Chrysler Gets Too Small Too Fast

There are suddenly a lot of companies that want to be the small, low-cost, nimble niche car company that builds vehicles for what used to be an American market that produced 16 million unit sales a year. The goal of being the largest car company in the US has gotten so unattractive that several of the auto firms like Chrysler say that making money has nothing to do with being big. The irony of the current state of the auto industry is that no one aspires to be the No.1 car company in the largest car market in the world. Being big has become obscene as well as unprofitable.

In the race to become the best small and highly profitable auto company in the US, Chrysler is losing out to a number of rivals. Scale has its advantages in most manufacturing businesses, but the No.3 American car company has played that down and can no longer hide the fact that it may have become smaller but it can’t make money.

Success is measured by profits margin in the niche car company derby. BMW and Porsche have advantages because of the high price they charge for their vehicles. Kia makes inexpensive cars, but it makes them inexpensively.

Chrysler’s sales fell 47% in May to 79,010. The firm’s management spoke of the drop as a victory because the pace of the fall-off in sales did not accelerate from the first four months, something that analysts said might happen when the firm entered Chapter 11. People have not stopped buying Chryslers because the company is in trouble. They have continued to leave the brand because it does not make attractive, high-quality cars.

In May, the niche part of the non-luxury segment of the American car business got very crowded. Hyundai sold almost 37,000 cars, down 20%. Honda (HMC) sold 98,000 cars, down 49%. Nissan sold just over 67,000 vehicles, off 33%. Mazda and VW aspire to be part of the mid-tier, mid-priced part of the American car market as well.

Chrysler’s trouble is that there is not enough of the middle of the market to go around. About ten million vehicles will be sold in the US this year. A company that wants to be in the business of selling under one million cars can only do so  if most of those cars are built someplace where the cost of manufacturing is less than it is in the US. The pressure on car prices in a market as anemic as the current one may be so great that even firms with a manufacturing cost advantage like Hyundai may be losing money on the cars they sell.

Chrysler has promoted itself as a company that can survive by offering low-priced minivans and small SUVs. Its Dodge models don’t sell well anymore. Unfortunately, the models that are supposed to sell well, like Jeep, no longer sell well either.

Chrysler has gone from being one of the four largest car companies in America to being one of at least a half a dozen car companies that want to operate with small model lines and work to attract small segments of the market. The fighting is as vicious among the welterweights. Shrinking Chrysler was supposed to make it profitable again. Instead it is putting the company out of business.

Douglas A. McIntyre