The End of Chrysler’s Smooth Road

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The recent news from Chrysler has been almost all good. U.S. sales rose 40% in February, well outdistancing the improvement for most of its rivals. The car maker repaid $7 billion in loans given to it by the U.S. government as it went through Chapter 11. Sergio Marchionne, the CEO of both Chrysler and Fiat, said he did not take a salary for his Chrysler role in 2011. A report filed with the SEC indicated that Chrysler is worth $7.5 billion. Now comes the bad news.

Chrysler made $183 million in 2011, which is nearly nothing. Ford (NYSE: F), on the other hand, made more than $20 billion. The size of its sales and earnings are partially reflected in its market cap of $46 billion. And Ford carries a debt level of $13.1 billion in its automotive unit, while Chrysler’s balance sheet is clean due to its bankruptcy. That makes Ford’s market cap even more impressive.

Chrysler now faces the hard part of its turnaround, and its greatest challenge will be product quality. Despite the popularity of any car products, quality problems always catch up to auto companies. Detroit found that out as it competed with high-quality models from Toyota (NYSE: TM) and Honda (NYSE: HMC), starting in the 1980s.

Chrysler’s brands rated dead last in the most recent JD Power Reliability Survey. Chrysler, Jeep, Ram and Dodge were the bottom four nameplates. The quality problem was exacerbated recently as Chrysler recalled 209,724 Jeeps made in 2004 and 2005. That will not help much. The headlines in the news media were dominated by the word recall. The years the Jeeps were manufactured were there in print.

Marchionne claims that he has turned Chrysler around, both in terms of its financial status and the popularity of its products. But the U.S. market is awash in cars and light trucks with much better quality reputations. These brands still include the Japanese companies, and now include General Motors (NYSE: GM) and Ford as well. These high-quality products make the problems with Chrysler’s light trucks and cars all the more glaring.

Douglas A. McIntyre