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Can the Germans Rescue Chrysler?
With strong new managers and a smart plan, they have a shot. But fierce competition will make it much harder for Chrysler to regain the sizzle that made it a standout in the 1990s.
FORTUNE
Monday, April 30, 2001
By Alex Taylor III
Send to a Friend Print Subscribe to Fortune
Get Smart
How did the most successful American car company of the 1990s become the biggest bust of the new millennium? That was just one of the questions raised when Chrysler began piling up losses last fall. This, after all, was the company that had pioneered new markets for minivans and SUVs and feinted past competitors with its savvy, sassy marketing. Other questions quickly followed--with no easy answers. Who was to blame for the sudden collapse: Chrysler's American managers or its German owners? Would the company, which had dodged bankruptcy twice before, survive and prosper again? Finally, would DaimlerChrysler Chairman Jurgen Schrempp, 56, have to retreat from his quest to build the world's best car and truck manufacturer?
So shocking was Chrysler's decline that Detroit's rumor mill worked overtime trying to make sense of it all. Chrysler, people said, was being bled of cash to fund losses at other DaimlerChrysler operations. Deutsche Bank, DaimlerChrysler's largest shareholder, was getting ready to oust Schrempp. Chrysler would be broken up into smaller pieces and sold off. Lee Iacocca and Bob Lutz, Chrysler's fabled former executives, were returning from retirement to revive it.
The rumors turned out to be just that. Schrempp still has his job; Iacocca and Lutz remain on the sidelines (though Schrempp does talk to them); Chrysler is in one piece. And all the wild talk obscured an important fact: Schrempp has moved with characteristic speed and decisiveness to fix Chrysler. He fired Jim Holden, Chrysler's president and CEO; Dieter Zetsche, 48, a trusted Daimler executive, took Holden's job. Schrempp authorized a thorough overhaul of Chrysler's processes and extensive cost cutting. His actions have been endorsed by, of all people, UAW President Steve Yokich, who said that without Daimler, "I don't think there would be a Chrysler." In February, Schrempp predicted that Chrysler would be profitable again in 2003.
After months of turmoil, life is now somewhat calmer at Chrysler headquarters in Auburn Hills, Mich., north of Detroit. Zetsche's efforts have improved morale among both hourly and salaried workers. A reorganized management team has introduced engineering systems to cut costs, improve efficiency, and boost quality. Plans for some new products through 2005 have been revised, and also synchronized with those of Mercedes-Benz and Japan's Mitsubishi, in which DaimlerChrysler has a one-third stake.
Still, the outlook for Chrysler is hardly sanguine. The company that emerged stronger from its previous near-death experiences--in 1979-81 and 1989-90--will find recovery much more difficult this time. After several exceptionally strong years, sales of cars and trucks seem poised to slow along with the U.S. economy. Demand for Chrysler's high-margin minivans and SUVs is already cooling, and competition from Toyota, Honda, and Volkswagen is eroding its customer base. Despite heavy use of incentives, Chrysler had a 14.2% market share for the first three months of 2001, vs. 15.1% for the same period in 2000.
"The competitive landscape has changed," says Michael Bruynesteyn, an analyst at Prudential Securities. "In the best-case scenario, it will likely take three or four years to bring the Chrysler division halfway near the profitability levels of 1998 and 1999." Chrysler prospered then because of a hard-to-duplicate confluence of positive factors: innovative designs, segment-leading products, and rising sales throughout the auto industry. Chrysler executives don't disagree with Bruynesteyn's downbeat forecast. "I don't know that we can get back to the profits of the mid-'90s, but I'm convinced we can do a lot better than the level currently," says Jim Donlon, Chrysler's senior vice president and comptroller. "In this environment, for us to be able to hold on to or build market share is very tough."
The story of Chrysler's decline is a cautionary tale for any company that begins to mistake good fortune for sound planning and execution. In true fin de siecle style, Chrysler was breathing its own fumes. It made unrealistic projections about the future at the same time that it was spending money extravagantly and its famously entrepreneurial culture was operating unchecked. "The company lost its purpose and lost its discipline," says former chief engineer Francois Castaing, who retired from Chrysler at the end of 1997.
Buoyed by the success of vehicles like the Ram pickup truck, Jeep Grand Cherokee, and Dodge Durango, Chrysler thought the good times would never end. Executives set a stretch target to increase market share to 20% by 2005, far above the company's historical level. Chrysler also spent heavily refurbishing plants and buying new equipment without making realistic plans to recoup the investments. "If you are very successful, you start thinking you can walk on water," says Zetsche. He points out that Chrysler went from having the fewest workers per point of market share in 1996 to the most in 1999. Another former executive agrees: "We hired too **** many people and put too much into the product."
This happened partly because the platform teams that helped make Chrysler's product-development system so fast and efficient didn't communicate with one another. Instead of taking advantage of economies of scale by using the same parts in different cars, the teams bought their own components. For example, the Durango and the Jeep have different windshield wipers, and Chrysler's five teams specified three different kinds of corrosion protection for a simple piece of rolled steel used to reinforce plastic bumper surfaces. Multiply an extra $1 or $2 per part by an annual production of three million vehicles, and the costs pile up.
At the same time, Chrysler invested heavily to upgrade its vehicles. But the Chrysler and Dodge brands weren't strong enough to command higher premiums from customers, and intense competition forced the company to keep prices down. "We lost our way on what to put into a vehicle and what to leave out," says Rich Shaum, executive vice president for product development and quality. "The result was that the cars became unaffordable." To prop up sales, Chrysler spent as much as $3,000 per vehicle on incentives. It tried to reduce incentives last spring, but when competitors didn't follow, it had to raise them again, which added to its costs (as of February, Chrysler was outspending all other major automakers on incentives). There were other problems. The company made too many old minivans as it was switching production to a new one, and flooded the market. And when it tried to sell the new vans without incentives, customers balked at the high prices.
During the second half of 2000, Chrysler lost $1.8 billion and went through $5 billion in cash. It was a stunning collapse--made all the more so because GM and Ford were still doing well. Zetsche was dispatched to Auburn Hills with simple instructions: "My orders from Schrempp were to fix the place."
On his first day Zetsche fired the head of sales and marketing, but solving Chrysler's other problems has been harder. He found stacks of financial projections but no assessments of the company's strengths and weaknesses. Assumptions that underpinned budgets and business plans kept collapsing. Even so, he managed to produce a three-year turnaround plan in two months. Announced in Stuttgart on Feb. 26, it called for cutting 26,000 jobs (20% of the work force) by 2003; reducing the cost of parts by 15% in the same period; and closing six assembly plants. Zetsche assumes that U.S. car sales will stay above 16 million units per year (they are running at a rate above 17 million so far) and that Chrysler will hold on to its current share. Under those assumptions, he says, the company will lose $2 billion to $2.5 billion this year. He projected a return to breakeven by 2002 and an operating profit of $2 billion in 2003.
Chrysler's Sudden Skid
Year Operating Profits
Per Vehicle
1996 $1,908
1997 $1,322
1998 $1,597
1999 $1,618
2000 $164
Source: Chrysler Group
Can the Germans Rescue Chrysler?
With strong new managers and a smart plan, they have a shot. But fierce competition will make it much harder for Chrysler to regain the sizzle that made it a standout in the 1990s.
FORTUNE
Monday, April 30, 2001
By Alex Taylor III
Send to a Friend Print Subscribe to Fortune
Get Smart
How did the most successful American car company of the 1990s become the biggest bust of the new millennium? That was just one of the questions raised when Chrysler began piling up losses last fall. This, after all, was the company that had pioneered new markets for minivans and SUVs and feinted past competitors with its savvy, sassy marketing. Other questions quickly followed--with no easy answers. Who was to blame for the sudden collapse: Chrysler's American managers or its German owners? Would the company, which had dodged bankruptcy twice before, survive and prosper again? Finally, would DaimlerChrysler Chairman Jurgen Schrempp, 56, have to retreat from his quest to build the world's best car and truck manufacturer?
So shocking was Chrysler's decline that Detroit's rumor mill worked overtime trying to make sense of it all. Chrysler, people said, was being bled of cash to fund losses at other DaimlerChrysler operations. Deutsche Bank, DaimlerChrysler's largest shareholder, was getting ready to oust Schrempp. Chrysler would be broken up into smaller pieces and sold off. Lee Iacocca and Bob Lutz, Chrysler's fabled former executives, were returning from retirement to revive it.
The rumors turned out to be just that. Schrempp still has his job; Iacocca and Lutz remain on the sidelines (though Schrempp does talk to them); Chrysler is in one piece. And all the wild talk obscured an important fact: Schrempp has moved with characteristic speed and decisiveness to fix Chrysler. He fired Jim Holden, Chrysler's president and CEO; Dieter Zetsche, 48, a trusted Daimler executive, took Holden's job. Schrempp authorized a thorough overhaul of Chrysler's processes and extensive cost cutting. His actions have been endorsed by, of all people, UAW President Steve Yokich, who said that without Daimler, "I don't think there would be a Chrysler." In February, Schrempp predicted that Chrysler would be profitable again in 2003.
After months of turmoil, life is now somewhat calmer at Chrysler headquarters in Auburn Hills, Mich., north of Detroit. Zetsche's efforts have improved morale among both hourly and salaried workers. A reorganized management team has introduced engineering systems to cut costs, improve efficiency, and boost quality. Plans for some new products through 2005 have been revised, and also synchronized with those of Mercedes-Benz and Japan's Mitsubishi, in which DaimlerChrysler has a one-third stake.
Still, the outlook for Chrysler is hardly sanguine. The company that emerged stronger from its previous near-death experiences--in 1979-81 and 1989-90--will find recovery much more difficult this time. After several exceptionally strong years, sales of cars and trucks seem poised to slow along with the U.S. economy. Demand for Chrysler's high-margin minivans and SUVs is already cooling, and competition from Toyota, Honda, and Volkswagen is eroding its customer base. Despite heavy use of incentives, Chrysler had a 14.2% market share for the first three months of 2001, vs. 15.1% for the same period in 2000.
"The competitive landscape has changed," says Michael Bruynesteyn, an analyst at Prudential Securities. "In the best-case scenario, it will likely take three or four years to bring the Chrysler division halfway near the profitability levels of 1998 and 1999." Chrysler prospered then because of a hard-to-duplicate confluence of positive factors: innovative designs, segment-leading products, and rising sales throughout the auto industry. Chrysler executives don't disagree with Bruynesteyn's downbeat forecast. "I don't know that we can get back to the profits of the mid-'90s, but I'm convinced we can do a lot better than the level currently," says Jim Donlon, Chrysler's senior vice president and comptroller. "In this environment, for us to be able to hold on to or build market share is very tough."
The story of Chrysler's decline is a cautionary tale for any company that begins to mistake good fortune for sound planning and execution. In true fin de siecle style, Chrysler was breathing its own fumes. It made unrealistic projections about the future at the same time that it was spending money extravagantly and its famously entrepreneurial culture was operating unchecked. "The company lost its purpose and lost its discipline," says former chief engineer Francois Castaing, who retired from Chrysler at the end of 1997.
Buoyed by the success of vehicles like the Ram pickup truck, Jeep Grand Cherokee, and Dodge Durango, Chrysler thought the good times would never end. Executives set a stretch target to increase market share to 20% by 2005, far above the company's historical level. Chrysler also spent heavily refurbishing plants and buying new equipment without making realistic plans to recoup the investments. "If you are very successful, you start thinking you can walk on water," says Zetsche. He points out that Chrysler went from having the fewest workers per point of market share in 1996 to the most in 1999. Another former executive agrees: "We hired too **** many people and put too much into the product."
This happened partly because the platform teams that helped make Chrysler's product-development system so fast and efficient didn't communicate with one another. Instead of taking advantage of economies of scale by using the same parts in different cars, the teams bought their own components. For example, the Durango and the Jeep have different windshield wipers, and Chrysler's five teams specified three different kinds of corrosion protection for a simple piece of rolled steel used to reinforce plastic bumper surfaces. Multiply an extra $1 or $2 per part by an annual production of three million vehicles, and the costs pile up.
At the same time, Chrysler invested heavily to upgrade its vehicles. But the Chrysler and Dodge brands weren't strong enough to command higher premiums from customers, and intense competition forced the company to keep prices down. "We lost our way on what to put into a vehicle and what to leave out," says Rich Shaum, executive vice president for product development and quality. "The result was that the cars became unaffordable." To prop up sales, Chrysler spent as much as $3,000 per vehicle on incentives. It tried to reduce incentives last spring, but when competitors didn't follow, it had to raise them again, which added to its costs (as of February, Chrysler was outspending all other major automakers on incentives). There were other problems. The company made too many old minivans as it was switching production to a new one, and flooded the market. And when it tried to sell the new vans without incentives, customers balked at the high prices.
During the second half of 2000, Chrysler lost $1.8 billion and went through $5 billion in cash. It was a stunning collapse--made all the more so because GM and Ford were still doing well. Zetsche was dispatched to Auburn Hills with simple instructions: "My orders from Schrempp were to fix the place."
On his first day Zetsche fired the head of sales and marketing, but solving Chrysler's other problems has been harder. He found stacks of financial projections but no assessments of the company's strengths and weaknesses. Assumptions that underpinned budgets and business plans kept collapsing. Even so, he managed to produce a three-year turnaround plan in two months. Announced in Stuttgart on Feb. 26, it called for cutting 26,000 jobs (20% of the work force) by 2003; reducing the cost of parts by 15% in the same period; and closing six assembly plants. Zetsche assumes that U.S. car sales will stay above 16 million units per year (they are running at a rate above 17 million so far) and that Chrysler will hold on to its current share. Under those assumptions, he says, the company will lose $2 billion to $2.5 billion this year. He projected a return to breakeven by 2002 and an operating profit of $2 billion in 2003.
Chrysler's Sudden Skid
Year Operating Profits
Per Vehicle
1996 $1,908
1997 $1,322
1998 $1,597
1999 $1,618
2000 $164
Source: Chrysler Group
