Can Chrysler Keep It Up?
The Jeep Grand Cherokee roared along the Andes mountain range in Argentina with Chrysler President Robert A. Lutz at the wheel. Lutz had come to South America to join journalists on an off-road trek and attend an auto show in Brazil. But as he gunned the Jeep down a dusty trail, he seemed oblivious to the scenery. He was preoccupied with a question that once would have been unthinkable back home in Detroit. "Where is it written that Chrysler has to be a permanent No.3 in the American market?" he said. "Who says we can't move up?"
A pipe dream? Perhaps. But with Chrysler Corp. racing to an all-time high of 16% of the U.S. auto and light- truck market, these are heady times for the smallest of the Big Three. With consumer demand leveling off and rebates on pricey American models intensifying, General Motors Corp. and Ford Motor Co. increasingly seem stuck in neutral. But Chrysler continues to blow the doors off the competition.
Since its brush with bankruptcy at the beginning of the decade, Chrysler has doubled its revenues, to a projected $58 billion for 1996. This year alone, hot models such as the Ram pickup, the Town & Country minivan, the Jeep Grand Cherokee, and the redesigned Jeep Wrangler have thrust the company into overdrive: Chrysler sold 2.1 million vehicles in the U.S. through October, a 15% leap in a market that has grown just 3%. Chrysler's 1.6% gain in U.S. market share came straight out of Ford and GM, where volume is flat.
Moreover, Chrysler is now Detroit's profitability champion. Schroder Wertheim & Co. analyst John A. Casesa's estimate of Chrysler's earnings--$1,226 per vehicle--dwarfs GM's $689 and Ford's $661. In the third quarter, Chrysler earned $680 million on revenues of $14.4 billion, while Ford earned about the same amount, $686 million, on more than double the revenues, or $34 billion. All together, Chrysler could break its record $3.7 billion profit set in 1994.
MANIC DEPRESSION. Will it last? That's the question that dogs Detroit's feisty No.3. No auto company has suffered more than Chrysler from the corporate equivalent of manic depression. Euphoric highs have been historically followed by gloomy crises when the market turns sluggish. And following its periodic slumps, Chrysler has repeatedly slammed the brakes on product development and capital investment--adding to its troubles for years thereafter.
Given that erratic past, Wall Street wonders whether the company can manage the next downturn without undoing much of what it has achieved. "Investors still believe that the company can't get through a downturn unscathed," says Casesa. Despite its current good fortune, Chrysler remains more vulnerable than its rivals. With 65% of its sales coming from expensive, gas-guzzling trucks, a recession or a spike in oil prices could hurt Chrysler far more than others. And Chrysler has little foreign presence to offset a U.S. slowdown. Moreover, competition in its core markets is rising: GM will introduce three new minivans next year, while Toyota, Mercedes, and Nissan are all adding entries to the crowded light-truck market. "The worry beads are whether Chrysler can hang on to 47% of the minivan market and one third of the sport-utility market," says one big Chrysler shareholder.
But Chairman Robert J. Eaton argues that today's Chrysler is profoundly different. "Given our success, we could declare victory," he says. "But we won't do that." From his office at Chrysler's new 15-story heaquarters in the Detroit suburb of Auburn Hills, he says it can make money, pay its dividend, and execute development plans even if auto sales slump 20% and marketing costs soar.
How will Chrysler do that? The nuts-and-bolts answer is easy: Helped by a clean balance sheet, with $7.5 billion in cash stowed away, it will continue the sharp styling and lean manufacturing that have driven its turnaround. Yet its secret to success runs deeper. The financial explanations fail to capture what Eaton calls "the Chrysler difference"--a corporate culture that rejects Motown's hidebound bureaucratic traditions.
No group of managers has stirred up Detroit more since Ford's fabled Whiz Kids of the 1950s. The tone is set by Eaton, whose low-key demeanor belies a fierce competitive streak, and Lutz, the swashbuckling ex-Marine with a flair for product creation. But behind Eaton and Lutz, Chrysler boasts a little-known cast of managers who've become the envy of the industry. If Chrysler is to escape its past, it will largely be because of the work of these five executive vice-presidents: design guru and international director Thomas C. Gale, engineering head Francois J. Castaing, supply chief Thomas T. Stallkamp, manufacturing boss Dennis K. Pawley, and sales honcho James P. Holden. Their successes--and setbacks--will determine if Chrysler can shed its boom-and-bust image.
Together, the five survived Chrysler's brush with disaster, emerging with a willingness to take risks and a camaraderie rarely found in Detroit's executive suites. "This isn't a love-in, but I've never seen guys work together like this," says Lutz, who worked at Ford, GM, and BMW before joining Chrysler. Even rivals offer grudging respect. "They've done a very good job of resurrecting their position in the marketplace," says Jacques A. Nasser, head of Ford's auto operations. Company sources say that upon turning 65 in February, Lutz will give up the presidency and become vice-chairman overseeing product development. Chrysler's next president--and possibly CEO--is likely to emerge from this close-knit group.
Still, Eaton's team faces major challenges in 1997. Besides fighting off rivals in its core minivan and sport-utility segments, Chrysler is launching a new generation of family sedans in hopes of improving its stagnant 10% share of the passenger-car market. Chrysler must also improve its vehicle quality and revamp its aged plants--all in a cyclical market that is flattening out.
Moreover, Eaton has set Chrysler's goals high. By 2000, he expects Chrysler to boost capacity from 3.2 million vehicles to 3.8 million, improve productivity to 42.5 vehicles per employee from 33.7 today, and hike net margins to 8% from this year's estimated 6.5%. By contrast, margins at GM and Ford will run just 3.8% and 3.9% this year, estimates Scott F. Merlis, an independent auto analyst in Westport, Conn. Eaton also expects Chrysler's U.S. market share to grow without upping incentive costs.
That's not all: to reduce vulnerability at home, Eaton is also bolstering exports to South America, Asia, and Europe. In three years, he has doubled Chrysler's yearly international sales, to 250,000 vehicles, roughly 10% of the total. Since 1995, he's planned investments of $1 billion in South America alone. Despite plenty of competition, Eaton expects to double foreign sales again by 2000.
MOMENTUM. Those are heady goals. But Wall Street thinks that Chrysler's earnings and margin growth may be peaking: According to I/B/E/S, analysts' consensus estimate for Chrysler's earnings is down slightly in 1997, to $3.53 billion. If demand stalls in Chrysler's core markets or rivals score with new products, warns Stephen J. Girsky of Morgan Stanley, Chrysler won't be able to keep up its profits.
To hit Eaton's targets, Chrysler can't play it safe. It has to pare more costs, squeeze more production out of its plants, rev up vehicle development, and keep cranking out models. Those tasks fall to its all-star roster of executive VPs.
A close look at how they operate shows why they're so valuable. The process starts with Gale, the 53-year-old design specialist. A 29-year Chrysler veteran, he persevered through the 1980s when the boxy K-cars set the standard for dull, predictable vehicles. But Gale's design team smashed that image with its popular "cab-forward" blueprint for the Chrysler Concorde and Dodge Intrepid family sedans introduced in 1992. Other hits followed. Today, the big-rig Ram pickup, tony Jeep Grand Cherokee, and sleek new minivans fuel the growth.
Now, Gale is trying to build on that momentum. In September, Chrysler added the Dakota pickup, a scaled-down version of the hugely successful Ram. Gale's love for 1930s-era hot rods inspired Chrysler's latest design triumph, the retro-styled Plymouth Prowler, which goes on sale next spring. And coming next fall will be elegantly redesigned family sedans and the all-new Dodge Durango sport utility, which has the popular, brawny front end of the pickups. "They take risks," says Christopher Cedergren, an analyst in Thousand Oaks, Calif. "They understand that this isn't a commodity business."
Gale's credo is to add value in design without adding cost. "You want it to look like more money without spending it," he says during a Sept. 27 "walk-around" with his top deputies. Once a week, the free-spirited designer spends several hours evaluating the aesthetics of Chrysler's future products. On this day, for example, Gale and his crew enter Chrysler's "design dome" to view three full-size clay models for a future version of the Jeep Cherokee. Gale pushes his designers not to play it safe: He wants a strong-looking redesign. "One is `evolutionary,' two is `revolutionary,' and three is what we call the `military' look," says Gale. He isn't happy with the military version, calling the front end "too soft." He worries that the bumper "looks like it's falling off" the revolutionary model but admires its reared-back, prepared-to-pounce stance.
Soft-spoken and thoughtful, Gale seems an unlikely source of Chrysler's swaggering design ethic. And some insiders say he may be too pleasant to become president, though Lutz praises his role as an "agent of change." Gale gives his designers freedom--and finds them in unlikely places. An ex-Wall Streeter with a psychology degree is responsible for the Intrepid's aggressive stance, for example.
Gale works closely with Castaing, the French-born head of engineering, and Stallkamp, who has rewritten the book on supplier relations in Detroit. "The secret to our success," says Gale, "is how we manage the overlaps between us." To achieve the decidedly European feel of the new family sedans, for example, Gale wanted a powerful headlamp with a distinctive look. The cost worried Castaing and Stallkamp. Instead of an executive tug-of-war, they agreed after a simple discussion to keep the lights on the upscale LHS and Eagle Vision models and put cheaper lamps on the Concorde and Intrepid. "Working together is a more natural state than fighting together," says Castaing.
Castaing, 51, came to Chrysler in 1987 in its acquisition of American Motors Inc. A former racing-engine designer for French carmaker Renault, Castaing brought with him an expertise in powertrains that has vastly improved Chrysler's reputation for engineering. "Castaing is key to Chrysler's ability to build a superior product at lower cost," says investor Seth Glickenhaus, whose New York firm owns or manages 9.7 million shares. Chrysler's newfound skills are paying off elsewhere, too. BMW recently surprised observers by agreeing to let Castaing's team design the engines that the two will jointly build in South America. "You can bet this engine will have every attribute of quality and reliability," says BMW Chairman Bernd Pischetsrieder.
Today, Chrysler is the industry benchmark for lean engineering. It estimates that its engineering expenses account for just 2.7% of total revenues, compared with 5.9% at Ford, 5.5% at GM, and 5% at Toyota. Having spent millions on sophisticated computer-design equipment in recent years, Chrysler is cutting costs by prototyping parts and machinery on-screen rather than building a variety of models. Chrysler built only one prototype of the new 2.7-liter aluminum engine that will go into its new family sedans, for example, where it once would have built as many as five. Such savings trimmed development costs for a new three-engine program to $600 million, from $1 billion.
Chrysler is also slashing its product-development times. The 1993 Intrepid took 38 months from conception to market, while next fall's Durango sport-utility took just 28 months. How do they do it? Platform teams for different vehicles share technology, production processes are engineered concurrently with the vehicle, and the computerized designs allow Castaing & Co. to make decisions faster. Castaing has no patience with bureaucratic bottlenecks. At an Oct. 29 meeting with platform team members, he bristled at an engineer's complaint that teams were duplicating work on the scores of fasteners used in Chrysler vehicles. "You are the ones who see the problems--fix them," Castaing said.
Castaing's frugality and Stallkamp's drive to cut supply costs have allowed Chrysler to drastically shrink expenses. While the 1998-model Mustang cost Ford $700 million to develop, the Sebring convertible Chrysler launched last fall ran just $240 million. Bringing suppliers into the process early on is crucial. The Prowler, for example, cost just $75 million to develop, partly because suppliers provided much of the engineering research and squeezed out costs on their own. Stallkamp, who worked at Ford before joining Chrysler in 1980, projects Chrysler will save $9.8 billion on parts-purchasing this decade. "GM can't do it because they're too big, and Ford can't do it because they don't have the management mind-set," he says.
Outspoken and direct, the 50-year-old Stallkamp is an unlikely star in Motown--a purchasing expert who gets suppliers to meet target prices without twisting arms. "It's the people thing," says John Spoelhof, who heads the Prince Corp. automotive interiors unit of Johnson Controls Inc. "Over time, Tom has built a lot of trust."
Chrysler expects suppliers to suggest their own price reductions. And while submissions are voluntary, Stallkamp pushes laggards. "Some of you need to pick it up," he told a dozen suppliers at a quarterly roundtable discussion on Oct. 24. "They basically get two years--the year we find out and the year to recover," he says later. "Then, we'll start moving business away." Insiders say Stallkamp's decisiveness and business acumen could make him the favorite for the Chrysler presidency.
None of the executive VPs appreciate the open, cooperative culture more than Pawley, the burly manufacturing expert who spent 21 years at GM and two years with Mazda Motor Corp. before joining Chrysler in 1989. A self-described "ass-kicker" in his former jobs, Pawley, 55, has mellowed into a tireless preacher of lean manufacturing as pioneered by Toyota Motor Corp.
To Pawley falls perhaps Chrysler's most difficult task: improving the reputation for subpar quality that has hounded the company since its penny-pinching years. That's a big part of the reason Chrysler's performance in passenger cars has remained mixed. Quality problems led to a recall of the compact Neon following its 1994 launch, for example, slowing its acceptance by consumers. Spotty quality also doomed its midsize sedans, such as the Cirrus, to also-ran status in a segment dominated by the Toyota Camry, Honda Accord, and Ford Taurus. Only in the large-car segment has Chrysler had a winner: The Dodge Intrepid is this year's best-seller, although sales have slowed for the LHS and Concorde versions. Chrysler is counting on next year's restyled models to regain the momentum.
Still, some think consumers remain wary of Chrysler cars until they have been on the market for a few years. "Our surveys show it takes two to three years before a Chrysler car gets up to a decent quality level," says Robert Knoll, automotive testing director at Consumer Reports. "The LH sedans are decent, the minivan is pretty good, and the Rams and Jeeps are coming up, but the other cars still have problems."
ON THE PROWL. Chrysler has poured $9 billion into revamping its plants since 1991. Under Pawley's direction, it has methodically replaced old stamping presses with new German-made machinery. In its Warren (Mich.) plant alone, for example, Chrysler has invested $250 million since 1993 to replace antiquated equipment used to stamp out body panels for minivans and the Ram and Dakota pickups. The result: smaller gaps between doors and exterior panels and fewer leaks and rattles. Pawley's staff has also led more than 1,500 quality workshops for employees since 1994.
When Pawley tours his plants, he rolls up his shirtsleeves and reviews the operations with the supervisors running the plant. During an Oct. 30 trip to Chrysler's Windsor (Ont.) minivan plant, Pawley spent four hours prowling the line looking for problems--supply racks out of place, workers who needed to bend or stretch for parts, dim lighting in the aisles. Afterward, in a closed-door meeting, Pawley tells the supervisors: "I'm not going to let you guys ever get to the point where you think you're there. Never." Says plant manager Adrian Vido: "You always know where you stand with Denny. He's a realist."
So is Holden, the 45-year-old marketing and sales chief who has shaken up the "soft side" of the business. He has cut layers of marketing bureaucracy and streamlined distribution. Long-stalled moves to get Jeep/Eagle dealers to link up with Chrysler/Plymouth franchises are under way, for example. By 2000, he wants to cut Chrysler's dealerships 14%, to 4,000.
A fast-tracker who previously headed Chrysler's quality and personnel departments, Holden sees himself taking the same risks in sales that Gale does in design, Castaing in engineering, Stallkamp on the purchasing side, and Pawley in the plants. "This is not the same old company playing by the same old rules," he declares. True. While Ford and GM have shunned the new auto superstores for fear of alienating dealers, Chrysler shocked its dealers in January by awarding a new-car franchise to CarMax, the used-car superstore.
Holden says the deal is an "experiment" to study the chain's customer-service techniques and computer operations. Interactive technology linking the customer to Chrysler, he says, gives it insight into the colors, styles, engines, and options most in demand--even if the dealership doesn't make a sale.
Like the others, Holden lives and breathes cars and trucks. "The only way you can be successful at Chrysler is if you're a car freak," he says. "If that's what you are, there's only one company to work for, and that's us." Whether that's confidence or cockiness, it captures the attitude Chrysler exudes. It's an attitude that has brought Detroit's hottest auto maker far in five short years. But will it be far enough? Chrysler execs point to the appreciation they've won on Wall Street: Since early '92, Chrysler shares have risen nearly sixfold, to a split-adjusted 33, vastly outpacing Ford and GM. But its price-earnings ratio, at 6.7 times expected 1996 earnings, still lags roughly 25% behind those of its crosstown rivals. While Chrysler is racing flat-out to prove them wrong, investors still seem to be hedging their bets on whether Chrysler's comeback is here to stay.