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Chrysler to cut back its lineups
Chrysler signaled a major shift in its product lineup and sales network Friday, saying it would phase out look-alike models, eliminate some dealerships and urge others to consolidate brands in a bid to cut losses.
The fresh direction reflects the willingness of Chrysler's new owner -- private equity fund Cerberus Capital Management -- to break with Detroit tradition.
The No. 3 American automaker has long stamped out similar models bearing its Chrysler, Dodge and Jeep nameplates. Although Chrysler didn't say which models would drive off into the sunset, the list of copycat vehicles includes the popular Dodge Caravan and Chrysler Town & Country minivans.
The redundancy was largely to keep its dealers happy, ensuring that both Dodge and Chrysler dealers, for example, had minivans on their lots.
Now, Chrysler's new bosses -- including former top Toyota Motor Corp. executive Jim Press -- say dealers should combine brands in anticipation of a shrinking lineup.
"If we keep doing the same thing, we won't be viable, and that's why we need to change," Press, named vice chairman of Chrysler in September, said at an industry conference in San Francisco.
Press said no decision had been made on how many of the company's 3,000 dealers would be eliminated or how many models would be discontinued, labeling as "conjecture" news reports that their ranks could be slashed in half. He offered only a rough time frame, saying the consolidation would occur within the next four to five years.
Nonetheless, Press made it clear that big changes were coming, and analysts said such an overhaul was long overdue.
"They definitely need to consolidate; they've got too many dealers currently," said Aaron Bragman, an analyst with consulting firm Global Insight. However, "when it comes down to who's going to accept that buyout, nobody wants to be the dealer to do so."
Chrysler also has plenty of opportunities to reduce duplication in its product lineup, Bragman said.
In the mid-size sport utility vehicle category, for example, the company makes the Jeep Grand Cherokee, Patriot and Liberty, the Dodge Durango and Nitro, and the Chrysler Aspen.
The issue of duplication isn't unique to Chrysler among U.S. automakers. The Mercury Grand Marquis and Ford Crown Victoria sedan, both built by Ford Motor Co., are virtual twins. The Pontiac G5 and the Chevrolet Cobalt, both products of General Motors Corp., are similarly joined at the hip.
Analysts say U.S. automakers traditionally have developed similar products under multiple badges as an inexpensive way to provide dealers for their various nameplates with full product lineups, from small cars and full-size sedans to SUVs and pickup trucks.
Japanese automakers have tended to keep their product lines simpler and have introduced fewer offshoot brands -- and when they did, as with Toyota's Scion nameplate, they were sold by traditional Toyota dealers. That strategy has helped the Japanese firms keep the number of dealerships down while helping to boost dealer profits by maintaining a high level of sales per dealer.
In December, for instance, Lexus, Toyota/Scion and Honda dealerships held the top three spots in the U.S. in sales per dealer. At an average of 155 sales per dealer that month, Toyota was well ahead of Dodge (35 vehicles), Chrysler (17) and Jeep (16).
The takeover of Chrysler by private, non-auto-industry owners and the hiring of Press, who played a key role in fashioning Toyota's retail operation in the U.S., provide a rare chance to remake the struggling automaker.
"They have an opportunity with private ownership to make much more drastic decisions," Bragman said. "They don't have the same kind of sentimentality that the die-hard Detroit guys would have."
The focus will be on combining local dealerships into a smaller number of larger dealerships, Press said, and on reducing stand-alone dealerships by bringing all three brands under one roof. In some cases, larger dealers may be urged to buy out smaller competitors that don't sell all three Chrysler brands. There are 185 dealerships in California that sell Chrysler vehicles.
Bruce Bendell, who consolidated some of his operations into a single Chrysler-Dodge-Jeep dealership in New York last year, said the move saved money by cutting overhead.
He expects Chrysler to pit similar models against each other on the showroom floor, keeping the vehicle that sells the best. That approach would alienate fewer customers, he said, and would boost brand value by discarding vehicles that require heavy incentives to sell and often have low resale values.
Still, making deep cuts in dealer ranks can be a painful and expensive process.
GM is still involved in lawsuits with dealers after it killed its Oldsmobile brand in 2004. In another episode, GM tried to combine its wholesale distribution network under a single flag during the 1990s but ultimately returned to the brand-by-brand approach after the consolidation proved unworkable.
In addition, all states have laws that provide varying degrees of protection for dealers. In California, terminating a dealer's franchise can land an automaker in front of the state New Motor Vehicle Board, which can block the move.
"If it were easy, all of the car companies would be doing it," said Michelle Krebs, senior editor of the website Edmunds AutoObserver. "All of the domestic brands have too many dealers."
On Friday, GM's head of sales, Mark LaNeve, said that his company's network of 6,800 dealers was too large and that the automaker "plans to consolidate in metropolitan markets."
And though Chrysler was mum about how many dealers it expected to have after the shakeout, Sidney DeBoer, who owns 40 Chrysler dealerships, said the optimal number would be about 2,000.
Besides shrinking its dealer network and reducing duplication in its product lineup, Chrysler also faces the challenges of developing vehicles that will bring buyers into its showrooms, dealers and analysts say.
"They're in big trouble on the product front," Krebs said, "and that's not something you fix tomorrow because it takes a long time to develop a car."
In particular, she said, Chrysler's roster lacks a small, fuel-efficient car and a competitive crossover sport utility vehicle. It also has been behind the curve with gasoline-electric hybrid vehicles.
Chrysler recently tried to boost sales by offering a lifetime powertrain warranty, but it still recorded a 12% plunge in January sales -- a much steeper drop than other big automakers experienced.
"They put out the lifetime warranty, but that's not working," said Salem Arnaout, owner of Simi Valley Chrysler Jeep Dodge. "People don't seem to pay attention to that in California, but they do pay attention to mileage."
Chrysler's U.S. market share, which currently stands at 13.2%, hasn't eroded to the degree that Ford's and GM's have in recent years. However, the company has said it could lose $1.6 billion this year -- double last year's loss -- and it is badly lagging behind in overseas markets, which account for only 1% of Chrysler's sales.
Press said Chrysler planned to triple its international market share over the next five years, although it's unclear whether it can do that with the current product lineup. Chrysler is working on joint ventures in China and South America to jump-start its business in those locales.
At the industry conference, Press made clear that his focus would be on returning Chrysler to profitability rather than simply trying to keep its share of the sagging U.S. market.
"Volume is vanity," he said.