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What's Driving Chrysler's Comeback

How DaimlerChrysler stanched the fiscal blood flow at its U.S. division with a return to its heritage of edgy innovations and a model that has been turning bling into ca-ching
Paul A. Eisenstein
From the Print Edition:
Jimmy Smits, May/June 2005

Nothing was lost in translation when Chrysler Group CEO Dieter Zetsche picked up the phone a few months back only to discover a voice mail from Snoop Dogg. "What I gotta' do to get that brand new 300 up outta' you?" the gangsta-rapper asked. "Get back in contact with my nephew so he can make it happen, then it's official like a referee with a whistle." Zetsche might not be a fan of rap, but it didn't take the German executive long to figure out the message—or to make sure that Snoop and fellow rapper, 50 Cent, both got brand new 300 sedans.

With their mammoth grilles and chopped roofs, Chrysler's 300 and especially the Hemi V-8-powered 300C are equal parts hot rod, muscle car and luxury sedan. Brash, bold and bordering on the outrageous, it's not surprising that the model has connected squarely with hip-hoppers—for whom it's the ultimate example of bling—and hip business executives alike,

becoming one of the biggest, if unexpected, hits of the past year. The 300C has been featured in music videos and played a starring role in an episode of the TV series, "ER," and Chrysler is losing count of all the awards piling up. In January, a panel of 50 top automotive journalists named the 300C as North American Car of the Year, perhaps the industry's most sought-after award.

In an era when rebates and subsidized loans are the norm, rather than the exception, the 300 carries lower incentives than even some of the most popular Japanese products, which is not surprising since Chrysler can barely keep up with demand and is ramping up a nearly 50 percent increase in production capacity. What is remarkable is that nearly half of all buyers are opting for the fully loaded 300C in order to get their hands on Chrysler's muscular Hemi engine. That means lots of cash falling to the bottom line for an automaker that was hemorrhaging red ink just a couple of years ago. Things were so bad, recalls Zetsche, that analysts and shareholders alike were calling on him to close or sell off Chrysler's passenger car operations and focus on the still profitable truck side of the business. Of course, fortunes in the auto industry are a lot like Michigan's weather. Just wait, and things will turn upside down. And in the case of Chrysler, the latest turnaround is laden with irony.

An All-American Automaker
The 300 sedan may be the most unabashedly American automotive design on the road today, but for many, Chrysler has traditionally been viewed as the most classically American of the Big Three. In his memoir, founder Walter P. Chrysler recalled being denied a spot at the 1924 New York Auto Show, forcing him to stage his own introduction at the Commodore Hotel. Experts say that's little more than myth, but what's fact is that a freak snowstorm left thousands of commuters stranded, and as they wandered into the hotel lobby, Chrysler took advantage of this unexpected audience. The automaker always cultivated a reputation as a maverick, with a fittingly cowboy corporate culture that often led it to shoot from the hip.

Engineering was Walter P.'s strong suit, and it paid off in the muscle-car era, when products powered by the original Hemi, like the Challenger, Charger, Barracuda and Road Runner, dominated the road. Innovation was another company hallmark, underscored in 1984, when Chrysler rolled out the first modern minivan. Today, despite a flood of competitors, it remains the dominant player in this profitable, if oft-maligned, segment. To stand out in a domestic market ruled by the better funded Ford Motor Co. and General Motors, Chrysler has often played a trump card with the sort of cutting-edge styling that its larger, risk-averse competitors shied away from. In the early 1990s, that led to a lineup of products as bold and unusual for their day as the 300 sedan is today. The so-called "cab forward" look, with its short nose and sumptuously large cabin, revolutionized automotive styling and heavily influenced the industry for the next decade.

That first generation of cab-forward cars, including the Chrysler Concorde and Dodge Intrepid, every bit as successful as the 300 is today, provided a perfect backdrop for the oft-delayed departure of legendary Chrysler Chairman Lee Iacocca. But his successor, Bob Eaton, had a nervous eye on the past. Shortly after signing on at the number three automaker, Eaton pulled together 90 of his top managers. The company had just reported a record-breaking quarter, but if the executives were expecting a celebration, they were in for a surprise, for the bulldog-mannered Eaton started waving a pile of newspaper and magazine clippings, all raving about the carmaker's comeback. Or, more precisely, comebacks, for some of the clips dated back to 1934, when founder Walter P. Chrysler had to dig the company out of debt. Every single chairman in Chrysler's history, Eaton hammered, had to save the company from bankruptcy, "and some of them did it twice," he added, in reference to Iacocca's tumultuous tenure.

It was a realization that dominated Eaton's own turn in office, for while he was there, he seemed unable to enjoy Chrysler's thriving success. He was bound and determined to avoid another repetition of the bankruptcy scenario—even if it cost Chrysler the very independence that seemed its most precious core value.

Merger of Less Than Equals?
Secrets in the auto industry typically don't last very long. Most manufacturers have a pretty good idea of what the competition is doing, thanks in part to a vibrant press and the spy photographers who snap pics of products years before their formal launch. Yet when the early edition of the May 6, 1998, Wall Street Journal hit the stands, one could hear the collective sound of jaws dropping all over the automotive world.

Never confident of Chrysler's chances going it alone, Eaton had led a handpicked team of associates to a secretive series of rendezvous with their counterparts from Mercedes-Benz AG. The man sitting opposite Eaton was, by the staid and cautious rules of German business, himself something of a cowboy, and the plan that the MBAG chairman, Juergen Schrempp, had in mind clearly would enhance that reputation. It was audacious, at the least, and completely unexpected. For more than a decade, industry analysts and planners had come to realize that their world would be getting smaller. Weaker players, like Jaguar and American Motors, were either going belly-up or being gobbled up by bigger automakers intent on expanding their global grasp. But what Schrempp had in mind went far beyond anything yet attempted.

In a deal initially valued at a whopping $150 billion, Germany's most prestigious automaker, king of the global luxury market, would marry that plebian prince of Detroit and expand its reach into the mass-market segment. In the celebratory aura of the announcement, the new partners glowingly described their relationship as a "merger of equals." While the legal headquarters of the new DaimlerChrysler AG (DCX) would be in Germany, they explained, management operations would be carefully divided between sleepy little Stuttgart and Chrysler's sprawling, recently opened headquarters in the Detroit suburb of Auburn Hills.

Yet the sounds of celebration had barely died down before the promises of the deal began to ring hollow. Schrempp, as he would frequently boast, was a master chess player, and that passion clearly influenced his business strategy. It also nearly proved his undoing when he was interviewed for a story that ran in the Financial Times on October 30, 2000. Talk of a merger was just a charade, Schrempp declared. From the very day he walked into Bob Eaton's office in January 1998, the German executive boasted, he had intended to swallow Chrysler whole. "Me being a chess player, I don't normally talk about the second or third move. The structure we have now with Chrysler [as just a division] was always the structure I wanted."

Try as they might, corporate handlers couldn't quite spin those comments in a more favorable light—especially with it becoming increasingly obvious who was running the show. While Chrysler might have been a Wall Street darling during the years leading up to the "merger," the situation quickly took a turn for the worse. Suddenly, black ink turned blood red, and the toll could be measured in human terms. Chrysler's senior managers were sent packing, and a new German management team, headed by Zetsche, moved into the spacious tower offices lit by a massive skylight in the shape of Chrysler's penta-star logo. Controversial, yes, but it was a stroke of genius that may have been the best thing to happen to DaimlerChrysler in years.

The Knife Plunges Deep
The tall, bald and unexpectedly outgoing new chief executive officer had long been on the Mercedes fast track. "He is the anointed one," a well-placed MBAG source confided to this correspondent nearly 20 years ago. But the situation Zetsche inherited left him wondering whether he was being set up for a fall. What he knew he had to do certainly wasn't going to win many friends, at least not in Auburn Hills.

On a bitterly cold morning at the end of February 2001, Zetsche faced off with a pack of stone-faced journalists in a small auditorium at Chrysler headquarters. As always, details had begun to leak out over the previous few days, but even the most hardened business writer had to gasp at the depth the knife would plunge in. The U.S. side of DCX would need to cut 26,000 jobs and close six plants, possibly more, in an effort to reduce costs by nearly $4 billion. And the pain would be spread to suppliers, who were told they'd have to cough up 5 percent in price cuts on the bits and pieces that make up every Chrysler car and truck.

However, another part of the plan would, in the long run, prove equally important. There's an oft-used cliché in the auto industry: "it's all about product." But clichés so often become such by being true. "You can't cost-cut your way to prosperity," said analyst David Cole, of the Center for Automotive Research in Ann Arbor, Michigan.

In the months following the grim announcement, you were likely to find Zetsche out of his office quite frequently. Along with chief operating officer Wolfgang Bernhard and a core of trusted German and American lieutenants, they were spending a disproportionate share of their time down in Chrysler's well-guarded styling studios, combing over new design proposals, or over in the engineering department, outlining plans for an entirely new generation of products.

Product, Product, Product
In 1980, hoping to win a bailout from Congress, Chrysler took the unheard of step of releasing sketches of the products it was then developing. It helped convince lawmakers that the company could survive. In the late 1980s, Chrysler began rolling out a string of concept

vehicles that hinted at what was coming. This helped convince lenders—and consumers—that the company could survive. Zetsche and his team hoped they might pull off the same trick yet again.

In 2001, they rolled out an assortment of distinctive concept vehicles, including the Crossfire, which combined American design with Mercedes-derived German engineering. "It's where Route 66 meets the Autobahn," Zetsche declared during the North American International Auto Show in Detroit that January. Seven months later, the automaker announced plans to put the edgy roadster into production. The 2003 Detroit show was dominated by Chrysler's over-the-top Tomahawk, a 500-horsepower motorcycle with an estimated speed of 300 to 400 mph. Bernhard personally drove it on stage.

A lot of smoke and mirrors? Perhaps, but a signal that Chrysler wasn't out of the action—as it proved next with the introduction of the radical 300, and the equally unexpected Dodge Magnum wagon. Yes, wagon, a word that for years had been anathema to Detroit. The automaker also scored big with the revival of the Hemi. Actually an all-new engine, with virtually nothing in common with the legendary V-8 of the 1960s, "it has become Chrysler's fourth brand," says the automaker's marketing czar, Joe Eberhard. If the 345 hp of the 300C isn't enough, Chrysler has just launched a second version of the Hemi, this one bored out to 6.1 liters and able to pump out 425 hp. The new car, the 300C SRT-8, is making more power than the Chevrolet Corvette.

Topsy-turvy
Product isn't everything, of course, but across the board, there are good things happening at Chrysler. "We take the lean initiative very seriously," says Frank Ewasyshyn, Chrysler Group's manufacturing chief. Tooling costs, he noted, have dropped at least 40 percent since the turnaround announcement, while warranty costs have fallen 32 percent over the last three years. The bottom line is, well, the bottom line. Chrysler just closed the books on an incredibly good year, its best since the merger, if you still choose to call it that. During the fourth quarter alone, sales rose 12 percent, while operating earnings doubled. "Chrysler," says Dan Gorrell, of the automotive consulting firm Strategic Visions, "is very definitely riding the wave."

The situation is quite different, ironically, on the other side of the Atlantic. DCX reported an overall 63 percent plunge in fourth-

quarter net income, while operating earnings tumbled 67 percent. All manner of issues plagued the company, including problems stemming from its affiliation with Japan's crumbling Mitsubishi Motor Co. and the struggles at smart, a European line of micro-minicars. Yet it's the vaunted Mercedes-Benz brand that catches most of the blame.

What's gone wrong? Sales remain reasonably strong, and the automaker continues to enter new market segments with some success, but it is paying a heavy price for its decision to add models ranging from the A-Class minicar to its super-luxurious Maybach. In the early years of the annual Initial Quality Study, Mercedes-Benz topped the charts. Lately, it has tumbled badly in the oft-quoted report from J.D. Power and Associates. The German marque did show signs of a turnaround in the 2004 IQS, its score improving 20 percent, but even so, it could only claim 10th place, behind Cadillac and Japan's Lexus, which topped the survey.

Mercedes' love affair with technology catches much of the blame. Juergen Hubbert, the man known as "Dr. Mercedes" until his retirement last year, revealed that electronic systems are responsible for seven out of ten defects. Some are complex coding errors that might only show up when a car is cruising at Autobahn speeds. Others reveal an absurd lack of foresight, like the transmission controller on the previous C-Class that could short out if even a few drops of liquid sloshed out of a cup sitting in the center cup holder. "Mercedes has a lot of positive equity," asserts analyst Gorrell, which he believes will carry the brand through its current crisis. But a highly placed source inside the German side of DCX hinted that quality and other problems are beginning to take their toll, with the Mercedes brand's loyalty rates sliding noticeably over the last two years.

What Next?
This reversal of fortune may actually be a good thing, long-term, insiders and outsiders agree. Members of the Mercedes "family" long sniffed at the idea of having to work with "those American cowboys," as one confided off the record. Now, with Chrysler carrying the company weight, doors are opening. "The two parts of the company are a lot more collaborative today," insists Canadian-born Tom LaSorda, who succeeded Bernhard as chief operating officer in February 2004.

There are those who bridle at the term, Big Three. Chrysler, they argue, is no longer an American automaker. Technically true, yet even with top managers with names like Zetsche or Eberhard, the automaker's revival seems to have more to do with its U.S. roots than anything that its German partner brought to the table. True, DaimlerChrysler provided enough cash to carry Chrysler through its recent downturn, but it's flying high again on Yankee know-how and classic, brash American styling.

"The question is how long that wave will last," cautions analyst Gorrell. As Eaton notes, every CEO in Chrysler history has had to save the company at least once, a troubling trend that continued even after Chrysler became part of DaimlerChrysler AG. Not all is going smoothly. The quirky Pacifica crossover got off to a slow start, as has the latest version of the Jeep Grand Cherokee. Facing intense competition, Chrysler's light trucks—which account for nearly two-thirds of its sales—are no longer an undisputed profit center.

Yet the 300C, the Magnum and the formidable Hemi show why Chrysler should never be counted out—especially by its skeptical partners on the other side of the Atlantic. v

Paul A. Eisenstein publishes an automobile magazine on the Internet at www.TheCarConnection.com.

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