Why Chrysler Failed

Chrysler had a good year in 1939. Sales from the automaker's combined divisions had put it solidly in second place against General Motors (GM), while hard lessons learned from the company's problems marketing its groundbreaking Airflow models were dictating future design. The Airflow—the first of the streamlined American cars—used unibody construction to strengthen a vehicle while lowering its weight. But because the design was widely rejected by consumers, Chrysler would play it safe.

Chairman K.T. Keller knew that his company's strength came from its engineering reputation, but he also believed the public would always demand a car with a roofline tall enough that customers could drive in dignity wearing their hats. Keller didn't mind that GM was becoming the styling leader because he thought GM favored style over substance. He demanded that Chrysler models be known for value even if they didn't turn people's heads.

Keller, who had been at company founder Walter Chrysler's side since the days of Buick, was the man Chrysler had personally entrusted to get Dodge up and running in the late 1920s. He was more autocratic than his counterparts at GM—or those at Chrysler, for that matter. Yet Walter Chrysler had handed his company over to Keller in the middle of the Great Depression.

Keller's Chrysler would become a congressional and military favorite during World War II, when its work always earned a clean bill of health. The company didn't indulge in price gouging as it delivered war materiel on time and with few mechanical problems. Late in the war, efforts by Chrysler engineers to develop a new engine for the famed P-47 Thunderbolt fighter gave us the Hemi engine.

What Keller could not understand or appreciate was that during the two decades following World War II, the American middle class's new affluence would completely change the dynamics of the automobile industry. GM was well placed to enhance its dominance because styling drove GM's automotive decision making. Chrysler was still designing cars as if men would forever wear fedoras.

Truman Called Keller to serve in 1950

Keller had made some fast friends in Washington during the war and was respected by many—most notably President Harry S. Truman. On Oct. 25, 1950, the White House made a telephone call that changed U.S. and Chrysler history.

At that time the country's guided missile program was in shambles. Competing egos from different military branches were vying for research dollars. The German rocket scientists who had migrated to the U.S. after the war lacked a reliable engineering-and-production group to put their theories into practice. Once the Soviet Union had the bomb, North Korean troops had crossed the 38th Parallel, and the Cold War was fully engaged, Truman badly needed someone to pull competing fiefdoms together and help get the U.S. missile programs on track within a reasonable budget. That day, Keller accepted the President's call.

He took with him some of Chrysler's best engineers. This group would change the American aerospace program, perfect the Redstone rocket that first launched our astronauts into space, and be the lead group on the powerful Saturn 5 missile program that in 1969 put men on the moon. The American public has never appreciated that Chrysler's contribution to space exploration may have hurt the company's sales on the ground.

The company Keller left behind was already in serious trouble. Early in 1951, Chrysler unveiled its V-8 "Firepower" engine known as the Hemi, thrusting Chrysler into the lead in the race for horsepower. But the company knew it had to overhaul its outdated and badly functioning executive suite. To that end it hired McKinsey.

Dangerous Management Prescriptions

The consultants made numerous recommendations, most of which would prove near-disastrous for Chrysler. The first was to develop a decentralized management system that gave executives full authority over their divisions, just like at GM.

By setting up distinct Plymouth, DeSoto, Chrysler, and Imperial lines, Chrysler had emulated GM's concept of "a car for every purse and purpose." But the GM of the early '50s had nearly 30 years of practical experience with decentralization. Chrysler had nearly as many car divisions as GM, but Keller had micromanaged each of them.

Tex Colbert, who took over when Keller left, tried to implement decentralization but found the concept too alien for his executives. By 1958 they had reverted to using the old, failed system.

McKinsey had also suggested that Chrysler needed to become far less dependent on the U.S. market—that it needed to take on a foreign partner to become international like GM and Ford. But most of the best foreign car companies were either strongly independent or so troubled that the consultants' advice should have been ignored. Colbert approached both Rolls-Royce and Volkswagen, but they rejected his offer to buy in. Chrysler settled for a 25% stake in France's Simca.

With the American Century in full swing and the automobile age roaring ahead, Chrysler was badly losing market share. In 1954, Chrysler was forced to turn to Prudential for a 100-year loan of $250 million, the first sign that its future would be hampered by debt.

Forward by Design

When everything fails in the automobile industry, one should always go back to the basics. This truism led Chrysler to hire Virgil Exner. One of the nation's premier styling experts, Exner had been responsible for designing Studebaker's new look of 1947. It was this outsider's vision of the future that finally gave Chrysler the attractive new "forward" look its vehicles boasted for 1955. Although the response was encouraging, the look may have been too little, too late for Chrysler. The corporation had started the decade with 23% of the new car market and ended 1959 with a mere 11% share.

The Chrysler design story had a positive effect on one competitor. In the late '50s a number of Young Turks in GM's design studios managed to get inside Chrysler and look at their rival's future models. Blown away by what they had seen, they went back to GM, tore up their 1960 model designs—based on another variation of the tail fin and bucktooth grilles of the '50s—and gave GM a clean look to start the Camelot years. It was this youthful insurrection that finally pushed GM's design chief Harley Earl out and installed Bill Mitchell. For the next 12 years, Mitchell's GM stylists would lead automotive design worldwide.

Chrysler's problems would continue in spite of its newly proclaimed passion for styling. Unlike Lee Iacocca at Ford (F) and such legends as John Delorean at GM, Chrysler seemed oblivious to the fact that the first of 84 million Baby Boomers would come of age starting in 1964, and Boomers would dictate automobile design for the next 45 years. Chrysler finally responded with the Dodge Charger and 440 Magnum in the late '60s, but these gas-guzzling vehicles badly typecast Chrysler for the energy crises that would come in the 1970s.

When GM and Ford came out with their "import beaters"€the term used loosely for their Vega and Pinto€Chrysler had to turn to a foreign partner for compact cars, bringing the Mitsubishi-designed and -built Dodge Colt to market in 1970. GM's and Ford's reputation for small-car engineering was poor, but they could still afford to engineer and design their own compacts. Chrysler seemed financially incapable of either.

Although the Colt would win the company few converts, Chrysler would never have survived the 1980s without its relationship with Mitsubishi.

The Launch of Japan's Game-Changers

In June 1975, as the last of the Chrysler-engineered and -built Saturn rockets lifted our astronauts into space for the historic Apollo-Soyuz docking, Joe Garagiola was hired to hawk the "Chrysler Carnival of Savings." in commercials. This launched the rebate era, marking a low point in Chrysler's modern history.

The vicious recession that had swept the nation in the aftermath of the 1973 oil embargo was starting to lift: Sales at GM and Ford raced ahead as pent-up demand for automobiles exploded. Neither GM's nor Ford's vehicles were then known for fuel-sipping ways, but Chrysler's products looked relatively fat and out-of-date.

The company's rebate sales campaign of 1975 was successful enough to buy the company time to retool. But 1975 also marked the turning point in Japan's quiet battle against Detroit. Toyota (TM) had already introduced the Celica, taking styling cues from the 1969 Ford Boss 302 Mustang—already so legendary in Japan that well-heeled customers had paid up to $12,000 to import used ones from the U.S.

Shortly thereafter Honda (HMC) introduced the first Accord—Japan's game changer.

Still living down mistakes from 30 years earlier, Chrysler resorted to such celebrity pitchmen as Ricardo Montalban, who sold consumers not so much on the Chrysler Cordoba as on its "Corinthian leather" seats. In dire financial straits again by 1978, the desperate automaker hired Lee Iacocca, famously fired from Ford. This was Chrysler smartest move in decades.

Lee Iacocca's Magical Pitches

Iacocca was inheriting a company so listless that its best recent marketing move had been to emphasize processed cow skin to get the public to buy its cars. But there was something magical about Iacocca's persona. He understood that Chrysler had been down so long that the public considered it not only dated, but irrelevant. With a second energy crisis hammering nails into Chrysler's coffin in 1979, the company was out of cash. Nothing new was coming to market but mediocre K Cars and a Horizon compact, complete with a Volkswagen engine. So Iacocca took the battle to Congress to save Chrysler for the American people.

Unlike the congressional hearings marked by Detroit executives' poor performances last year, Iacocca stood tall before Congress. He knew the government had bailed companies out before—most famously, Lockheed Marietta in the early '70s. This was a man willing to put his corporate renown on the line for a car company no one cared much about. Suddenly Americans started thinking that if Iacocca cared that much about Chrysler, the automaker might deserve a second look.

More important, Iacocca became Chrysler's face in TV commercials that managed a near-impossible transformation of Chrysler's image: Once Detroit's leaden anchor, the company would become Americans' favorite underdog.

Few had ever owned a Chrysler product. But the people wanted a real American comeback story in those troubled times, and Iacocca gave it to them. Within two years, with a recession in full swing, Chrysler turned a $170 million profit. The difference came not from building automobiles, but from the sale of its tank division—the one Harry Truman had so respected that he asked K.T. Keller to leave Chrysler and lead the U.S. guided missile program.

Then came Iacocca's minivan, which brought Chrysler massive profits from the early to mid-'80s. Chrysler was not only back. For the first time it had actually created an automotive craze. Iacocca and Chrysler validated Americans' belief that no matter how far down we are, the U.S. comes back.

Chrysler was the Rocky Balboa of the automotive industry. When the time came to rebuild an iconic symbol of our country—the Statue of Liberty—it was only fitting that the job go to Iacocca. No one in America could doubt the wisdom of that decision.

Feast and Famine, Fame and Failure

Iacocca had another brilliant move to make—purchasing Jeep in 1988. Chrysler was again stalling out, with cash reserves ominously low. Feast and famine had always ruled the automobile industry, and Chrysler always felt the effects most acutely. Iacocca was forced to broach the idea of selling Chrysler to Fiat 20 years ago, but the overture didn't take. He was again forced to reinvent Chrysler.

To his credit, with sales slowing and little new product coming out in the late '80s, Iacocca had started adding airbags to many of his products. Sure enough, he did this exactly when Americans were becoming serious about automotive safety. Once again, Chrysler's sales improved sufficiently to buy some time.

Having inherited AMC's Francois Castaing in engineering, and with Bob Lutz at his side for styling, Chrysler was about to enter its second golden decade. Led by the Cab Forward look of its new midsized sedans, sustained by contemporary styling for its minivans, and empowered by the Neon, a Chrysler-designed and -engineered compact car, Chrysler had finally become hip. GM was still the 800-pound gorilla in the room, but Chrysler's styling was the closest Detroit had come to the future of automobiles. GM's lame Luminas and bulbous Impalas left the public feeling flat.

Iacocca had brought the best of the best into Chrysler to make one last go of it. By the end, though, he failed to understand what the public really wanted. He was misfiring as badly as Keller once had, wanting to add faux wire wheels, vinyl landau roofs, and square headlights to the new models. But Iacocca had twice saved Chrysler&mdashfirst, by recognizing the depth of talent inside the company and the second time, by bringing in fresh faces.

a mismatch for the ages

Chrysler was hot and its profitability per car built was the envy of the industry—which made it the best takeover prospect. That vulnerability led Chrysler into its ill-considered "marriage made in heaven" with Daimler (DAI) in 1998.

The public loved the idea of the world's most respected car company courting one of Detroit's own. The media couldn't write enough about the move's brilliance. Mercedes would bring Chrysler its vaunted engineering while the U.S. automaker would show Mercedes how to produce cars with greater financial efficiency. The wedding vows were touching: Mercedes even suggested that one day an American might become CEO of Daimler Chrysler. The media and public might have been fooled. But an American taking the helm of Germany's premier corporation was about as likely as a control freak letting the newlywed spouse manage their joint checking account.

The marriage was never going to work. One merely had to look at what had happened when Daimler bought Fokker Aircraft in the early 1990s, or when BMW (BMWG) bought British Rover. It was clear that when real problems arose at properties they'd acquired, the Germans cut their losses and ran if the outsiders' financial problems threatened their crown jewels.

Moreover, Daimler's acquisition of Chrysler could not have come at a worse time. Chrysler's profits in 1997 had been $2.8 billion, as Detroit collectively earned $15.1 billion. When purchased, Chrysler had owned 15.2% of the car market—its highest market share since the early '50s. But by 2001, Chrysler was bleeding $2.3 billion.

Possibly the biggest damage was caused by Lutz having taught Chrysler to act as an integrated team, copying Honda's maverick attitude. Chrysler's integrated, shoot-from-the-hip team fell apart almost immediately as Lutz departed when Daimler came into the picture. He was soon followed out the door by designer Tom Gale and then by many more key upper managers.

That period also marked the start of ever-larger rebates to move U.S. cars at retail—which infuriated Daimler, even though the Germans had been known to offer rebates to pump slow-selling Mercedes models from time to time.

It is fair to say that the stewardship of Chrysler during its 10-year mismatch with Daimler could not have been worse. Daimler's executives and the policies they embraced wiped out 20 years of goodwill that Chrysler and its dealers had created with the public.

Fireworks You Can Still See

One bright, shining moment illuminated this dark period: the introduction of the Chrysler 300 in 2005. Using many hand-me-down parts from the Mercedes E Class of 1996–2002, Chrysler created an American sedan whose superior styling and window sticker price made it more than competitive with anything on the market, including the best autos from Japan. In the first few months of sales it was reported that a high percentage of trade-ins on this Chrysler were BMWs, Mercedes, and other luxury makes. Daimler had finally hit the perfect formula for Chrysler: Give the American public a car with the ride and feel of Germany's best at a price that screamed value.

Perhaps the realization that Mercedes owners were trading in their cars for a Chrysler made Daimler reconsider. Or maybe the 300 was simply an automotive fluke. But then-Chrysler and now Daimler Chairman and Mercedes head Dieter Zetsche reversed course: Chrysler products would henceforth be engineered to be built with the lowest production costs, with window sticker prices among the most competitive in the industry.

At the same time, Daimler pressed to consolidate Chrysler's different divisions. No longer would there be Chrysler-Jeep and Dodge dealerships; they were combined to rationalize retail. The move made no sense because no dealer needed both the Chrysler 300 and Dodge Charger on the same lot any more than they needed both the Chrysler Sebring and Dodge Avenger.

Chrysler had already experienced the downside of combining Chrysler and Jeep stores, which left the company with too many dealers competing in metro areas. And Daimler had already managed to alienate many formerly high-volume Chrysler dealers. The multinational's high-pressure tactics—which included forcing dealers to take more product than they could possibly sell—had drained their passion for selling cars.

In 1998, Chrysler was the hottest, hippest, and most profitable American car company per car built. In May 2007, when Cerberus Capital Management acquired Chrysler, the private equity firm bought a German-inspired mess.

Cerberus: No Inspiration for Dealers

The new owners made a fundamental error on day one: Cerberus had the chance to hire automotive boy wonder Wolfgang Bernhard as CEO and instead chose Bob Nardelli. Nardelli may have been the perfect executive in terms of money management—best at controlling both costs and huge money demands in an industry geared toward consumers. But Chrysler dealers worshipped Bernhard in ways no nonautomotive person could possibly understand.

What Cerberus needed to do was to bring those dealers back to life. After 9 years under Daimler many dealers were indifferent and demoralized. A respected car guy who'd already served a tour of duty at Chrysler, Bernhard was a leader who could immediately have recharged the dealers' drained passion and restored their loyalty. Had those dealers recommitted to the company and gotten excited about their potential, they would have sold more cars—which Chrysler desperately needed. Instead more than a few dealers wound up grumbling that Cerberus' Chrysler pushed them as hard to order unwanted vehicles as Daimler ever had.

Cerberus' purchase was predestined to fail because its experience in, and knowledge of, the auto industry was negligible. The key to a manufacturing company's future is the dealers' faith in the factory and the product. Cerberus never understood that its fatal mistake was to fail utterly to inspire faith.

End of the Trail of Trials?

So why did Chrysler fail? The company had been falling short for many decades, interrupted by moments of sheer brilliance that the company never managed to carry into the next era. The Chrysler Airflow's flop in the thirties convinced management that the public would reject anything too hip or futuristic. They then demanded that future designs be conservative—and kept that stance for two decades in which outrageous automotive design became the norm. The company lost more than half its market share in the '50s.

Chrysler was hurt when Keller and some of Chrysler's best left to take over the U.S. missile program, although we salute them for getting us to the moon. Chrysler's Golden Years ran from 1983 to 1988 and from 1993 to 2000, but the car guys who made that second resurgence happen left when Daimler took over.

The distinction between being a scorned loser and being an underdog the public cheers is crucial. Iacocca understood this perfectly and erased losing from Chrysler's image. Neither the Germans nor Cerberus understood, with predictable results.

Today the U.S. may have reached the point where Americans will never again cheer on an automotive underdog. That's always been Chrysler's best "hold" card. We'll soon see if Fiat understands how to play it.

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