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Chrysler Submits Viability Plan and Promises Greener Cars

Chrysler has submitted its viability plan to the U.S. Treasury Department, promising increasing fuel economy – helped by a strategic alliance with Fiat – in return for a loan to stave off bankruptcy. Increasing fuel economy shouldn’t be difficult – in 2008 Chrysler offered only six vehicles with highway fuel economy of 28 miles per gallon or better.

Chrysler plans 24 vehicle launches in 48 months, and announced electric technology as a primary strategy for developing fuel-efficient, low emission vehicles, including an electric-drive vehicle in 2010.

Chrysler says that for 2009, 73 percent of its vehicles show improved fuel economy compared with the prior year’s model. The company says fuel economy will continue to improve in 2010 with the introduction of the all-new Phoenix V6 engine, which will provide fuel efficiency improvements of between 6 to 8 percent over the engines it replaces. This is still a very low level of improvement compared the progress of manufacturers such as BMW.

A two-mode hybrid version of the company’s best-selling vehicle, the Dodge Ram, is scheduled for 2010. Perhaps this is where Chrysler continues to go wrong – the Ram is hardly the most fuel efficient vehicle to have as a best seller.

The first Chrysler electric-drive vehicle is also scheduled to reach the market in 2010. It will be followed by other electric-drive vehicles, including Range-extended Electric Vehicles, in the following years in order to further reduce fuel consumption.

The proposed Fiat alliance would further help the company achieve these standards as Chrysler gains access to Fiat’s smaller, fuel-efficient platforms and powertrain technologies. The alliance would enable Chrysler to reduce its capital expenditures while supporting the company’s commitment to develop a portfolio of vehicles that support the country’s energy security and environmental objectives.

Chrysler’s plans include enhancing its product lineup; completing its ongoing aggressive restructuring; and achieving cost reducing concessions from stakeholders. The company’s plan is required to be finalised by March 31. The submission outlines significant progress towards meeting the terms of the U.S. Treasury Department’s loan agreement related to achieving competitive costs and increasing fuel economy.

“On behalf of the men and women of our extended family, we thank the Administration and the Congress for the opportunity to continue the process of requesting federal loans to assist Chrysler LLC in the restructuring necessary to achieve long-term viability,” Chrysler LLC Chairman and CEO Robert L. Nardelli said. “We fully understand the need to adapt to significantly reduced annual U.S. sales and to national concerns over energy security and climate change.

“We believe that Chrysler LLC will be viable based on the updated assumptions contained in this submission, and that an orderly restructuring outside of bankruptcy, together with the completion of our standalone viability plan, enhanced by a strategic alliance with Fiat, is the best option for Chrysler employees, our unions, dealers, suppliers and customers. Today, our people are eager to re-establish Chrysler as an iconic American company and, in the process, repay the U.S. government and taxpayers for their faith in our future. We believe the requested working capital loan is the least-costly alternative and will help provide an important stimulus to the U.S. economy and deliver positive results for American taxpayers. This plan will ensure the continued provision of health care and pension benefits to our active employees and retirees, while continuing to protect hundreds of thousands of middle class, quality American jobs at Chrysler, our dealer network and our suppliers.”

Since Chrysler LLC’s original $7 billion submission, there has been an unprecedented decline in the automotive sector. The continued lack of available credit affects consumers and dealers, leading to reduced wholesale orders for Chrysler. Due to this continued lack of consumer credit, the company is revising its Seasonally Adjusted Annual Rate (SAAR) forecast in the plan submitted, which is conservatively based and reflects the reality of a declining automotive industry.

Chrysler is now projecting a SAAR level of 10.1 million units for this year, (which is a 40-year low for the industry) and an average SAAR level of 10.8 million units for 2009-2012. This is a reduction from Chrysler’s original December submission of 7.2 million units, or an average 1.8 million units annually during the four years. For Chrysler, this represents a sales decline of approximately 720,000 units, (or an average 180,000 units per year) assuming a 10 percent market share. For Chrysler, this results in approximately $18 billion in lost revenue and a $3.6 billion decline in cash inflows during the four years.

Based on this, Chrysler will require incremental financial support to continue its restructuring and is therefore now seeking an incremental $2 billion in addition to the remaining $3 billion that was within the scope of its original December 2 plan submission.

Chrysler has signed a non-binding agreement to pursue a strategic alliance with Fiat. The written and oral testimony Chrysler submitted to the U.S. House and Senate in 2008 stated the Company’s intent to seek the benefits of global partnerships and alliances. The proposed Fiat Alliance would enhance Chrysler’s viability plan and would provide the Company with access to competitive fuel-efficient vehicle platforms, distribution capabilities in key growth markets and substantial cost-saving opportunities.

Chrysler’s product line is a key component of its Viability Plan. In 2010, the Company will launch four new platforms: a new Jeep Grand Cherokee, a new Dodge Charger, a new Dodge Durango and a new Chrysler 300. The Chrysler 300 launch will be followed by a new, bolder Dodge Charger and an all-new unibody Dodge Durango.

Chrysler LLC has aggressively restructured operations to significantly improve cost competitiveness while improving quality and productivity. Through year end 2008, Chrysler has:

* Reduced fixed costs by $3.1 billion

* Reduced its work force by 32,000 (a 37 percent reduction since January 2007)

* Eliminated 12 production shifts

* Eliminated 1.2 million units (more than 30 percent) of production capacity

* Discontinued four vehicle models

* Disposed of $700 million in non-earning assets

* Improved manufacturing productivity to equal Toyota as the best in the industry as measured by assembly hours per vehicle according to the Harbour Report

* Achieved lowest warranty claim rate in Chrysler’s history

* Recorded the fewest product recalls among leading automakers in 2008

The following additional restructuring actions are planned in 2009:

* Reduce fixed costs by $700 million

* Reduce one shift of manufacturing

* Reduce total manpower by 3,000 people

* Discontinue three vehicle models

* Take out 100,000 units of capacity

* Sell $300 million additional non-earning assets