The biggest news in the automotive industry this week is that Chrysler has finally been sold to a private investment firm called Cerberus Capital Management for $7.5Billion.  Compared to all the other bids that came in for the company the private investment option probably represents the best opportunity for Chrysler to finally turn around their business.

Chrysler was bought by Daimler in 1998 for $36Billion, yes you read that correctly!, this represents a $30Billion loss on the investment in less than ten years.  So what has gone on here, how can Daimler Group shareholders have allowed this to happen?.  Well one of the reasons for Daimler acquiring Chrysler was to get a strong foothold in the U.S market.  Daimler thought that with some strategic platform sharing they could improve the volume car production side of their business.  Their Mercedes Benz brand has always been perceived as a premium brand.  What they thought they could do was acquire Chrysler in order to go head to head with Ford and GM in the high volume car production market. Over the past ten years Chrysler has been taking previous generation Mercedes car platforms and using them for their product range.  For example the Chrysler Crossfire is based on the previous generation Mercedes SLK and the successful Chrysler 300C Saloon is based on the previous generation Mercedes E-Class saloon.  In fact the Crossfire was the first car to be jointly developed by Mercedes and Chrysler.  So why the history lesson on platform sharing I hear you ask?, well it is an important trend in automotive manufacturing today and serves as an excellent way to reduce costs and improve profitability per vehicle.  So the question now is where will this leave Chrysler?, will they have to reduce their product portfolio to offset the additional costs of developing their own platforms once again?

Well the answer seems to be that they want to find new partners around the world, less than three days after the sale was announced, Chrysler were already talking about finding global partners to help grow their business.  Chrysler itself is an extremely strong brand which also incorporates another iconic brand, Jeep.  Cerberus felt that there was obviously something here that could be turned around and at the end of the day Daimler more or less paid Cerberus to take Chrysler off their hands.  However interestingly, as part of the deal, Daimler will retain a 20% stake in Chrysler. This was probably negotiated to ensure that Chrysler could retain the supply of key Daimler components, eg engines, switchgear and other underbody components. This is no different to the deal that Ford negotiated recently with Prodrive, the UK company that bought their Aston Martin division.  Ford will continue supplying engines etc and at the same time Ford gets to protect its intellectual property rights to the components that it provides to the Aston Martin range of cars.  This type of partnership agreement was essential to ensure the long term survival of Aston Martin and exactly the same deal has now been negotiated between Daimler and Cerberus.

Most private investment companies will try to look for some sort of exit strategy within a five to six year time frame, so apart from the obvious restructuring requirements within Chrysler it will be interesting to see how Cerberus can turn around this business.  They will be looking to cut costs significantly to improve profitability, they will be looking to streamline Chrysler’s supply chain and find global partners to reduce product development costs.  For this type of situation, outsourcing resource intensive parts of the business must be considered as a relatively easy way to help reduce costs across Chrysler.  Their B2B infrastructure will have to be reviewed for example, a plan worked out on how to separate this infrastructure from Daimler and then find a way to continue working seamlessly with the network of suppliers that they have built up during their time as part of the Daimler Chrysler Group.  This is an ideal scenario where GXS Managed Services could be introduced to help manage Chrysler’s B2B infrastructure.  As you may have seen from some of my earlier posts, GXS Managed Services basically allows a company to potentially outsource their entire B2B infrastructure to our company.  GXS Managed Services has been proven in many large companies worldwide as a B2B outsourcing solution which can help reduce network, transaction and overall B2B infrastructure costs.  With extensive restructuring going on in the automotive industry as a whole at the moment, it will be interesting to see how Cerberus handle the management of Chrysler’s suppliers.

I have been fortunate enough to visit the Daimler Chrysler Head Office in Detroit, a very impressive facility where no expense was spared in its construction.  One of the things I remembered from someone I spoke to during the visit was that the building was designed in such a way that sections of it could be easily partitioned off and converted into a large shopping mall if required.  Now I am not saying that this will happen but it was interesting that the architects of the building had the foresight to include this as part of the design of the building!  Chrysler will inevitably have to go through some sort of downsizing process but one thing is for sure, the company will come back leaner and meaner and ready to take on their key rivals Ford and GM.