Another Chrysler Crisis

Speaking grimly at a crowded Detroit press conference, Chrysler Chairman Lynn Townsend repeated a somber theme that he has been sounding ever more urgently since the collapse of U.S. auto sales last fall. "We need leadership out of Washington, and in my opinion we're not getting it," Townsend said, calling for deep tax cuts and much more ease in monetary policy. He added: "We're in a very, very serious recession. The spiral is still going down."

There was stark evidence of that in Chrysler's dismal year-end results, out last week. Having earned a very respectable $255 million in 1973, Chrysler reported a shocking $52 million loss in 1974--by far the biggest in its 50-year history. The worst damage hit in the fourth quarter, when the company lost $73.5 million. With more bad news expected this year, the board voted to omit the 350 quarterly dividend--the first time it has had to do so since 1938.

Chrysler is not the only auto company struggling with punctured profits. Earnings at General Motors fell 60% last year, to $950 million, and GM's board voted to reduce the quarterly dividend from 850 to 600. Ford reported profits down 60% in 1974, to $361 million. Thanks to some tax credits, Ford can show a $22 million profit in the fourth quarter; but on a pretax basis the company lost $46 million. Many Wall Street analysts expect the company to report more big losses for the first few months of this year. American Motors managed to clear $13 million in 1974, but that was down 84% from 1973, and AMC spokesmen warn that the next few months will be "very unfavorable."

Still, none of the U.S. automakers are more vulnerable to zigs and zags in the market than Chrysler. With sales of nearly $11 billion, it is one of the very biggest U.S. manufacturers (it was No. 4 on the FORTUNE 500 list for 1973). Yet it has had a feast-or-famine existence ever since World War II, and the fundamental reason is its small size compared with GM and Ford.

Chrysler has 15% to 17% of the U.S. car market; because it has only six auto-assembly plants in the U.S., it cannot tune its production as closely to actual sales as GM (which has 23 assembly plants) and Ford (15 plants). Chrysler's limited production capacity puts a premium on inspired market forecasting; the company must build relatively larger inventories than its rivals early in each new-model year so that dealers will have enough cars to sell. Early in 1974, Chrysler, like the other automakers, geared its production plans to the then widespread forecasts of a year-end economic upturn. But the economy slammed down, and Chrysler was caught with a massive, 135-day backlog of unsold cars by year's end.

Because that idle inventory cost Chrysler's dealers $2 million a week to finance, Townsend decided to reduce it fast--first by virtually stopping production, then by initiating the cash rebates on new-car sales.* Chrysler lost so much money in the last three months of 1974 because sales and production were running far under the company's breakeven level of some 275,000 cars per quarter (current quarterly production rate: about 140,000 cars). But the company's backlog of unsold cars is now gradually approaching a normal level of 80 days or so, which means that Chrysler could be able to increase production modestly this spring--if sales pick up.

The company has some other fundamental problems with market strategy that would not be cured by a quick sales upturn. Officials at other auto firms fault Chrysler for having tried to match GM in sheer model proliferation in the 1960s, but then being slow to meet the growing small-car market. With the Valiant and the popular Dodge Dart, Chrysler today has the largest share (32%) of compact-car sales, but its biggest product investment last year was in a costly redesign of its full-sized cars. Its one subcompact, the Dodge Colt, is built by Japan's Mitsubishi, and has not caught on especially well with U.S. buyers. Chrysler does plan to introduce three new compacts this fall, but the one new subcompact on its drawing boards will be built by Chrysler's French subsidiary and not imported into the U.S.

Financial Cushion. Townsend, a veteran accountant, seems in no danger of being replaced, because it is in bad times that the Chrysler board most appreciates his specialty. As one former Chrysler executive puts it, Townsend is "a cold-blooded cost cutter." The company recently renegotiated a $455 million, three-year revolving credit agreement with a syndicate of 80 banks led by New York's Manufacturers Hanover Trust Co. The banks gave Townsend his financial cushion mainly because he convinced them that he could and would slash Chrysler's overhead to the point where the company can make money even in a poor 6 million-car-sales year.

To meet that target, he may have to close two or three of Chrysler's six U.S. plants and cut the company's payroll by 25% to 30%. This means that many of the laid-off Chrysler workers--presently 20,000 of its 40,000 salaried employees and 60,000 of its 115,000 production workers--will never be coming back.

* All the automakers are considering ways to keep sales up after the scheduled end of the rebates on Feb. 28. GM will reduce the list prices on some of its small cars by from $104 to $313 by making such items as radial tires and deluxe steering wheels optional rather than standard equipment.

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