Why the Meltdown was Good for Chrysler

When the U.S. new car market crashes from 16 to 10 million units almost overnight, you have to know there’s going to be blood on the floor. Following the collapse of Lehman Brothers in 2008 and the “Great Recession,” a lot of people stopped buying new cars and trucks.

Seventeen months ago, Chrysler ended its protective bankruptcy proceedings and has now reported an operating profit of $239 million for the three months ending in September. The company said that improved product mix and rising unit sales contributed to the operating profit, while higher costs tied to seasonal plant changeovers resulted in an overall net loss of $84 million.

A lot of things are going on in the market, but once credit availability returned people started buying again. That helps everyone, of course, and the new models that the company has brought out have pushed the average buy from $25,400 at the beginning of 2009 to $27,300 now.

Plant closures, as traumatic as they are to all involved, have allowed the company – and the industry in general – to unload old, inefficient facilities and invest in new or upgraded manufacturing processes. Now, as the conversions proceed and the company’s sales and revenues begin to increase (up 5.2% this quarter), the future looks much better.

In fact, the company has revised its forecasts for the rest of the fiscal year, indicating an operating profit of $700 million, up from $200 million, while net revenue at $42 billion stays within the Original forecast of $40 – 45 billion.

Originally expects to generate $500 million in positive cash flow this year, compared with negative cash flow of $1 billion previously forecast. A cashflow turnaround from negative $1 billion to positive $500 million is also anticipated.

In commenting on the results, Sergio Marchionne, Chief Executive Officer said “Chrysler’s financial success is dependent upon the vehicles we design, build and sell. In a mere 16 months, the Company is delivering 16 all-new or refreshed products led by the critically acclaimed all-new 2011 Jeep Grand Cherokee and including the Fiat 500, signaling the return of the Fiat brand to the U.S. and Canada.”

Ultimately, no company can cost-cut its way to recovery. Product has to be sold and product that people want is easier to sell. Neither the U.S. economy nor Chrysler are out of the woods yet, but confidence is returning and that’s good for everyone.

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