SURGE AT CHRYSLER
On Oct. 21, an ebullient Robert J. Eaton addressed a gaggle of reporters on the flight deck of the aircraft carrier U.S.S. Intrepid in New York Harbor. It was a flashy gimmick to kick off sales of Chrysler Corp.'s hot new family sedans. And Chrysler's vice-chairman and successor to retiring Chief Executive Lee A. Iacocca was upbeat in describing the new models. He was equally cocky when talking about Chrysler's future. "We know how to be successful even in a down market," he boasted.
Eaton can be forgiven a little grandstanding. With the rest of the U.S. auto industry trapped in a prolonged slump, Chrysler announced surprisingly strong third-quarter earnings of $202 million, after a loss of $82 million last year. Even better times may be coming in the months ahead. The new cars now hitting showrooms are the snazziest Chrysler has produced in decades.
That sure doesn't sound like the Chrysler of a year-and-a-half ago--the one that was on life support. In 1991, the No. 3 U.S. carmaker was losing money at a dizzying pace. Cash was so tight that Chrysler's accounting department sometimes had to scramble to meet the payroll. The company's market share was skidding, and with no merger partner in sight, industry experts figured Chrysler was dead meat.
NICE NEIGHBORHOOD. But led by the feisty Iacocca, Chrysler is roaring back from oblivion for the second time in a decade. Fueled by strong demand for minivans and the hot new Jeep Grand Cherokee, the company's share of the U.S. truck market has climbed to 22% this year, from 19% a year ago. Even better, Chrysler will earn about $500 million in 1992, compared with a $795 million loss last year (chart). And analysts are looking for net earnings in the neighborhood of $800 million in 1993. Much of the improvement stems from a cost-cutting crusade that lopped off$4 billion in annual operating costs in just three years.
To be sure, Chrysler isn't entirely out of the woods. After years of reduced corporate contributions to its pension fund because of weak earnings, the company must now come up with a plan to fill a $5 billion shortfall. Unfortunately, Chrysler has only $3.3 billion in cash on hand, a relatively meager sum in the auto industry. And with its bond ratings languishing at junk levels, the company has been virtually shut out of the credit markets. Even more worrisome is the shaky economy. If skittish car buyers vanish again, all bets could be off.
Still, barring unforeseen calamities, Chrysler's revival looks increasingly unstoppable. The auto maker's revamped new-product program, which dedicates autonomous teams of engineers, marketers, and outside suppliers to each new vehicle, has quickly transformed Chrysler into Detroit's most efficient designer of new vehicles. That capability has already spawned a slew of new products, including the slick LH sedans--the Eagle Vision, Dodge Intrepid, and Chrysler Concorde. And in late 1993, Chrysler will launch a moderately priced subcompact that officials promise will be the first profitable North American-made small car in decades. "In the next three years, we'll be bringing out more new products than Chrysler brought out in the past 20 years," crows Eaton.
Even Iacocca's retirement at yearend shouldn't cause a ripple. Within the auto industry, Chrysler's top management team is considered among the most gifted in the U.S. Headed by Eaton, a 52-year-old former General Motors Corp. executive hired in March to succeed Iacocca (page 96), the group has the kind of broad experience Chrysler needs to keep the momentum rolling. It includes stars such as Thomas C. Gale, the creative design chief who insiders say is also one of the company's shrewdest marketing minds, and Jerome B. York, the chief financial officer whose engineering background helps him cut costs without compromising the performance of Chrysler's products.
The cohesiveness among Chrysler's top management even survived Iacocca's dithering when it came to settling on a replacement. Many had speculated that Robert A. Lutz, Chrysler's president and onetime heir-apparent to Iacocca, would bolt when Eaton was brought in. But so far, the two executives appear to be getting along, with Lutz continuing to head Chrysler's critical product-development efforts. "We sing from the same song sheet," says Lutz, describing his relationship with Eaton.
SPEND STRATEGY. If Chrysler's is now a happier tune, it was quite a while in the composing. Executives at the auto maker have been holding their breath for three long years. Back in 1989, Iacocca and other top managers realized that the long-awaited recession was coming as profits dipped sharply. "I thought: 'Oh my God. We're going to tank again,' " Iacocca recalls. Detroit tradition mandated chopping new-product programs to husband cash and ride out the slump. But Chrysler's brass knew that route meant suicide, since the company's aging lineup already couldn't compete. The only alternative: keep spending on new models and ax overhead costs.
The strategy began to take shape on June 2, 1989. Bennett E. Bidwell, then head of Chrysler's automotive business, held a daylong meeting with 25 top officers at the Bloomfield Hills Country Club. Bidwell, Lutz, York, and others broke into teams and hacked $1 billion from Chrysler's capital-spending plan. Smaller groups met later to smooth out the details. When Bidwell proudly presented the results at a Chrysler directors' dinner July 12, Iacocca dropped another bomb: He wanted an additional$1 billion sliced from operating costs.
Chrysler continues to cut costs aggressively. And executives admit they have a lot more fat to trim. A recent study by consultants Harbour & Associates Inc. puts Chrysler's labor cost per car at $1,872--less than GM's $2,358, but not as good as Ford Motor Co.'s $1,563. York says Chrysler will continue to improve productivity by cutting spending by 4% to 5% a year through the 1990s.
To do that, Chrysler is "benchmarking" everything from accounting to manufacturing. A team of nine senior executives from all areas of the company, including the United Auto Workers, is currently visiting 65 companies in the U.S., Asia, and Europe, looking for ways to improve operations. One early success: After adopting Motorola Inc.'s more-efficient accounting practices, Chrysler is closing its books a week earlier each quarter.
Chrysler has also overhauled its top-down, autocratic management structure. After an in-depth study of Honda Motor Co. by 14 young employees who hadn't been thoroughly steeped in traditional Chrysler-think, Lutz and engineering chief Francois J. Castaing began dismantling rigid departments, such as the engine division. They were replaced by nimble, Honda-like product-development teams. The teams pulled together in one location experts in areas as diverse as design, manufacturing, marketing, and purchasing. Each team got the power to make decisions ranging from styling to choice of suppliers.
The result: a dramatic leap in efficiency. One team of 85 people designed the $50,000 Dodge Viper sports car in just 36 months--an astounding feat for a company that has traditionally taken at least 4 1/2 years to design new products. And less time means less money. The Viper cost just $75 million to develop. By contrast, Mazda Motor Corp. spent $118 million to develop its ragtop Miata.
The new approach demanded change from everyone in the company, right up to Iacocca. No longer could he rule by fiat. For instance, instead of striding into Chrysler's styling studios and ordering the kind of chrome-laden, boxy designs he prefers, Iacocca reluctantly acquiesced to team decisions. "I used to go in and tell them everything," concedes Iacocca. "But you can't do design by the seat of your pants."
TRUCKIN'. A little luck has helped the turnaround, too. Chrysler's strong products, minivans and Jeeps, happen to be in segments where sales are surging right now. Its industrywide truck sales are up 11% so far this year, while car sales haven't budged. It also helps that those products boast healthy profit margins. Chrysler makes an average of more than $5,000 on every minivan it sells and up to $8,000 on top-of-the-line Grand Cherokees. Many of Chrysler's cars, by contrast, barely break even.
Going forward, Chrysler is betting much of its continued success on the its ability to keep its product line fresh. The company has plans to unveil a new model every six months for the next few years. It wants to spend $17.3 billion on new products through 1997.
So far, Chrysler's new products seem to be winners--even when stacked up against tough Japanese competition. The LH sedans are still in short supply as the Bramalea (Ont.) plant that builds them gears up. But they're already causing a stir. Alan Spitzer, whose family owns 10 Chrysler dealerships in Ohio and Florida, says the cars are attracting buyers as well as sightseers who just want to look. "We've sold a few dozen--all we've been able to get our hands on," he says.
The new cars had better be winners. Chrysler is betting a total of $1.6 billion in development and production costs on the LH. It's the company's last-ditch effort to reenter the lucrative midsize-sedan market, now dominated by the No. 1-selling Honda Accord as well as the Ford Taurus and Toyota Camry.
ELBOW ROOM. Next summer comes a brawny new full-size truck, the T-300, which will offer daring styling and an optional cast-iron version of the Viper's aluminum V-10 engine. Then, early in 1994, will come the PL subcompact. Like the LH line, the PL will feature Chrysler's cab-forward design, which will make it roomier inside than competitors such as GM's Saturn and Honda's Civic. Chrysler engineers say a more powerful engine will also give it a sportier feel. A new compact car to replace the current, boxy Dodge Spirit and Plymouth Acclaim, plus an all-new minivan, will soon follow.
Of course, just one flop could jeopardize the cash flow Chrysler needs to fund development of subsequent models. A loser could also sour consumer appetites for new Chrysler models. But if the new products are hits, Chrysler could become a cash machine. Harbour & Associates' James E. Harbour, a former Chrysler executive, says the company's sales volume could jump from 1.5 million vehicles a year to 2.5 million. And profits would follow.
Despite the rosy profit forecasts, Chrysler faces some daunting challenges in the months and years ahead. The corporate cash crunch is probably the most pressing problem. Chrysler wants to come up with $2.5 billion to $3 billion in cash over the next five years to start paying down its pension liability. That's a tall order on top of the roughly $3.5 billion it will need every year to develop new products.
Chrysler officials insist they can find the cash they need without resorting to another stock sale. But that may be too optimistic given the company's cash demands. An investment banker who has worked with Chrysler in the past says the company is merely biding its time while the stock price rises before announcing a new issue.
BOND BURDEN. Chrysler's poor standing in the credit markets is also beginning to take its toll. Ever since its bond ratings slipped below investment grade two years ago, Chrysler Financial Corp. has had difficulty matching the consumer-financing rates offered by competing car companies. Increasingly, that has meant lost sales. CFC also can't finance new-car purchases at Chrysler's rental-car companies--Dollar, Budget, and Thrifty. As a result, they're turning to higher-cost financing elsewhere, further pinching margins. And Chrysler executives don't expect to regain an investment-grade rating until 1995 at the earliest.
As if the financial hurdles weren't enough, Chrysler also needs to work on quality, an issue that has nagged it for years. Chrysler cars and trucks, while vastly more reliable than they were 10 years ago, still don't match the competition. Chrysler models virtually never achieve the industry average for quality, according to surveys by market researcher J.D. Power & Associates Inc. The company is trying to remedy that with the LH sedans, which are aimed at upscale buyers who won't settle for anything less than the top quality they're used to in Japanese models. Still, Iacocca admits: "The quality jury is still out."
Eaton knows Chrysler has to do better if it's going to compete. Already, he has developed a reputation as a quality guru. He has pushed engineers to improve designs so cars are simpler and easier to build and thus less likely to develop problems. For example, engineers on the PL-subcompact team have reduced the variety of nuts, bolts, rivets, and other fasteners they use. The cars will have about 2,000 parts in all, down from 3,000 in the models they replace. That brings costs down, too. The PL's $1 billion startup budget is one-fifth of the $5 billion GM has sunk into Saturn.
Despite the lingering problems, Eaton could hardly have asked for a better time to take the wheel at Chrysler. If the economy cooperates and car sales pick up, there's a good chance that Chrysler may finally be rid of its reputation as the auto industry's perennial weakling. Says Eaton: "I feel like a batter coming in with the bases loaded and nobody out." All Chrysler's next boss needs is some solid hits to guarantee Chrysler's winning streak.CHRYSLER'S STRENGTHS...
- By creating product teams, it trimmed development time for new models by 1.5
- It has boosted sales with a string of hot products, including minivans, the
Jeep Grand Cherokee, and midsize sedans
- It has reduced annual overhead by $4.2 billion in just 3.5 years with
- Unlike GM, it has forged close links with suppliers and unions
- The junk-bond rating on its debt means that Chrysler can't raise enough
money to offer better auto-loan terms to customers
- It must come up with $3.5 billion a year to finance new-product development
- Despite the popularity of some of its models, Chrysler still lags behind
Ford, GM, and Japanese carmakers on quality
- It needs to improve productivity. Ford and Japanese rivals are more efficient
David Woodruff in Detroit, with Elizabeth Lesly in New York