Analysis: Another Chapter Begins for Chrysler

Chrysler has been up and down like a teeter-totter since the company was founded in 1925. In this latest deal, there’s nothing close to a guarantee the auto maker has a long-term future.

David C. Smith, Correspondent

April 30, 2009

5 Min Read
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Even as it slips into bankruptcy and escapes to fight another day, Chrysler LLC as the world has known it will never be the same.

“Part of my life is being destroyed,” says Steve Sharf, who retired in 1986 as executive vice president in charge of manufacturing.

Sharf was a key player in many of its most successful vehicles, including the late-’70s Dodge Omni and Plymouth Horizon compacts, the ’81 K-Car compacts, Chrysler’s pacesetting minivans in 1984 and the acquisition of American Motors Corp. in 1987, and with it the iconic Jeep brand.

Most problematic now is what happens if Italy’s Fiat Auto Group eventually takes control of 35% of Chrysler’s stock while the United Auto Workers union, via its retiree health fund, owns 55%. The government and other investors own the remainder.

Although bankruptcy signifies failure in the minds of most people, it does provide Chrysler at least a breather to restructure and survive.

But like its often volatile past, there’s nothing close to a guarantee that Chrysler has a long-term future. As the saying goes, it could become a death by a thousand cuts.

First, how can Fiat be cast as a savior for the ailing auto maker? It is putting no cash in the deal but reportedly offers “billions” in technology and vehicles, specifically small fuel-efficient cars, which no one is buying with gas at $2 per gallon.

Chrysler’s aerodynamic ’34 Airflow” remains a classic but failed in market.

Moreover, when – and if – Fiat starts building cars and components in Chrysler’s U.S. plants, as outlined in the government bailout, the new company still will have to compete head-on with the Toyota, Honda, Hyundai and Kia brands, which now dominate the market, let alone General Motors Corp., Ford Motor Co. and – soon – legions of Chinese cars.

The “new” Chrysler will be headed by Fiat CEO Sergio Marchionne, who, without spending a single lira, demanded upfront Chrysler retiree health-care costs be cut 50% and that Chrysler’s workers reduce their wages to match the foreign-based U.S. transplants.

Clearly, Marchionne used his leverage as a potential white knight to make these demands, as well as gaining that potential 35% stake.

This shotgun marriage is by no means a Godsend.

Fiat is virtually unknown by the current generation of Americans and had a reputation for poor quality and premature rust before it pulled out of the U.S. market in the early 1980s. However, Fiat today reportedly has fixed its quality problems.

There are parallels to the Daimler-Benz AG takeover of Chrysler Corp. in 1998. That deal made little sense because Chrysler at the time was flying high with arguably the industry’s most impressive streak of winners – and had $9 billion in the bank.

Lee Iacocca, Chrysler’s consummate pitchman.

Daimler used the cash, in effect, to take over the U.S. auto maker and made multi-millionaires out of Chrysler’s top executives, who quickly exited as the Germans took command.

Sharf underscores why that deal was doomed at the outset. “Chrysler didn’t need high-priced cars and components. It wasn’t a good combination, and they were very different cultures,” he says. “Chrysler needed low-price components.”

Founded in 1925 by Walter P. Chrysler and greatly enhanced when he purchased the Dodge Bros. Co. in 1928, the auto maker has had more ups and downs than a teeter-totter.

Chrysler was a natural-born mechanical genius and inventor and was extremely ambitious. He rose to president of GM’s Buick Div., fought with GM founder Billy Durant and struck off on his own.

Although not known for technical innovation in recent decades, Chrysler through the years was considered by many as an engineering leader. Hydraulic brakes, all-steel bodies and alternators are only a few of its pioneering efforts.

Ironically, Chrysler also is remembered for one of its biggest failures: the aerodynamic mid-1930s “Airflow” design that remains a classic but was a marketplace dud. Chrysler experimented with turbine-powered cars in the 1950s and 1960s but folded the project as unworkable.

Original Dodge Challenger part of muscle-car legacy.

The auto maker muddled through the 1930s Depression but became an important contributor to Detroit’s “Arsenal of Democracy” during World War II, building tanks, trucks and engines. After the war, it built rockets for the National Aeronautics and Space Admin.

Its cars and trucks for much of the 1950s, 1960s and 1970s aligned closely with what GM and Ford were offering, fins and all. Under Chairman Lynn Townsend, Chrysler sought to go global by purchasing ailing overseas manufacturers such as the U.K.’s Rootes and France’s Simca, again leading to failure.

By 1978, Chrysler was back in foundering mode. Enter Lee Iacocca, who had been fired as Ford president by Henry Ford II. He soon replaced John Riccardo as CEO, brought in a batch of former Ford executives and began to revamp the auto maker.

It wasn’t enough. To avoid a bankruptcy, Chrysler convinced the U.S. Treasury to come up with a government-guaranteed loan.

With the K-Cars coming soon and the minivan a few years away, Uncle Sam gave Iacocca $1.2 billion in 1980, and he was off and running. Three years later – seven years before it was due – Chrysler repaid the government, plus $350 million in interest, to boot.

Under Iacocca, Chrysler flourished and introduced a steady stream of new models, including the Viper sports car, Dakota midsize pickup, a beefed-up Jeep lineup and the LH front-wheel-drive sedans that caught the public’s fancy.

After he retired in 1992, the new team also kept the pipeline flowing with a series of attractive models, including the revived Ram pickup and PT Cruiser small car.

But in recent years, Chrysler’s only standout entry has been the 300C fullsize car and the high-performance Dodge Challenger. The Jeep lineup has expanded, but purists now see the brand’s offroad credentials seriously in question.

Much has been reported about mismanagement and a greedy union as cause for Chrysler’s downfall. Much less has been said about the impact of $4-per-gallon gas last summer and Wall Street’s meltdown, accompanied by the resulting steep drop in the car market as reasons for its limping into bankruptcy.

Whatever happens, Chrysler won’t be the same company that has survived for 84 years.

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