Chrysler Reports Record Earnings of $3.7 Billion for 1994 : Autos: The Big Three together are expected to post a record profit of more than $13 billion for the year.
If there was any question that these are the best of times for U.S. auto makers, it was emphatically answered Tuesday when Chrysler Corp. reported 1994 earnings of $3.7 billion, the highest in its 69-year history.
The earnings report is the first of the Big Three, which together are expected to post a record profit of more than $13 billion for 1994. The previous top year was 1988, when Chrysler, Ford Motor Co. and General Motors Corp. together earned $11.2 billion.
The auto industry’s strength is a reflection of the health of the national economy, whose steady expansion is providing the jobs and incomes needed to buy Detroit’s increasingly expensive cars and trucks.
They also demonstrate that Detroit is fully reaping the benefits of the painful restructurings of the late 1980s and early ‘90s. Today’s Big Three are more competitive and efficient than ever and are producing cars of world-class quality.
No company has come further than Chrysler. Only a government bailout saved it from bankruptcy in 1980, and the firm stared down another financial crisis five years ago. Today, the No. 3 auto maker is the U.S. industry’s low-cost producer, makes popular segment-defining vehicles such as the minivan and is an emerging force in auto design and marketing.
The company received the ultimate compliment last year when Toyota engineers spent months tearing apart the new Neon subcompact trying to figure out how Chrysler made the car so quickly, cheaply and with so few parts.
“This is a sea change in the industry,” Chairman Robert Eaton said in his year-end review earlier this month. “We used to learn from the Japanese and still are. But now they are learning from us too.”
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Despite the impressive earnings, Chrysler’s stock slumped to $51.625, down $1.25, on the New York Stock Exchange on Tuesday. Analysts speculated that some investors were reacting to fears that poor small-car sales were signaling the beginning of a downturn.
Chrysler’s 1994 earnings easily surpassed its previous record of $2.4 billion set in 1984. The auto maker enjoyed brisk sales of its popular minivans, sport utility vehicles and pickups. Chrysler also strengthened profit margins by lowering production and marketing costs.
The improvement came even as the company fully funded its pension liability for the first time since 1957 and built up a $7.6-billion rainy-day fund to help ride out the next recession.
It was “an extremely powerful performance,” said Scott Merlis, an analyst with Morgan Stanley, a New York brokerage.
Chrysler promised more of the same this year. The company remains the most bullish of the Big Three, predicting a 5% increase in industrywide sales in 1995, to 15.9 million vehicles. That would come on top of sales of 15.1 million in 1994, a 9% increase from 1993.
“We think the market will continue to grow through this year,” Eaton told reporters in a conference call from New York.
He also said that further interest rate increases by the Federal Reserve Board are not likely to stall the auto sales boom, merely stretch it out with a more gradual climb to a peak in 1997.
One problem is that the Big Three are having difficulty keeping up with demand. The auto makers are reluctant to build new plants and instead are adding shifts and production lines in factories.
Because of these production constraints, the Japanese gained market share slightly last year. They countered the strong yen, which makes imports more expensive, by holding down prices on popular models and offering leases.
Still, the strongest sales are in a segment dominated by the Big Three: minivans, sport utility vehicles and pickups. The trend is a boon to Chrysler because about 65% of its sales are trucks, compared to 57% for Ford and 37% for GM. The Japanese have only 14% of the segment, less than half their share of the car market.
Trucks are also more profitable than cars. They are generally easier to build, and demand is so high that manufacturers do not have to lure customers with rebates.
As a result, Chrysler’s profit margins are a healthy 7.5%, the highest in the industry. The company earned an average of $1,230 on each vehicle it sold last year, up from $820 in 1993. The average discount offered to buyers was $410 in the fourth quarter, down from $650 a year ago.
Last year, the No. 3 auto maker had operating earnings of $2.4 billion, before a one-time $5-billion charge, mostly for retiree health benefits. Revenue was $52.2 billion in 1994, compared to $43.6 billion the previous year.
In the fourth quarter, Chrysler earned $1.2 billion, compared to $777 million during the same period in 1993. It had quarterly sales of $14.3 billion, compared to $12 billion in the last three months of 1993.
To be sure, Chrysler is not without problems. There are still questions about quality: Its vehicles rank below competitors’ on many customer sales and satisfaction surveys. And some analysts say increased competition in the minivan and sport utility vehicle arenas will test its mettle.
That is why Chrysler is continuing a strong product make-over. Last year, it introduced the Neon subcompact and Cirrus sedan. This year, it will begin production of its highly touted 1996 minivans. The changeover, however, is likely to cost the company about 65,000 minivan sales.
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Ford is standing in the wings hoping to pick up the slack with its trio of minivans: the Aerostar, Windstar and Villager. The company already has five of the eight best-selling vehicles.
Analysts expect Ford to report earnings of more than $4.5 billion in the next several weeks. But it is undergoing a major reorganization worldwide because it can’t match Chrysler in terms of efficiency and profit margins.
“There is a level of inefficiency and waste at Ford and GM that we just can’t identify,” said Joseph Phillippi, an analyst for Lehman Bros. “GM has an incredibly long way to go.”
GM is struggling to return its North American auto operations to profitability. The auto maker has been plagued by labor problems, slow model start-ups and high operating costs. GM should earn more than $5 billion in 1994, but the profit is largely from non-automotive and overseas operations.
