Investors Want Another Overhaul for Chrysler

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A three-year overhaul of the U.S. arm of DaimlerChrysler AG (DCX), the world's fifth biggest carmaker, has failed to stem the losses at Chrysler and investors are hungry for another, more effective plan.

Fears of another profit warning are mounting as executives have given only qualified affirmation of Chrysler's latest targets after a shock profit warning in June and an almost one billion euro second-quarter operating loss at Chrysler.

Few analysts expect an improvement in the cut-throat U.S. auto market this year, and they say Chrysler will be forced to downsize and close assembly plants.

"We think a new restructuring has to be on the agenda," said Deutsche Bank analyst Mark Little.

Chrysler Chief Executive Dieter Zetsche said earlier this month he was not planning radical steps, but neither did he rule them out for later. A recent wage deal with the U.S. auto union, while favourable, offers no miracle cure either.

A profit-eroding U.S. price war, overcapacity and low productivity levels compared with Japanese rivals, also hitting rivals General Motors Corp. (GM) and Ford Motor Co. (F), are hampering a return to long-term profits.

Chrysler is most vulnerable — last month Japan's Toyota overtook it as the third biggest U.S. auto seller — and few investors think it will meet its goal of a small operating profit this year.

Short of dispensing with Chrysler, another revamp seems most likely. But Zetsche's options are limited after he has already in the last three years cut 20 percent of Chrysler's workforce, now 96,000 strong, and slashed billions of euros in costs.

The agreement just struck with the United Auto Workers (search) allows Chrysler to sell or shut up to seven poorly performing parts plants over four years, a move that could lead to at least 9,000 job cuts and a lower cost base, despite some up-front charges.

"The wage deal gives them some breathing room, but it does not materially change the supply-demand matrix," said Morgan Stanley analyst Adam Jonas.

Many analysts think assembly plants need to go as well and say this week's decision to scrap plans for a new plant to build Sprinter vans highlights how dire the situation is.

They also cite a recent report by industry consulting firm Harbour that shows capacity utilisation at Chrysler's U.S. plants ranging from 39 to 122 percent, meaning some are virtually idle while others face overtime costs.

Some investors say Chrysler should implement an overhaul similar in scale to the last one, which cost up to four billion euros ($4.6 billion), aiming at a lower market share and improved pricing.

But even a smaller Chrysler would need a revenue boost and a sparkling model line-up. Analysts say Chrysler still needs to work on this. Its products have been thin on the ground, and the long-awaited but overpriced Pacifica (search) had a bad start.

"We miscalculated the possibility with carry-over products, but now the product is coming and we are confident," Zetsche said earlier this month.

Zetsche says sales of the Pacifica are heading in the right direction. But he has also edged away from a goal to lift sales by one million vehicles in the next decade.

The five-year old merger may have stalled — DaimlerChrysler stock has lost over two-thirds of its value in the five years since the merger and profits have fallen way short of targets — but a reversal is unlikely, say analysts and financial sources.

"It is tempting to think DaimlerChrysler may... wish to disengage from its troublesome subsidiary," said Smith Barney in a recent research note. "In our view this is investor wishful thinking and in practice is simply not an option."

There are two major obstacles: group Chief Executive Juergen Schrempp and the recent integration of the Daimler empire.

Daimler's "global strategy" was a personal crusade for Schrempp, and most industry experts think his fate is bound with Chrysler's. The CEO may be on a short leash, but there are few whispers yet of his imminent departure, so Chrysler looks secure.

Another difficulty with a possible dismemberment of Chrysler via a sale, spin-off or even Chapter 11 bankruptcy protection is the integration of Chrysler products with those of Daimler's Japanese partner Mitsubishi, say industry experts.

"I think the companies are too entwined (for Chapter 11)," said Sean McAlinden, chief economist at the Center for Automotive Research in Michigan.

"They just keep trying to pare Chrysler down slowly... all the car products will (eventually) be Mitsubishi products with final assembly (by) United Auto Workers," he said.

One banker who worked on the merger said Daimler may further integrate Chrysler and Mitsubishi but ringfence Mercedes to limit the damage to the valuable brand from bad U.S. publicity. That would leave the door open to an exit later.