DETROIT (Reuters) – Chrysler LLC is rapidly burning through cash and being driven to prepare for a possible break-up if it can’t clinch a merger with General Motors Corp (GM.N) or get government funding needed to ride out the economic crisis, people with knowledge of the situation said.
Without new funding or a wrenching restructuring, executives have raised concern about the automaker’s ability to finance its operations from existing cash beyond the first half of 2009, said the sources, who were not authorized to discuss Chrysler’s performance.
Chrysler has had to pay out over $100 million a month to support strained suppliers on top of a total $200 million support to sales through dealers in August and September as it suspended vehicle lease financing, the sources said.
The $11.7 billion the struggling automaker said it had as of end-June has seen a substantial decline because of the company’s deteriorating performance marked by a 35 percent slide in October sales and increasing cash incentives, they said.
Chrysler and its owner Cerberus Capital Management LP CBS.UL declined to comment.
Cerberus and GM had agreed last month on the broad terms of a merger of Chrysler’s loss-making auto operations and those of its crosstown rival but the deal foundered when the Bush administration rebuffed a request for some $10 billion to support it, sources have said.
That setback has put the focus on winning support for a broader federal rescue package for GM, Chrysler, Ford Motor Co (F.N: and their suppliers that the industry argues would save jobs and protect benefits for retirees.
But Chrysler has been forced to consider a more drastic set of backup plans that could include selling off key business lines — including Jeep, considered its most valuable brand. It may also outsource its finance and human resources, sources said.
As a step toward that hard-landing scenario, the automaker is moving to split up its replacement parts business based on brand so that its Chrysler, Jeep and Dodge operations could be completely separate, one source briefed on that plan said.
That could make it easier to sell off an individual brand.
Chrysler Chief Executive Bob Nardelli joined GM CEO Rick Wagoner and Ford CEO Alan Mulally on Thursday in meetings with U.S. House Speaker Nancy Pelosi and Senate Majority Leader Harry Reed.
The three automakers lobbied the Democratic lawmakers — who increased their power in Tuesday’s election that also saw Barack Obama elected president — for up to $50 billion in federal aid, sources said.
The push for aid has been accompanied by increasingly dire warnings from industry executives and their political allies about the cost of inaction and the risk of a failure that would cost tens of thousands of manufacturing jobs.
Chrysler does not release financial information.
While executives, including Vice Chairman and President Tom LaSorda, once touted that lack of disclosure as a strength, the same lack of transparency could now complicate the automaker’s efforts to seek aid under a federal rescue package.
In addition, analysts have said Chrysler’s ownership by Cerberus poses a political problem as a federal rescue could be criticized as a bailout for a secretive Wall Street firm known for its political contacts.
Cerberus is chaired by former Bush administration Treasury Secretary John Snow and its board includes Dan Quayle, who was vice president under former president George H.W. Bush.
Both GM and Ford are expected to post deep quarterly losses on Friday and announce further urgent steps to cut costs and conserve cash in the face of a plunge in auto sales to their lowest in around a quarter of a century.
GM’s president for North America Troy Clarke said late on Wednesday the government and industry faced a critical “100-day” window to secure financing and restructure.
The sharp decline in U.S. auto sales that began in the summer and has since accelerated has hit Chrysler particularly hard.
A pending asset sale is unlikely to be enough to save the day. Though Chrysler is pushing to complete a sale of its Viper sports car line this year, that is likely to bring in $80 million or less, said a person familiar with the brand’s valuation.
U.S. sales of the Chrysler, Jeep and Dodge brands were down almost 26 percent this year through October, and Chrysler’s market share has slipped to just 11 percent in October, putting it in an almost dead-heat with Honda Motor Co (7267.T) for the No. 4 spot in the U.S. market.
Under Cerberus, Chrysler’s captive finance arm, Chrysler Financial, moved quickly to suspend lease financing in August when resale values of its SUV and truck-heavy line-up plunged and threatened deep losses.
But Chrysler was forced to increase cash incentives by $2,000 per vehicle to offset the sudden move to drop leasing. That cost some $200 million in August and September, the automaker told dealers in late September.
“The lifeboat is coming. We just have to keep rowing,” Chrysler Vice Chairman Jim Press said in a briefing for dealers that also discussed the automaker’s lobbying for government support, according to a person who heard the remarks.
Separately, LaSorda told dealers at the same late September event that Chrysler, which depends on the U.S. market for some 90 percent of its sales, was pressing ahead with alliances and believed it was close to a deal for the Russian market.
By Poornima Gupta and Kevin Krolicki
(Additional reporting by Jui Chakravorty in NEW YORK) (Editing by Ian Geoghegan)