For Fiat Chrysler Automobiles, It’s 2004 Once Again – Motley Fool

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FCA spent a fortune revamping its Sterling Heights Assembly Plant to make the Chrysler 200. Yet sales of the 200 have actually slumped, and now FCA plans to discontinue the midsize sedan and spend yet another fortune to convert the plant to truck production. Image source: Fiat Chrysler Automobiles

Last month, Fiat Chrysler Automobiles (NYSE:FCAU) said that it will certainly lay off a shift of concerning 1,300 workers at its Sterling Heights Assembly Plant near Detroit. The task cuts will certainly be efficient as of July 5.

Given exactly how solid the U.S. new-auto market has actually been, news of layoffs at an auto plant comes as something of a surprise. Not in this case, though: Sterling Heights builds the Chrysler 200 sedan, and the 200’s sales have actually fallen sharply due to the fact that last summer. 

But there’s a lot more to this compared to a slumping market for sedans: FCA is slowly winding down production of the 200 since it plans to usage the Sterling Heights factory to build a lot more profitable trucks instead. A similar story is playing out along with the 200’s smaller sized sibling, the Dodge Dart, and its plant in Belvidere, Illinois, which will certainly be making Jeeps as opposed to sedans prior to long.

Skimping on cars to go all-in on truck and SUV sales is exactly what the Detroit automakers were doing spine in 2004, and it burned them badly as soon as the market turned spine toward fuel-efficient cars a few years later.  has actually FCA not learned from history? Or is this a Hail Mary attempt to enhance the struggling automaker’s profits?

Not long ago, the Chrysler 200 was a promising product
FCA put a great deal of effort in to the Chrysler 200, and it was hailed as a promising product as soon as it was very first introduced. It’s a midsize sedan priced to rival entries love Ford’s (NYSE:F) Fusion and Honda’s Accord, Yet along with a plusher feel. Reviewers gave it mixed marks for its old-school cushy ride, Yet it was praised for its long list of luxury-car-love features and an attractive, quiet interior. 

Overall, it looked love a success. Sales of the brand-new 200 rapidly eclipsed those of its predecessor and were growing sharply. Yet then, last summer, FCA stopped promoting the sedan. due to the fact that then, sales of the 200 have actually fallen off a cliff.

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Data source: Fiat Chrysler Automobiles

Clearly, the 200 didn’t have actually enough energy to sustain sales on its own. And now, FCA is turning away from the 200 and its sibling.

Why FCA is stepping away from mainstream sedans
love its rivals, FCA is confronting market reality: auto buyers are increasingly opting for crossover SUVs over sedans. That’s a trend we’ve seen unfolding for a while now, and most experts agree that it’s most likely to be a long term shift, not simply a fad. 

For numerous automakers, that’s not a big problem: Sedan sales are down some, Yet they’re (to varying degrees) making up the difference along with SUVs. Sedan-heavy rivals love Toyota (NYSE:TM) are losing a bit of ground, while crossover-rich competitors love Ford are seeing gains. Yet for both, and most others, it’s simply the winds of the market, not a requirement to make radical shifts in production or product lines. 

For FCA, which is under heavy tension to enhance its profit margins, it’s a various story. Sales of the company’s pretty popular (and presumably pretty profitable) Jeep line of crossover SUVs have actually been booming, so considerably so that its factories are struggling to comply with demand. Likewise, the market for full-size pickup trucks has actually been strong, and FCA has actually been selling numerous profitable Ram pickups. 

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While its sedan sales have actually slumped, FCA is selling every one of the Jeep Cherokees it can easily make. That’s why it will certainly end production of the Dodge Dart and usage its factory to make a lot more Cherokees. Image source: Fiat Chrysler Automobiles

Put simply: Jeep and Ram factories are struggling to preserve up along with booming demand, while the factories that make the 200 and Dart are operating below capacity. Building brand-new factories isn’t an answer: brand-new plants would certainly be hugely expensive to build and to run on an ongoing basis, and FCA would certainly almost undoubtedly regret the added fixed costs as soon as sales slump throughout the next recession. Hence the solution strike on by Marchionne.

Will history repeat itself?
FCA has actually said that it will certainly enable sales of the 200 and the related Dodge Dart compact sedan to “run their course,” and that the company will certainly eventually replace both sedans along with vehicles earned by a partner (yet to be determined).

But once they’re gone, Marchionne and FCA will certainly be all-in on a big bet that solid necessity for SUVs and trucks is here to stay. will certainly FCA grab burned by that bet as its predecessor once did? It looks love we’ll discover out.

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John Rosevear owns shares of Ford. The Motley Fool owns shares of and recommends Ford. Attempt any sort of of our Foolish newsletter services free for 30 days. We Fools could not every one of hold the exact same opinions, Yet we every one of believe that considering a diverse range of insights makes us much better investors. The Motley Fool has actually a disclosure policy.