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Chrysler For Sale?

From| February 15,2007

DaimlerChrysler Chief Executive Dieter Zetsche, under enormous pressure in Germany to spin off the money-losing Chrysler Group, says all options for the U.S. auto making arm are now on the table.

The surprise statement overshadowed details of Chrysler's three-year, $4.5 billion recovery plan announced Wednesday that includes 13,000 job cuts.

Attention immediately shifted to who, if anyone, might be interested in Chrysler. A German magazine reported that DaimlerChrysler (nyse: DCX - news - people ) was in talks to sell its Chrysler unit to General Motors (nyse: GM - news - people ), but officials declined to comment. "I cannot and will not go into any further details," Zetsche told reporters in Detroit.

Carlos Ghosn, chief executive of France's Renault (other-otc: RNSDF - news - people ) and Japan's Nissan (nasdaq: NSANY - news - people ), has made known his desire to add a North American partner to that global alliance. But after talks with GM broke down earlier this year, he played down that ambition. When asked about future alliances during a Renault press conference on Feb. 8, Ghosn said both companies needed to focus on their own challenges. "Is that in general terms a good idea? Yes, I believe it is a good idea, because we are thinking in terms of synergies that we have measured," he said. "However, at this stage we are not moving on."

On Wednesday, Ghosn reiterated that position. "We remain open to extending the alliance, but we have no plans to pursue that at this time. Nissan is focused on its own challenges and performance."

But the pressure on Zetsche to shed Chrysler is intense. Over the weekend, a DaimlerChrysler shareholder told a German newspaper, "This needs to be an option that must be examined again and again." DWS fund manager Henning Gebhardt compared a potential DaimlerChrysler breakup to BMW's sale of Rover: "It would be irresponsible for [Daimler] management to exclude this option." DWS, Germany's largest fund company, owns less than 1% of DaimlerChrysler shares.

By putting Chrysler in play, Zetsche bought himself some time to try to fix the struggling Chrysler. And his surprise announcement managed to deflect pressure onto the United Auto Workers union, which has been none too cooperative with Chrysler in recent months. The union has refused to give Chrysler the same health care concessions it gave General Motors and Ford Motor (nyse: F - news - people ), for instance, because of the deep pockets of its German parent company. With bargaining on a new national contract set to begin later this year, Zetsche's message to the UAW was clear: Accept new terms, or Chrysler could be sold.

Zetsche doesn't seem all that eager to shed Chrysler, a company he successfully turned around earlier this decade. In fact, he has said so on several recent occasions. Other senior managers in Germany support his position, say company sources.

The problem, these sources say, is that nine years after the marriage between Daimler-Benz and Chrysler, mid-level managers at Mercedes are still resisting any collaboration that could sully the luxury brand's image. That has made it difficult to achieve the level of synergies promised in 1998.

Chrysler Group President Thomas LaSorda said the recovery plan outlined Wednesday would solidify Chrysler's position in the North American market while laying the foundation for a new business model that would stress global growth and a shift to more fuel-efficient models. The plan calls for a return to profitability by 2008 and a 2.5% return on sales by 2009. Chrysler lost $1.5 billion in 2006, while DaimlerChrysler overall earned $7.3 billion.

In all, Chrysler said it would eliminate 13,000 jobs, or 16% of its workforce, including 11,000 in the U.S. and 2,000 in Canada. In the U.S., 2,000 white-collar jobs would be cut, along with 9,000 UAW jobs. It will shut an assembly plant in Newark, Del., that makes large SUVs, and a parts distribution center in Ohio. Eliminating shifts at two other truck plants in Michigan and Missouri will help reduce production capacity by 400,000 units, the company said.

Meanwhile, Chrysler said it would launch 20 all-new vehicles, and 13 refreshed products, between now and 2009. It also will invest $3 billion in new engines, transmissions and axles in a bid to develop more fuel-efficient cars and trucks. At the same time, it intends to eliminate 70,000 low-margin rental car sales, which should help profits.

Rising costs for raw materials like steel and plastic are one reason Chrysler and other automakers had a tough year in 2006. Nevertheless, Chrysler said its aim is to cut material costs by $1.5 billion by 2009.

Longer term, Chrysler said it wants to expand outside of North America, where 90% of its sales currently are based, and make more use of global partnerships. It recently announced an agreement in principle with China's Chery Automobile Company, for instance, to develop a small car for sale in North America and Western Europe.

Indeed, an alliance or partnership, rather than an outright sale, might be what Zetsche has in mind for Chrysler. The company, he said, is "looking into further strategic options with partners" that would accelerate Chrysler's recovery.

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