Wall Street Journal - May 26, 2007

..From the standpoint of financial outcomes, there are two kinds of
auto makers: momentum companies and hit-driven companies. A momentum
auto maker enjoys strong consumer confidence, produces sound but
usually unflashy vehicles, and is very good at the blocking-and-
tackling aspects of the business, both technical and managerial. Toyota
and Honda are momentum auto makers; so are BMW and PSA, Volvo and
Subaru too, on a smaller scale. GM used to be one and so was Nissan,
but both committed a cascade of managerial and product gaffes that
erased their momentum and dropped them into auto-maker purgatory...

Chrysler has been the epitome of a hit-driven company for more than 50
years. At its ultimate perigee in the late 1970s, buffeted by an
extensive new-product losing streak and the unusual expenses of meeting
new fuel economy and safety standards, it was headed for bankruptcy. A
modest federal loan guarantee and some artificial respiration from the
UAW gave newly arrived CEO Lee Iacocca time for some inspired
improvisational first aid -- and ultimately the introduction of a real
home run product, the first front-wheel-drive, garageable, car-based
minivan.

Then the new product pipeline dried up, the numbers headed south and
Chrysler seemed perigee-bound again. Somehow Mr. Iacocca's team not
only managed a reprise of its earlier rabbit-from-the-hat trick but did
it with a trifecta of hit products: the muscular Ram pick-up, the
civilized Jeep Grand Cherokee SUV and the so-called "cab-forward" sleek
Dodge Intrepid midsize sedan. Chrysler became suddenly the most
profitable auto maker on the planet. Unfortunately the gush of profits
began to flow only after the Chrysler board, mistakenly convinced that
Mr. Iacocca had lost his fastball, handed him the proverbial gold watch
and replaced him with Robert Eaton, freshly imported from General
Motors.

Mr. Eaton encountered a paradox: Buyers were flooding the dealerships
for the spiffy new vehicles developed under Mr. Iacocca's leadership,
yet by any objective evaluation -- fit and finish, product durability
and reliability, or plant productivity -- Chrysler was a basket case.
He assumed that fixing these problems was of higher priority than new
hits. This was a big mistake but Mr. Eaton turned out to be the
luckiest man in Motown. At the 1998 Detroit Motor Show, Daimler-Benz
chairman Jurgen Schrempp button-holed him, apparently out of the blue,
to propose the great transnational auto maker that would be created by
exchanging Daimler shares for Chrysler shares.

Herr Schrempp's penance for undertaking the least diligent due
diligence in recent corporate history was spending $36 billion on an
acquisition which almost instantly plummeted deeply into the red. It
was making better quality vehicles more efficiently, thanks to Bob
Eaton's efforts, but hardly anyone wanted them. The magic had vanished
and despite heroic efforts by Dieter Zetsche, parachuted in from
Stuttgart in 2000 to turn things around, it has not returned.

Even mini-hits like the Chrysler 300 http://snipurl.com/Chrysler_300 -
the big gangsta-car with the narrow windows and powerful hemi engine,
is proving to have no legs in the market. Worst of all, Chrysler's most
recent new offerings have been panned by Consumer Reports, the great
auto market influencer, as both mechanically and cosmetically deficient.

Mr. Zetsche, rewarded in January 2006 with the top job at then
DaimlerChrysler, had already cleaned things up at Chrysler the way a
financially oriented new owner like Cerberus might do it. Perhaps Mr.
Feinberg and his colleagues can push even further, persuading the union
to accept give-ups, but it will have to overcome a natural suspicion at
Solidarity House, UAW headquarters, of financial hotshots with a Park
Avenue business address. To the UAW, Cerberus has deep pockets, a
situation much different from 1979-80, when Chrysler was a stand-alone
entity and could not survive without union help.

Cerberus may find some imaginative way of slashing Chrysler's inflated
dealer body, along with the market ineffectiveness and internal cost
burden it imposes on the company. But this is likely to be both
expensive and time-consuming. GM says it paid out $2 billion to close
down its Oldsmobile network. That may have been its out-of- pocket
cost, but if staff time for negotiating dealer payoffs were factored in
the real cost was undoubtedly much higher. And Chrysler dealers are
legitimately wary, no matter who owns the company. Late last year they
had considerable numbers of unordered and unwanted vehicles thrust down
their throats to get them off Chrysler's own books.

Yet cutting costs doesn't make an auto maker successful or profitable.
Chrysler demonstrated in its two recoveries under Mr. Iacocca that
costs can be high and quality modest, but attractive products can make
these into virtual non-issues.

There's the rub: What even Dieter Zetsche could not accomplish was the
mysterious feat of generating hit products. And hitmakers are hard to
find. Cerberus has brought aboard a well-known auto industry ronin,
Wolfgang Bernhard, as an advisor, but Mr. Bernhard, Chrysler COO from
2000 to 2004, was on the bridge with Mr. Zetsche not when the company
was generating hits, but rather when it wasn't.

Cerberus, too, is taking on serious downside risk. Chrysler's physical
assets are essentially worthless because no one else will want them,
and its marketplace equity is modest at best. The Dodge and Chrysler
brands have only slight cachet although Jeep remains relatively iconic.
How long it will remain iconic is questionable. The company has been
endeavoring to exploit the brand, flooding its product line with
dubious and slow-selling new variants.

Unloading 80% of Chrysler is almost certainly a good deal for Daimler.
Smart and resourceful as the Cerberus principals may be, this time they
could be significantly over their heads.