Chrysler: No Profit This Year And Questions About GM

Chrysler’s prospects for 2010 seemed so promising. The company’s management, captained by Fiat chief Sergio Marchionne, was optimistic about the year as the No.3 US car firm shaved its loss in the second quarter to $172 million from $197 million in the first. That did not seem much, but Marchionne deemed it real progress.

Marchionne now says the car company will have a hard time making money this year. He did not address the critical issue of how much a loss could be attributed to debt service on money loaned to it by the US government, and how much may be due to the weakening domestic car market in the second half. The remarks will cast a pall over the GM IPO process. The market’s primary concern about GM is whether it can make a profit if American sales fade.Chrysler is faced with headwinds which GM is avoiding. The smaller company has very little presence overseas. GM’s position in China has been critical to its success. Chrysler has also been slower to market new products than GM or Ford Motor (NYSE: F) . Chrysler management would argue that it will bring fuel-efficient Fiats to America to offer a new line-up that should appeal to fuel-conscious consumers. There is resistance to this among Chrysler’s dealers who are already laden with unsold vehicles and do not want to add to inventory–even if the new cars are Fiats, largely an untested product in the US.

Chrysler’s core problem is that the US economy has slowed. GDP growth in the second quarter may have been no better than 2%. That could worsen quickly as the housing market continues to deteriorate and unemployment lingers close to 10%. US car buyers could go on strike again as they did in 2008 and 2009, concerned about their own job prospects and poor access to consumer credit.

Chrysler’s comments may be a canary in the coal mine for GM and the other large multinational auto companies that count on the US market for a large part of their sales. The sun may have begun to set on the recovery of vehicle companies which began less than a year ago and was supposed to salvage the industry.

Douglas A. McIntyre