Has Cerberus bit off more than they can chew in the Auto Industry?

In today's Wall Street Journal, there is an article about the challenges Cerberus is facing raising the required capital to complete the buyout of Chrysler from Daimlerchrysler AG (DCX).

"Investors who sat in on Cerberus's presentations as well as bankers familiar with its offering said the market is taking a cautious look at the company's bid to raise $62 billion for the deal. Potential investors are concerned they could lose the bulk of their money if Cerberus's turnaround of Chrysler fails and the auto maker has to seek bankruptcy protection, these people said."

In a related story, they also canned David Thursfield - an ex Ford executive that had been running GDX Automotive - which appears to be in big trouble and may end up filing for bankruptcy. (Goodbye $150 million dollar investment from Cerberus!)

Cerberus also backed out of the deal to buy automotive component maker Delphi.

So it turns out the Auto Industry is full of problems. Who knew?



Even with the advantages of being private, I don't see how Cerberus is going to magically pull off a turnaround at Chrysler. As I see it, they face too many challenges.

  • Too many dealers. If they can't reduce the dealer network substantially, the self competition will force them to drive prices down.



  • Increased and intense competition from Japanese manufacturers, particularily Toyota which is pushing it's new full sized Tundra pickup truck in a big way.



  • Poor product lineup. Jeep in particular has far too many vehicles that nobody wants, although the new 4 door Wrangler has been a huge hit. Examples of too many models include the ridiculous Hummer-ripoff Jeep Commander, the Jeep Compass, the Jeep Liberty, the Grand Cherokee, etc. They should probably cut Jeep back to two, possibly three designs.



  • If the price of oil shoots up they are poorly positioned to respond to consumer demands for high MPG vehicles. Rather than pushing hybrids and efficient four cylinders, they seem to be pushing their large V8 hemi engine into just about every car in the lineup. They also are pushing their SRT high performance vehicles in a big way. They recently eliminated one of their most popular and best mpg vehicle - the Dodge Neon, replacing it with a sort of crappy "tough" semi-crossover Caliber, which mostly seems to be popular with middle aged women.



  • Unions. This is the biggy. Toyota is eating the Big 3's lunch because they aren't trying to provide health care and retirement benefits for millions of people. The Unions aren't going to budge much. In 20-30 years, I imagine the Japanese competitive advantage will be eliminated union-wise in the United States. But until that happens I don't see how they are going to significantly reduce the cost of labor.



  • Private equity parts suppliers. It's going to be hard to build a car cheap and make a lot of profit when all of your suppliers are owned by private equity that would rather shut down a factory and see you fail than sell you a part at a loss. I think the impact of the aggressive managers installed by these companies is yet to be seen. But for sure, they are going to turn a profit, one way or another.

    Unless Cerberus has the magic formula to solve all these issues, I can't see Chrysler suddenly becoming a reformed company. If I were the banks, I'd be very skeptical too.

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