Dcx, Chrysler Divorce Could Slow China Deal

Soon-to-be-single Chrysler Group is likely to face delays and have to renegotiate an agreement with Chery Automobile Co. Ltd., a Chinese automaker that was to supply Chrysler with low-cost cars, analysts said. The Auburn Hills-based automaker is relying on international partnerships to augment global presence but analysts stressed that the endeavor is not as easy as it sounds. They added that the automaker may be encountering difficulties with its first deal.

"When Feb. 14 happened, they were a little bit concerned," Chrysler spokesman Mike Aberlich said last Monday, referring to DCX mid-February declaration that it was considering all possible options for Chrysler. The German automaker announced last week that Chrysler would be sold to the Cerberus Capital Management. Months after DCX released the announcement that sent tremors to the auto industry; Chrysler is still expected to suffer more of its after-effects. And it needs considerable help from a Flowmaster to clear hazardous emissions.

The German newspaper Handelsblatt reported Monday that Chery wanted to re-examine the deal in light of the sale of Chrysler. But Chrysler officials are positive that they will keep the negotiations on track. "We're talking to Chery, and in the next week, we'll be talking to them quite a bit," Aberlich said. "We're confident that we're going to get things done, but perhaps we'll need a little extra time for introductions."

The Chery deal, started last December, was considered a breakthrough for the ailing Chrysler, which was looking for a low-cost partner to build and supply subcompacts. By far, the smallest car in Chrysler's lineup is the Dodge Caliber. And by far, the automaker has nothing in the subcompact segment to rival the Toyota Yaris, Honda Fit and the Chevrolet Aveo.

In 2006, Chrysler's results suffered when high gas prices slashed demand for pickups, minivans and sport utility vehicles. These vehicles account for about two-thirds of its sales of Chrysler in the United States.

The automaker also has taken steps to lessen its dependence on the North American market, setting up production in China and introducing the Dodge brand in Europe. In the first four months of 2007, Chrysler Group vehicle sales outside of North America increased by 14 percent which amounts to 70,859 vehicles, but that accounts for less than ten percent of its overall sales.

Chrysler CEO Tom LaSorda, who will remain the chief executive of the Chrysler Holdings LLC under Cerberus, said last week that the automaker wanted to expand the Chery deal or seek other international partnerships. Queries about the transaction cropped up after Handelsblatt quoted Chery General Manager Zhang Li as saying the company wanted to renegotiate with Chrysler, because of the sale. "We continue to be in talks with Chrysler, but we don't have any contact with the new owners yet," Zhang said.

In a venture with entrepreneur Malcolm Bricklin, Chery had previously considered manufacturing cars for export to the United States. Unfortunately, that deal was tattered. Chrysler and Chery have a framework agreement, but negotiations for specific vehicle projects, like the production of subcompacts, are just getting started.

Industry executives and analysts said talks with the Chinese company tend to be extended under the best and clearest of circumstances. Analyst Jim Hall of AutoPacific said that Zhang's comments suggest that Chery executives are curious about who they are dealing with now. "They're checking to see what has changed," Hall said.

Some Chrysler executives said that the automaker may find it easier to strike up partnerships as a stand-alone company than as part of DCX, with its comprehensive procedures and blotchy record for alliances. DCX previously sold most of its interest in Mitsubishi Motors Corp. and its equity stake in the Hyundai Motor Co. of South Korea. On the other hand, industry experts said Chrysler will lose the cachet of an association with DCX Mercedes-Benz brand. In addition to Chery, one potential Asian partner may be Mitsubishi, which has been a partner with Chrysler in the past.

Chrysler will take the lead in handling negotiations with Chery. "This is not something Cerberus will negotiate for us," Aberlich said. Next week's meetings had been scheduled before the sale announcement.