CHICAGO - The sale of the Chrysler Group to a private equity firm could herald a major restructuring in the US auto industry, analysts said Monday.
New York-based Cerberus -- which agreed to buy an 80.1-percent stake in Chrysler for 7.4 billion dollars -- is expected to win major concessions from the automaker's main union when the contract goes up for renewal this fall.
And because the United Auto Workers (UAW) union has a history of negotiating similar contracts with all three automakers, those benefits ought to be passed along to Ford Motor Co. and General Motors Corp.
"What this could do is create a new model for restructuring through negotiations rather than bankruptcy," said Jeremy Anwyl, president of Edmunds.com.
The US auto industry is struggling with massive health care and pension liabilities and labor contracts which guarantee jobs to its workers. While the airline industry only managed to free itself from these obligations after a series of bankruptcies, Anwyl said the Cerberus move may help management rewrite the rules, he said.
"The thing that has really hindered the auto industry is that shuttering plants doesn't cut costs," Anwyl told AFP.
"There's a lot of creativity that could be applied if you're able to deal with this from a cost and marketing perspective and not have to deal with out-dated labor contracts."
The fact that Cerberus agreed to take on Chrysler's pension and healthcare liabilities and that the UAW has publicly supported the deal indicates that the union has assured Cerberus it is willing to grant some concessions, JP Morgan analyst Himanshu Patel wrote in a research report.
"We view the purchase of a majority stake in Chrysler by Cerberus as a positive for the Big Three's labor restructuring efforts," he wrote Monday.
Changes to work rules and the shifting of future health-care liabilities to a fund managed by the union "are the two likely areas of concessions over the next two years," he wrote.
A private equity group could also more than double the number of layoffs currently planned at Chrysler to reach 25,000 jobs, Lehman Brothers analyst Brian Johnson estimated in a March research report.
While it may force some major cuts, Chrysler workers should not be too worried that Cerberus will live up to its reputation as a strip-and-flip group, said Burnham Securities analyst David Healy.
"Right now there's nothing to strip. The cash has to flow the other way," he said in a telephone interview.
"I don't think they're in it forever. My guess is they'll want to make it solid and healthy and take it public (in a few years)."
The advantage of being run by a private group is that Chrysler managers will no longer have to satisfy Wall Street's demands for quarterly results.
"Now that it's a private company, if the company is interested in turning itself around on a long-term basis they can lose money with a free hand on a short-term basis," he said.
But while the new owners may be willing to invest billions to turn Chrysler around, it won't come without a price, Healy warned.
"I think some drastic surgery has to be done to get Chrysler back in the black," he said, adding that he expects union president Ron Gettelfinger to agree to significant changes.
"Gettelfinger is a realist. He'd rather have lower benefits if need be than no company," he said.
But cutting costs won't be enough to turn Chrysler around, warned Anwyl of Edmunds.com.
"They have to bring out competitive products," he said.
Chrysler's current product line has been undermined by cost-cutting on aesthetic quality, he said. While the designs have been great, customers have been turned off by interiors where critical things like the dash and gear shift feel "cheap" under the hand.
"It sounds like it's not that big of a deal, but when you're a consumer sitting in the car it's important."
05/14/2007 18:27 GMT