Nardelli: Back in the Game at Chrysler

Home Depot's widely criticized former CEO goes into private equity as he takes over a huge turnaround at the troubled automaker

Former Home Depot chief executive Robert Nardelli is the new chief executive of Chrysler Corp., marking the second time in less than a year that one of Detroit's struggling Big Three automakers has reached outside the automotive ranks to try and save one of America's industrial corporate icons. Ford named former Boeing (BA) executive Alan Mulally its CEO last September.

Nardelli was moved into the top position by Cerberus Capital Management, which last week closed a deal to take ownership of 80% of Chrysler from DaimlerChrysler (DCX). Nardelli, 59, replaces current CEO Thomas LaSorda who will become president and vice-chairman of the automaker.

Nardelli's move into the executive suite at Chrysler comes as a surprise. Just last week, Cerberus Chairman John Snow said Chrysler management would stay intact. But former Chrysler Chief Operating Officer Wolfgang Bernhard, who had worked with Cerberus on the acquisition and was expected to be named chairman, suddenly left Cerberus in the last few days for "family reasons," according to Chrysler spokesman Jason Vines.

A CEO with a Reputation

Nardelli, a former General Electric (GE) highflier who lost the contest to succeed Jack Welch as CEO of GE to Jeffrey Immelt, could be a jolt to Chrysler's culture. A hard-driving executive with a reputation for generating more fear than respect among the ranks, Nardelli left Home Depot (HD) last January under a cloud after the home-improvement chain's stock languished, customer service plummeted, and the CEO was tagged by angry investors as arrogant toward shareholders.

Nardelli also became a poster boy for skyrocketing CEO pay not tied to stock performance. To make his image on that score worse, Home Depot and the CEO negotiated a $210 million "retirement package" (see BusinessWeek.com, 1/4/07, "Out at Home Depot").

Besides Nardelli's appointment, Cerberus has a handful of former Chrysler executives with key advisory roles in the automaker's turnaround strategy. Retired design chief Tom Gale is advising on new product development. Former Chrysler sales and marketing boss Gary Dilts, who quit the company last year in a dispute over sales strategy, now has a role in developing the company's retail strategy. And Thomas Gilman, a past executive with Chrysler Financial Services, is helping Cerberus carve out its auto lending business from Daimler. Those advisers will have a key role in Chrysler's planning and business strategy, but so far none have taken key executive jobs. In a move that was expected, Chrysler Chief Operating Officer Eric Ridenour is leaving the company, and the position will not be filled. Ridenour couldn't be reached.

Recovering from Mismanagement

Cerberus has also set some aggressive new business goals for Chrysler. One is to cut sales to rental car fleets—typically a thinly profitable or even money-losing business—by as much as 200,000 vehicles a year. Cerberus believes that cutting rental sales will trim the supply of low-mileage used Chrysler vehicles on the market and help the company get better prices for its new cars.

Cerberus also wants Chrysler to boost retail market share by 1 percentage point, to 12%, over the next three years, says one source close to the planning.

Over the past two years, Chrysler had become terribly mismanaged under CEO LaSorda and its German parent, DaimlerChrysler. In 2006, Chrysler lost more than $1 billion. Indeed, virtually all the gains posted by DaimlerChrysler CEO Dieter Zetsche from 2000, when he began running Chrysler, to 2005, when he left Chrysler to run DaimlerChrysler, had been wiped out by losses and restructuring costs.

Many of the company's latest models have been slow-sellers. It became too top heavy in gas-hungry sport-utility vehicles when gas prices climbed above $3 per gallon, while its marketing strategy for the Chrysler, Dodge, and Jeep brands has wandered to ineffectiveness. And its dealer network is considered far too big to support its current market share.

Chrysler already has a restructuring plan in place that calls for the elimination of 13,000 jobs and a $3 billion investment in engine systems designed to improve fuel economy. The company also plans to close its factory in Newark, Del., and will eliminate shifts at other plants. Nardelli is expected to be an iron-fisted disciplinarian to make sure Chrysler's plan stays on track and profitability is restored.

Limited Success at Home Depot

Despite the disappointment of losing out on the top job at GE, Nardelli was anointed one of Corporate America's most talented executives back in 2000, and Home Depot appeared to have scored a big victory by hiring him. Almost immediately, he embarked on an aggressive plan to centralize control of the nation's second-largest retailer after Wal-Mart Stores (WMT).

He invested more than $1 billion in new technology, such as self-checkout aisles and inventory management systems that generated stacks of data. He declared that he wanted to measure virtually everything that happened at the company, according to Six Sigma principles he honed at GE, and hold executives strictly accountable for meeting their numbers. All of this was new at a relatively laid-back organization known for the independence of its store managers and the folksy, entrepreneurial style of the Atlanta-based chain's retired founders.

Among many of Home Depot's 355,000 employees, especially rank-and-file workers in its orange big-box stores, however, there was little sympathy as Nardelli dug himself into a deeper and deeper hole. They resented the replacement of many thousands of full-time store workers with legions of part-timers, one aspect of a relentless cost-cutting program Nardelli used to drive gross margins from 30% in 2000 to 33.8% in 2005. Declining service at Home Depot is often cited for smaller rival Lowe's Companies' (LOW) better same-store sales and share price appreciation. Staffing cuts led to persistent complaints that there weren't enough workers in Home Depot's cavernous stores to help do-it-yourself customers.

If Nardelli didn't do much for Home Depot's share price, he did achieve growth and profitability. Driven by a housing and home improvement boom, sales soared from $46 billion in 2000, the year Nardelli took over, to $81.5 billion in 2005, an average annual growth rate of 12%. Profits more than doubled, to $5.8 billion that year.

A Different Kind of Challenge

Nardelli is a newcomer to the auto business, but he considers himself an informed outsider. "I am very excited to be part of a team focused on re-establishing Chrysler as a standalone industry leader, with a renewed focus on meeting the needs of customers," Nardelli said in a statement. "Chrysler has many deeply talented and dedicated people, and I am confident that together we can continue the momentum of Chrysler's recovery and return this great American icon to a path for global growth and competitiveness."

At the newly chartered Chrysler, Nardelli will be able to work out of the glare of a publicly held company. He is going to inherit a product line for the next five years already locked in by his predecessors. He is also jumping in while Chrysler is negotiating a critical new contract with the United Auto Workers. Cerberus has agreed to take on most of the auto company's approximately $18 billion in long-term retiree health-care costs. The Pension Benefit Guaranty Corp., the federal agency that ensures private pensions, said Aug. 3 that Daimler will pay $1 billion into Chrysler's pension plan if it is terminated within five years. Chrysler also is contributing $200 million beyond the required minimums to its plan over five years. Cerberus, along with Ford (F) and General Motors (GM), is negotiating with the union to get the UAW to take on more of the costs of health insurance and deductibles. The Big Three currently pay hourly workers about $30 per hour more than Toyota pays its U.S. workers when salary and benefits are added up.

The union, as usual, is holding out as much as it can. But analysts believe a "transformational" agreement with the union is critical if GM, Ford, and Chrysler are to regain steady profitability. Whether Nardelli—a hard-charging former college wrestler—can aid Chrysler's enormously challenging campaign remains to be seen.

With Brian Grow.

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