Fiat Chrysler’s Jeep, Ram Pickup Production Capacity Boosted By Half A Million Units Going Into 2018 – Seeking Alpha
Tesla (TSLA) tends to get almost all the attention when it comes to speculation about increasing U.S. automotive factory capacity these days. Not that there aren’t other automakers who aren’t also expanding in the U.S. by building out other automobile factories, as Subaru (OTCPK:FUJHY), BMW (OTCPK:BMWYY), Volvo (OTCPK:VOLVY) and others have been working on the last year or two.
However, there is yet another kind of production expansion that doesn’t involve building a new factory or even meaningfully expanding the size of an existing automotive assembly plant: The return to new production from having reorganized existing production.
Say what? What does that mean?
Let me explain.
Fiat Chrysler [FCA] (FCAU) is one of the world’s largest automakers, as it produces and sells approximately five million vehicles per year world-wide. For example, in 2016 FCA sold 2.24 million vehicles in the U.S., flat over 2015: and 279,000 in Canada.
FCA owns brands such as Jeep, Dodge, Fiat, Chrysler, RAM, Alfa Romeo and Maserati. One of the major strategic initiatives FCA took 1-2 years ago was to decide to discontinue the manufacturing of its two smallest cars in the U.S.: Dodge Dart and Chrysler 200. The reason for this was to be able to manufacture more future versions of Jeeps, pickup trucks and other SUVs without having to build more factories or materially expand the existing ones.
In the years leading up to the second half of 2016, Dodge Dart and Chrysler 200 had been miserable failures with disappointing sales and attendant heavy discounting that wiped out any net profits for those two products. Meanwhile, FCA’s profitability, especially for the Jeep and RAM pickup truck product lines, was very healthy.
So what did FCA do? In October 2016, it ended production of the Dodge Dart, which was made in the Belvidere, Illinois, plant.
In December 2016, it ended production of the Chrysler 200, which was made in the Sterling Heights, Michigan, plant.
With these two facilities having been closed in late 2016, essentially nothing will be produced in them for some meaningful parts of 2017. We can discuss how many units that means have been unsold, but the rule of thumb is this: Each plant would be able to produce close to 200,000 units per year, perhaps closer to 250,000 utilizing overtime. Those are typical auto plant numbers.
However, it gets more complicated than that. This story is not as easy as these two plants being shut down for 2017. The story involves two other plants as well, and how production is shifting around to, nevertheless, yield the same outcome: Close to half a million units will be added back to FCA’s most profitable production capacity in time for calendar year 2018.
So what will be happening with these plants going forward? Let’s start with the Belvidere, Illinois, plant. This is the new location for manufacturing the Jeep Cherokee. The Jeep Cherokee was previously assembled in FCA’s Toledo, Ohio, plant.
Production of the Jeep Cherokee ended in the Toledo, Ohio, plant in April 2016 and is starting now in Belvidere, Illinois. As it happens, FCA sold 200,000 Jeep Cherokees in the U.S. in 2016 alone, plus 32,000 in Canada, so that will keep the Belvidere, Illinois, factory busy going forward.
But wait a minute! What happened to the half of the factory in Toledo, Ohio, from which the Jeep Cherokee was moved? That’s obviously a factory with a capacity of at least a quarter-million units for that half of the factory alone (the current Jeep Wrangler is made in the other half). Where did that quarter-million unit capacity go?
The answer is this: In the Toledo, Ohio, space vacated by the Jeep Cherokee, Jeep will start to build the Jeep Wrangler pickup truck at some point possibly within a year from now.
What is the Jeep Wrangler pickup truck anyway? This is the classic “GI Joe” Jeep Wrangler with a pickup truck bed in the back. Jeep dabbled in something along these lines decades ago, but it’s been clear for many years yet again that this is an “obvious” product for the U.S. market. Jeep Wrangler and Pickup Truck go together like Peanut Butter and Jelly. It doesn’t get any more American than this – apple pie, Elvis Presley, GI Joe, you name it.
Here are some recent spy pictures of the Jeep Wrangler pickup truck: SPIED: Wrangler JL Pickup Testing on Public Roads!
So do you see what happened here? In exchange for ending production of the Dodge Dart in the Belvidere, Illinois, factory in October 2016, Jeep starts production of the Wrangler pickup truck in the Toledo, Ohio, plant at some point within a year or so from now. The Jeep Cherokee production was moved in the last 90 days from Toledo, Ohio, to Belvidere, Illinois.
Got that? It’s almost as if one could illustrate this better with a flow-chart and arrows.
Basically, gone is the failed Dodge Dart, which nobody in the market misses – least of all the FCA shareholders, who got only red ink from that miserable failure. Instead, FCA’s shareholders are about to get what could be the hottest SUV-pickup truck vehicle to hit the market in decades.
Now that’s what I call a great trade! Out with the losses, in with the profits.
But wait a minute again! What happened to the space vacated by the Chrysler 200 in Sterling Heights, Illinois?
Starting near January 2018, FCA will be building a new RAM pickup truck in the Sterling Heights, Michigan, plant vacated last December by the discontinued Chrysler 200. Here are the some of the latest spy photos of this next-generation RAM pickup truck: SPIED: 2019 Ram 1500 Mega Cab Interior, Exterior, and Cargo Box.
In the short run – during calendar year 2018, perhaps even a little longer – this means that FCA will have three RAM pickup truck factories – One in Mexico and two in Michigan. This should mean a huge production year for RAM pickup trucks in 2018, potentially adding an approximate 250,000 additional pickup truck units onto the market, over and above the current production rate.
However, after a transition period that could take as much as approximately a year or two, in order to ensure a smooth transition to the new generation of RAM pickup truck and to ensure that no production is “lost” as a result of some potential snafu (they sometimes happen!), the Warren, Michigan, RAM pickup truck plant will be retooled in favor of two other new products:
– Jeep Wagoneer
– Jeep Grand Wagoneer
FCA has not announced any details about those two vehicles, but it is safe to say that we can describe them as follows:
Jeep Wagoneer: This would be a larger and more luxurious SUV than the Jeep Grand Cherokee, of which Jeep sold 212,000 units in 2016 in the U.S. alone (and 15,000 in Canada).
Jeep Grand Wagoneer: This would be a larger and/or even more luxurious version of the Wagoneer. We know very little about the two Wagoneers otherwise. FCA’s CEO has characterized them as something closer to a Range Rover in terms of luxury. One could also include Cadillac Escalade (GM), Lincoln Navigator (F), Infiniti QX80, Mercedes GL, Volvo XC90, Audi Q7 and the upcoming BMW X7 in this competitive set. These are three-row SUVs that sell mostly in the $50,000 to $100,000 range.
Here is some of the best that we (think we) know about the Jeep (Grand) Wagoneer: The 2019 Jeep Grand Wagoneer looks like a Grand Cherokee on steroids
So what is happening in this FCA Sterling Heights, Michigan, manufacturing reorganization, on a net basis?
FCA ended production of the Chrysler 200 car. See Dodge Dart for relief in terms of financial impact. The next-generation RAM pickup truck will be made there starting early 2018.
FCA is opening up space in Warren, Michigan, to produce the two largest and most luxurious SUVs in its lineup, competing in the $50,000 to $100,000 range, starting probably shortly after 2018.
Adding what we talked about previously, above, on a combined net basis, this means that:
Dodge Dart and Chrysler 200 were discontinued in late 2016.
Those two will be replaced in late 2017 and early 2018 by RAM pickup trucks, the Jeep pickup truck, and a year or two thereafter by Jeep Wagoneer and Jeep Grand Wagoneer.
Adding all of these production moves to the final bottom line, the total impact on FCA will, therefore, be twofold:
Profitability: The loss-making products are out and the most profitable prospects are added to the product mix.
Production boost for 2018: With a net of two factories idle for essentially one year – approximately calendar year 2017 – that means 2018 should see a production boost of as many as 500,000 units for these FCA factories.
Let’s quantify this a little bit: In 2016, the combined unit sales of the Dodge Dart and Chrysler 200 were 100,000 units in the U.S. market – most likely at fantastic losses. Sales of these two products will be minimal in 2017: They were 19,000 units in the U.S. for the first five months of 2017, so the annual total probably won’t exceed 30,000 as they are dwindling down to zero rapidly, selling out the remaining inventories that arrived on dealer lots approximately half a year ago.
In contrast, in 2018, FCA could see as many as 500,000 incremental sales from these other highly profitable models – Jeeps and pickup trucks. That’s a HUGE jump! 100,000 loss-making cars sold in the U.S. in 2016, perhaps 30,000 of them highly discounted from inventories in 2017, and then a jump up to perhaps 500,000 highly profitable Jeeps and pickup trucks sold world-wide starting in 2018.
All other things equal, this should provide for a major boost to FCA’s earnings.
Think about what this means with Tesla as a reference point. Tesla hopes to sell 100,000 combined Model S and X cars in 2017, up from under 77,000 in 2016. It then has guided to growing sales to 500,000 units in 2018 thanks to the Model 3 — in a single factory in California – which is a number essentially not even a single sell-side analyst has in their estimates for 2018.
Meanwhile, FCA is basically doing it. FCA is going from zero production in two factories on a net basis in 2017 to perhaps as many as 500,000 units in these factories in 2018. Unlike Tesla’s large and increasing losses, these FCA vehicles are also almost guaranteed to be some of the market’s most profitable ones – Jeeps and pickup trucks.
So tell me again, why is Tesla’s market cap $58 billion (and much more on a fully diluted basis) whereas FCA’s is only $16 billion? Shouldn’t it be *at least* the other way around?
But wait, there’s more! FCA is also proceeding as Alphabet-Waymo’s (GOOGL) (GOOG) signature partner for autonomous driving, with meaningful incremental progress likely to be shown over the next 3-6 months: Fiat Chrysler Likely To Deepen And Extend Autonomous Car Relationship With Alphabet/Waymo.
As far as these Chrysler Pacifica hybrid minivans go, I describe in this video how much less expensive they are compared to the only other three-row plug-in vehicles on sale in the U.S. market right now: Here are the 3 Most Fuel Efficient Family Haulers! Basically, with a starting price of approximately $42,000 before government incentives, the Chrysler Pacifica hybrid is significantly less than the Volvo XC90 T8 at almost $70,000 and the Tesla Model X at $85,500 for 7-seat configuration with the smallest battery, and $102,500 if you get it with 295 miles of range instead of 237. (Who gets a minivan with only 237 miles of range when 295 is available?)
FCA 2Q results are due to be reported later this month. This is the 2014-2018 business plan update.
Disclosure: I am/we are long F.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: At the time of submitting this article for publication, the author was long GM, F and GOOGL. However, positions can change at any time. The author regularly attends press conferences, new vehicle launches and equivalent, hosted by most major automakers.
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