Scouse Express

So,

What do you think of Chrysler's refusal to issue a recall, over this?

http://www.usatoday.com/story/money/...ecall/2388607/


Jim

RoadWarriorFromLP

Judging from the nature of the problem, it seems impossible to fix, as it's an inherent design flaw that might not be resolvable with a tweak or two. These were just badly engineered vehicles that put the fuel tank in the wrong place.

Judging from the number of vehicles involved, it has the potential to be a nuclear bomb for Fiat's plan to acquire Chrysler. This could mushroom into a ten-figure problem, and Chrysler can't easily afford to pay for that.

Michael

I suspect Fiat made that decision since profits from Chrysler has kept the parent company from going too far in the red. Fiat currently owns 58.5% of Chrysler and wants to purchase the remaining 41.5% of Chrysler. There are even rumors that Fiat may move it's headquarters to Detroit.

http://online.wsj.com/article/SB1000...064283018.html

Since most of the vehicles are very old (most are 1993-2004 models), I suspect Fiat is trying to delay complying with the NHTSA request to get more of the vehicles in the junk yard and improve profits on the whole company before any action may be taken. If they can delay action long enough, probably only the later models up to 2007 will be on the road and Fiat could probably buy back those cheaply and junk them.

However there is a risk in that strategy if it becomes front page news which could cause Chrysler sales to plummet.

RoadWarriorFromLP

The problem is much bigger than that. Waiting for attrition won't change much of anything.

I think that it's a negotiation tactic. They're trying to cut a deal with the government in order to reduce the cost.

Based upon the recall notice as issued, the logical thing to do would be to force Chrysler to buy back the vehicles. But that could conceivably bankrupt the company in the worst case scenario.

If they can agree to a compromise, such as installing a protective barrier for the fuel tank, then that would reduce the costs to a reasonable level. But it doesn't sound as if NHTSA (the federal agency) has agreed to do that, at least not yet.

Michael

Chrysler made $1.7 billion last year so a buyback could probably be handled by Chrysler profits and Fiat's available cash but Fiat probably doesn't want to do that until the European car market recovers and profits of the parent company go into the black. It's a tactic that may blow up in Fiat's face.

RoadWarriorFromLP

The recall involves 2.7 million vehicles.

If Chrysler had to buyback vehicles for an average of $5,000 each, for example, that would $13.5 billion (with a "b"). No, they can't afford that.

You need to read the actual recall notice. NHTSA basically says in its letter to Chrysler, "yes, the design was legal, but it's still defective because of the location of the fuel tank."

How does anyone possibly fix that? You can't just relocate the fuel tank. The agency has to change its position and provide room for a solution that allows the fuel tank to remain where it is.

Michael

Fiat won't pay that much for the vehicles. Currently I suspect the vehicles prior to 2000 likely have a value of less than $1,000 and private party sales of a 2007 model is currently $9,800 in good condition with 60,000 miles and a 2005 is $6,600.

So I suspect we are talking about an average price of maybe $2,000 right now. Fiat could probably reduce the price further by offering owners a rebate on a new vehicle if they accept a lower buy back price. Sometimes companies use rebates as a sale promotion and increased sales offset much of the cost.

So if Fiat can delay for 2 years, the cost of the buyback should be less. Also I suspect Fiat may also be using the NHTSA ruling (they probably knew the probable outcome for a while) as leverage against the trust fund to reduce the selling price of the 41.5% share that it owns. After all, the market value of Chrysler is not as high as without the ruling. If they can get the trust fund to reduce it's price by $2 billion, that may cover the cost of about 40% of the buyback.

If it was going to cost Fiat $13 billion, why would they even want 100% control and why would the trust fund think that their share was worth $4.5 billion? Each side is playing a game against the other.

RoadWarriorFromLP

If it's $2,000, then we're still talking about more than $5 billion. That would make for a rather costly recall.

I think that you're missing the context here. This has been a prolonged investigation and there is pressure on NHTSA by consumer groups to go ahead with this recall. Meanwhile, NHTSA has failed to provide a remedy, but has only defined an open-ended problem in such a way that it is cost prohibitive.

When they can figure out how to make this a $100-200 problem, then it will get resolved. I seriously doubt that Chrysler would be doing this unless NHTSA had failed to negotiate a cost-effective solution. Car companies rarely challenge recalls; it's usually better to cooperate.

Michael

Unfortunately I edited the post after you started you post. This is the edited line.

If it was going to cost Fiat $13 billion, why would they even want 100% control and why would the trust fund think that their share was worth $4.5 billion? Each side is playing a game against the other.

Now if it is $5 billion instead of $13 billion, executives are usually not dumb and look at value and consider that cost to determine whether everything makes sense. Yes they are playing a dangerous game that could have a bad outcome if the story becomes front page news but that is also another negotiating tactic to force the trust fund to reduce the price before their shares become worthless in case the story blows up.

I'm beginning to suspect that Fiat is planning to do the buyback but won't announce that decision until after the purchase. The purchase will be contingent on the story not becoming front page news which will push the trust fund to sell at a reduced price quickly.

RoadWarriorFromLP

I know a fair bit about this industry. Please try to understand these points:

1) The automakers and NHTSA haggle over this stuff. Recalls don't just happen out of the blue; the car companies and the agency work together to cut a deal that will dictate what the recall looks like.

2) A recall with "billion" in the cost is well above what they usually cost. This is not a trivial amount.

3) Going back to point (1), recall notices generally include a letter from NHTSA that specifies will be done to comply with the recall. And of course, that letter will be the byproduct of a negotiation between the automaker and the agency.

But #3 has not happened in this particular case. Instead, NHTSA's letter basically says that the gas tank is in the wrong place. As far as these kinds of letters go, that position is fairly extreme. NHTSA may as well said that they have to scrap all of the cars.

That's why Chrysler is putting up a fight. Telling them that the car is designed improperly in such a way that it can't be redesigned provides Chrysler with no feasible remedy. They need to go back and haggle some more, and get NHTSA to issue a follow-up letter that allows for some cheaper repair.

Michael

I agree with everything you say but I suspect besides that, Fiat is trying to get the best deal possible from the trust fund and after that, we'll see what happens. After that there may be a recall agreement with the NHTSA.

Pulaski

The bigger problem with the NHTSA position is that the "design flaw" is not unique to Chrysler Dodge Jeep vehicles; behind the rear axle is a common place to locate the petrol tank. Also, in many of the fatal accidents cited by the NHTSA the position of the petrol tank was not material to the outcome of the wreck. E.g. one wreck cited by the NHTSA involved a stationary Jeep hit by a tractor-trailer doing 65mph; even if the Jeep hadn't even had a petrol tank the wreck wasn't going to be survivable.

RoadWarriorFromLP

NHTSA's findings are "tentative", and put the onus on Chrysler to come up with an answer. And the recall notice reads like a sort of an indictment, with a lengthy explanation of how NHTSA reached these conclusions, complete with photos of burned out Jeeps.

Reading between the lines, it sounds as if NHTSA does have some sort of fix in mind (which isn't specified in writing, but something that Chrysler would have discussed with them), but Chrysler objects to it. NHTSA then put out the recall letter in the hopes that it would put pressure on Chrysler to "volunteer" to do it NHTSA's way.

If Chrysler doesn't want to do it, then it's probably expensive. And who knows, it's possible that some of these guys don't get along and there are some ruffled feathers in the mix.

lansbury

Not sure where you are getting those values from. My local dealer offered me $19k for my 2007 Grand Cherokee as a trade in. Pretty much in line with the Kelly Blue Book price.

Michael

The newer models that have problem are the Liberty and I assume the majority are not the limited edition. However even with the limited edition and every possible option installed on the vehicle and 60,000 miles (pretty low mileage for a 6 year old car), the private party price in good condition is $12,900. I suppose if they offered the certified pre-owned price for the Limited edition in excellent condition with every option imaginable installed, that would be $19,000 but I can't imagine that they would offer that much unless the vehicle had all those options, was in that condition, and a significant portion was a rebate on the purchase price of a new vehicle.