Chrysler's turnaround seen as race against time

By Soyoung Kim and Jo Winterbottom - Analysis

DETROIT/MILAN (Reuters) - Facing dwindling sales, Chrysler is discovering that it is easier to reinvent a balance sheet than a line-up of cars and trucks.

Now the clock is ticking, analysts say, and the coming months will be crucial to the bid by Italy's Fiat SpA (FIA.MI) to reinvent auto operations starved of investment in the run-up to Chrysler's bankruptcy.

After a quick makeover in Chapter 11 and some $14 billion in U.S. government funding, Chrysler has been given a clean balance sheet and much-needed small car technology from its new partner.

But its sales remain under pressure and analysts caution that fixing Chrysler's product difficulties will not be fast, easy or cheap.

"The ultimate heartbeat of a car company is the ability to bring out vehicles that will sell," said Van Conway, a restructuring expert at Conway MacKenzie. "There is a large question mark for Chrysler out there."

Chrysler's U.S. sales fell 15 percent in August, when overall industry sales rose 5 percent. Equally troubling was that its market share fell to 7.4 percent in August -- from 11 percent in 2008.

After freezing product development to conserve cash under former owner Cerberus Capital Management CBS.UL, Chrysler faces a dearth of new model launches, analysts say.

The result: Chrysler lacks small and fuel-efficient cars. Its truck-heavy lineup was called "woefully uncompetitive" by Consumer Reports in its latest issue.

With an average fuel economy of 28 miles per gallon for its fleet, Chrysler has the least fuel-efficient lineup among major automakers. General Motors' GM.UL average is 31 mpg, Toyota Motor Corp (7203.T) 36 mpg, Honda Motor Co (7267.T) 37 mpg, according to U.S. government data.

Erich Merkle, an analyst at Autoconomy.com, said he expects Chrysler's market share could drop as low as 4 percent by 2011. Merkle and other analysts said Chrysler will face a tough year in 2010 because it will feel pressure to drop unprofitable and slower-selling models like the Sebring.

At the same time, small cars from Fiat, including the 500, are not expected to arrive until early 2011.

"Fiat may have the products and powertrains that will add to Chrysler's ability to do business. But 18 months is a lifetime in this industry," said Gary Dilts, senior vice president of forecasting at J.D.Power & Associates.

"They don't have the option to wait for new products. Timing is the key to its survival," said Dilts, who headed Chrysler's U.S. sales before joining J.D.Power in 2007.

DIFFERENT CHRYSLER

Chrysler Chief Executive Sergio Marchionne, who also heads Fiat, said last month that the U.S. automaker was still burning cash but the rate had slowed.