Don't give DaimlerChrysler a pass

By Robert Walberg

One of the three beleaguered U.S. automakers has managed mostly to avoid the glare of the financial press.

Investors shouldn't be so generous.

Thanks to 10 consecutive months of record-breaking sales of Mercedes in the U.S., with year-to-date figures up 13.9%, DaimlerChrysler (DCX, news, msgs) has avoided the focus on restructuring at General Motors (GM, news, msgs) and Ford (F, news, msgs). Unfortunately, not even this growth rate is sufficient to offset the growing woes at Chrysler.

Looking for answers

Declining sales and bloated inventory have management and investors looking for answers, including the predictable decision to slash production and cut jobs. Taking a page from the playbook of GM and Ford, DaimlerChrysler recently announced that it could lay off as many as 4,000 employees in its North American truck unit next year.

DaimlerChrysler’s top management team is also leaning on another industry crutch -- executive turnover -- to prop up its sagging U.S. division. In the last year alone the company has turned over virtually all of its top sales and marketing folks, with Joe Eberhardt, Chrysler’s sales and marketing chief, the most recent victim. Tom Lasorda, Chrysler’s CEO, is rumored to be the next to go.

Given Chrysler’s current state, few would argue the need for a few changes at the top and for some cuts in hourly jobs. However, these moves are designed to improve operational performance and please Wall Street -- they won't fix Chrysler any more than slashing and burning has turned around Ford and GM. Ultimately Chrysler must make cars and trucks that appeal to a wider audience.

This isn’t rocket science, folks. Chrysler currently builds way too many Jeep Grand Cherokees, Dodge Ram trucks and Chrysler Sebrings than American consumers want to buy. As a result, dealer lots are stuffed with inventory that won’t move unless the company increases its incentives, which it has started to do. JD Power and Associates recently reported that it would take 118 days to clear Chrysler’s dealer inventory -- a number exceeded only by Isuzu (say it ain’t so, Joe).

Discounting merchandise in order to reduce excess inventory is a necessary step, even if it means suffering compressed margins and short-term losses. The problem facing Chrysler, however, is that it will be replacing unwanted old cars with unwanted newer ones, which means continued red ink.

Lack of cars people want

Chrysler unveiled a slew of new or revised SUV and truck models in 2007, just as consumers were demanding more fuel efficient vehicles to cope with soaring gas prices. Oops. Its updated Sebring line and the new Dodge Nitro, models that face serious foreign and domestic competition, also debuted to mixed reviews, suggesting nothing more than lukewarm sales going forward. In other words, there is no product like the Chrysler 300C waiting to save the day.

Domestic car makers are quick to cry foul given their high operating costs, but history shows that if U.S. automakers deliver a fresh, well-built and exciting product -- such as the Chrysler 300c -- consumers are more than happy to buy American. How sad that Chrysler’s German partner better understands the needs and wants of the U.S. consumer than it does.

The upside is that, with guidance from Germany, the folks at Chrysler might be able to get back on track sooner rather than later. This doesn't change the fact that next year will be tough for the automaker (projected loss of $1.3 billion), but it might keep Chrysler from suffering the same death spiral facing GM and Ford. Regardless, investors are advised to take a pass on DaimlerChrysler until there are more signs of stability and success at the U.S. division.

Street Patrol updates

With this column, I'll continue to reduce exposure to retail by closing out positions in Urban Outfitters (URBN, news, msgs) and Abercrombie & Fitch (ANF, news, msgs)in my tracking portfolio in our Experts Picks section. Also, I’ll bank profits in Oracle (ORCL, news, msgs) as the risk/reward ratio is now less favorable.

At the time of publication, Robert Walberg did not own or control shares of any companies mentioned in this article.