costs.

Finally, let's not forget that in essence the shareholders really scorched by the Chrysler bankruptcy were Daimler AG, which bungled its takeover in the first place, and Cerberus, the so-called turnaround artists who came very close to finishing the disastrous job Daimler started.

It's hard to feel sorry for either one.

The auto maker is presenting a revamped lineup, aiming to impress critics and buyers alike


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