CHRYSLER’S PROBLEM: IT’S (MOST OF) THE PRODUCT, STUPID!

1/31/13

The Wall Street Journal reported this (i.e., Thursday, 1/31/13, page B6) morning that “Chrysler’s Aging Cars Pose Hurdle.”  It seems that the Fiat miracle is taking more time, money, and effort than expected; while net income is increasing smartly at Chrysler, free cash flow over the next two years is expected to fall by half to $2 billion.  The primary reason for this relentless drain of company cash is the need to refurbish a tired and relatively sorry product line.

None of this comes as a surprise to my regular readers, who recall the following posts on one of this site’s precursors, The Insightful Pontificator:

“THIS ISN’T NEW YORK CITY, OR THE SECOND CITY, OR SIN CITY, AND WE’RE CERTAINLY NO ONE’S EMERALD CITY”, 2/7/11

WALTER P., LEE, AND ME?,  1/10/11

“UH OH, SERGIO…”, 7/3/10

“CAN THEY MAKE IT?  CAN THEY MAKE IT?”,  5/1/09, and

“WE ARE NOT AMUSED”, also of 5/1/09

The main point of those articles is that without good product, you don’t have a good company.   And Chrysler’s product has been wanting for years.   The Journal article has simply confirmed, and events and numbers have borne out, what my readers have known for years now.

Not all the Chrysler product is bad.   Jeep is selling briskly, and the Grand Cherokee is a hot and supposedly stellar product.  But the Grand Cherokee can’t be that good; its updated iteration was to be one of the eight new products Fiat/Chrysler’s CEO, the very capable Sergio Marchionne, wanted to introduce this year before money got too tight.  As I’ve said before, only Wall Street believes that the Jeep line is a great asset, probably because it is one of the few American brands that a Wall Street analyst would consider buying 

The Chrysler 300 is a truly great product, but that might be yours truly’s personal taste, and undying quest to find a product that would replace my long gone but still pined for 1990 Pontiac Bonneville SSE (aka “The Batmobile,” the last car with an automatic transmission that I truly loved), talking.   One of the few American sedans still available with a V8 (One of the others is the Dodge Charger, obviously another Chrysler product..), the Chrysler 300 is distinctive, powerful, safe, relatively fuel efficient, quiet luxurious, fun to drive, and a relative bargain.  And it’s a car that shows one means business.   But even the great Chrysler 300 is in a market segment characterized by (almost) equally great competition.   Still, if I ever get over what my friends and family deride as my manual transmission “fetish,” and start making some real money again, I’ll be driving one of these most testicular of automobiles.  But I digress.

The Ram pickup line also is a more than decent product, but still places third of three in its very competitive and profitable market segment.

Once one gets beyond Jeep, Ram, and the 300, one finds awfully slim pickings at Chrysler…and Mr. Marchionne knows it.   It is his urgent efforts to apply to Chrysler some of the product wizardry Fiat has displayed under his tutelage that are causing financial strain at the third of the Big 3.

One final, and somewhat personal, note:  the first of Mr. Marchionne’s efforts to produce some product fruit from Fiat’s purchase of Chrysler is the Dodge Dart, which seems to have fallen far short of expectations.   This Dart is built on the Alfa Romeo Giulietta platform and is supposed to ride and handle somewhat like an Alfa while providing a level of luxury, and an amount of room, beyond its competitors in the U.S. compact car market.   The car has, to put it only a bit too strongly, bombed, with poor sales and bloated inventories crowding dealer lots.   At first, the Dart’s problems were ascribed to the first few copies’ being available only with manual transmissions.   That problem was solved when Chrysler shipped subsequent, and much larger, batches of cars with slushboxes (i.e., automatic transmissions).  Still the car doesn’t sell.   Why?   Mr. Marchionne opined on Wednesday that there are too many variations and expensive features available of or on the Dart.

Mr. Marchionne is absolutely right.  Yours truly is interested in the Dart for the two reasons it isn’t selling:   It offers a manual transmission combined with some luxury features.  But I have all but given up my admittedly casual search for a Dart because I am confused by the baffling array of model combinations available and find that, when I have figured out what will meet my needs, I can buy a Honda Accord, which is one size larger and is, after all, a Honda, not a Dodge, for the same money.  At anything like the offered side, the otherwise excellent, or at least very good, Dart makes no sense.

However, if I could get a good enough deal on a Dart….

But it is difficult to prosper selling products nearly exclusively to people looking for, and insisting on, a great deal.

FEDERAL SPENDING: MAKE THEM PAY!

1/26/13

In her weekly column in this weekend’s (i.e., Saturday/Sunday, 1/26-1/27/13) Wall Street Journal, Peggy Noonan makes the following statement in arguing against the fiscal policy of Barack Obama and for fiscal prudence:

“Some, especially those who are younger, do not fully understand that what is supporting them is actually coming from other people.   To them, it seems to come from ‘the government,’ the big marble machine far away that prints money.”

Under normal circumstances, Ms. Noonan would be right, as she usually is.   But these aren’t normal circumstances; in the Bush/Obama years, we have fallen down the fiscal policy rabbit hole.

The hole in Ms. Noonan’s argument is, ironically, highlighted in her description of the government’s being, in some people’s perceptions, a machine that “prints money.”   In the modern Bush/Obama approach to fiscal policy, 30 cents of every dollar spent is borrowed.   So nobody is paying for roughly one third of the government services that people are demanding or are otherwise being handed.   One could argue that we are paying the interest on the money borrowed, but, at today’s near historically low interest rates, the interest on the debt is negligible.   Wait until interest rates return to “normal” levels if you want to see truly brobdingnagian deficits, but I digress.

Speaking of low interest rates, they are low because the Fed has aggressively expanded the money supply and targeted interest rates in its never ending crusade against elderly savers in order to reward the spenders and borrowers who got us into the economic miasma from which the experts tell us we are emerging.  The major component of this effort is purchasing treasury and mortgage backed securities with money that the Fed creates almost literally out of thin air.  In fact, the Fed buys roughly ¾ of net treasury borrowing in such a manner.  

So…

We are borrowing about 30 cents of every dollar we spend.   The Fed, in turn, is providing, by money creation, 75 cents of every dollar we borrow.   So what we have is a monetary policy problem perhaps as large as our fiscal problem.  Indeed, the monetary problem is probably larger because without such vigorous and energetic cooperation from the Fed, the government could not borrow, and spend, so much money.

So…

Ms. Noonan, who would be right under normal circumstances, is only partially right in the brave new world of BushObamanomics.  No one is paying for a large measure of the government “services” that are being provided.   We are effectively getting government at a 30% discount.   Nothing drives up demand like discounted prices; no wonder the demand, from all points along the political spectrum, for government continues to grow!

If indeed we want to throttle the growth of government (and yours truly and Peggy Noonan surely do), we should make someone pay for the government we demand.   Then those who have to foot the entire bill might be inspired to offer some spirited resistance to those who demand more and more from government.   No one likes higher taxes, especially yours truly.  But perhaps a balanced budget amendment that would wind up requiring higher taxes when people demand more government might be the most effective means of checking the seemingly never ending expansion of the federal leviathan.  Nothing else has worked.