Chrysler's Mike Manley introduced the Jeep Cherokee in Shanghai last week. Chrysler is bringing several Jeeps to China in a bid to boost profits. Photo credit: Chrysler Group

Chrysler Group LLC said on Monday that its first-quarter net income had fallen to $166 million, down 65% from a year earlier, on a decline in shipments and increased costs related to new product launches.

Chrysler, the Detroit automaker that forms the U.S. "house" of Italian automaker Fiat (NASDAQOTH: FIATY), said that first-quarter revenues were $15.4 billion, down 6%. The company's adjusted pre-tax profit was $435 million, down from $740 million in the year-ago period.

All of this was broadly in line with expectations, though Fiat shares dropped on the news. Fiat itself is set to report its own earnings late on Monday.

An expected increase in costs that should set up a strong second half
The drop in Chrysler's earnings was in line with expectations set by Fiat and Chrysler CEO Sergio Marchionne back in January, when he warned that shipment volumes in the first quarter would be hurt by several planned product introductions.

Chrysler launched revised versions of the heavy-duty Ram pickups and the Jeep Grand Cherokee during the quarter, and was ramping up to a second-quarter launch of the all-new Jeep Cherokee SUV. All of those projects involved production disruptions – production of the outgoing Jeep Liberty ceased during the quarter, in preparation for the Cherokee's launch – and all increased Chrysler's costs during the quarter.

Marchionne said in a statement on Monday that Chrysler remains on track to meet its previously announced full-year goals, something he described as a "daunting" task. Those goals include an 8% increase in shipments and an adjusted operating profit of $3.8 billion.

Surprisingly, Chrysler remains on track
All things considered, Chrysler has done surprisingly well since it emerged from bankruptcy into the waiting hands of Fiat in 2009, with this report making seven profitable quarters in a row. The company has posted monthly increases in U.S. sales for 36 straight months now. Its U.S. sales were up 21% last year, well ahead of the overall market, and up another 8% in the first quarter of 2013.

Chrysler's sales and profits have long trailed those of its larger hometown rivals, General Motors (NYSE:GM) and Ford (NYSE:F) for one big reason: scale. While GM and Ford both have significant overseas operations, Chrysler has for much of its history done most of its business in North America – and done so as kind of a value-priced alternative to its bigger rivals, with a larger reliance on sub-prime lending.

Its adoption by Fiat – a company that had been shut out of the U.S. market for a generation – was intended to give both automakers the global scale to compete in the automotive major leagues. So far, the mash-up has worked better than most observers anticipated: Shortly after taking control of Chrysler, Fiat mounted a high-speed makeover of Chrysler's neglected product line that resulted in a series of surprisingly competitive vehicles.

But Chrysler will have to carry Fiat for a while longer
Now, Marchionne is looking to Chrysler to carry Fiat, which has been hammered by wretched economic conditions in its home base of southern Europe and is expected to post a big loss later on Monday. Among other things, Fiat has helped Chrysler expand overseas: The company is bringing several of its Jeeps to China, for instance, where SUVs are a white-hot product category at the moment.

But while Chrysler's profits continue to be encouraging, Marchionne is right: Getting this mashed-up automaker safely through the next few years remains a daunting task.

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