The Grey Chronicles

2009.August.5

Kings of The Road to Roadkill: Chrysler



This continues yesterday’s post on the book Comeback (1994), written by two Wall Street Journal’s bureau chiefs, Paul Ingrassia and Joseph B. White. This post focuses on the events at Chrysler.

On 13 June 1978, Henry Ford fired Lee Iacocca, and it was the best thing that ever happened to Iacocca. If Ford had not fired him, Iacocca never would have gone to Chrysler, which he regarded as a third-rate outfit that did not pose a threat to anybody but itself. Iacocca arrived in November 1978 as president and second-in-command to Chairman John Ricardo. He quickly concluded Chrysler was even more poorly managed that he had previously thought. In September 1979 a despairing Ricardo resigned, Iacocca took the helm, working for a salary of just $1, and started taking action. He closed the sales bank for good. He started firing vice presidents, thirty-three of them in just thirty-six months. And he went on television to pitch Chrysler’s cars himself. In 1982 Chrysler actually run out of money, and Lee Iacocca mounted a disparate, but unsuccessful, effort to sell the company to Ford.

By June 1980, Chrysler signed the closing papers for a bailout plan with lenders and bankers of New York. Three years after, Chrysler made the most of the reprieve and paid off the last of its government-guaranteed $1.2 billion loans a full seven years early. The huge losses that Chrysler had racked up during its dark days could be carried forward to reduce taxable income, so Chrysler operated tax-free until early 1985.

Between 1979 and 1983 Chrysler slashed its white-collar workforce almost in half, to 22,000 from 40,0000. Blue collar workers suffered equally. In 1979 Chrysler had to sell 2.4 million cars and trucks a year just to break even. By 1983 the break-even point was down to just 1.1 million vehicles. Just eighteen months after repaying its federal loan, Chrysler posted $705.8 million in profits for the first quarter in 1984. That year, buoyed by the success of its K-car and the new minivan, Chrysler ran every one of its assembly plants full overtime, all year long.

It was also the year when Iacocca, an autobiography, was published after appearing on the cover of Time as “Detroit’s Comeback Kid” Iacocca became America’s first celebrity CEO. In April 1985, Time put him on the cover again: “America Loves Listening to Lee.”

After rewarding shareholders, massive stock buyback programs for $1.85 billion, Chrysler shelled out $636 million to buy Gulfstream Aerospace Corporation, a maker of executive business jets, in June 1985. A few months later Iacocca spent another $400 million to buy FinanceAmerica, a subsidiary of Bank of America that lent consumers money to buy anything from washing machines to vacations, and blended it into Chrysler Financial, a subsidiary that financed cars for both dealers and consumers. On 07 November 1985, Chrysler Corporation became a holding company with subsidiaries Chrysler Motors (cars), Chrysler Aerospace (Gulfstream), Chrysler Financial (lending), and Chrysler Technologies. Chrysler was still searching for a high-tech acquisition in the $1 billion range. In 1984, Iacocca struck a $400 million deal with Allesandro de Tomaso, who gained control of Maserati, the legendary Italian sports car company. In 1986 and 1987, Chrysler also bought Lamborghini and Electrospace Systems, a Dallas defense contractor, and in March 1987, it bought the 56% of American Motors Corporation, maker of Jeep, for $1.1 billion in cash. The diversification overwhelmed Chrysler, but it failed to spend for developing new cars and new engines.

In October 1987, just two months after Chrysler closed the deal, the stock market crashed. Chrysler launches a cost-cutting program including dismissing 3,600 white-collar workers, nearly 10% of Chrysler’s total including AMC. Two years after, Chrysler reported that its earnings from operations for the third quarter had plunged 80% to $22 million, its worst quarterly performance in seven years. In November 1989, Chrysler scrapped the holding-company structure established four years earlier to accommodate its diversification effort. In December, it announced it would try to sell Gulfstream and Electrospace Systems, marking a humiliating end to Chrysler diversification drive. In 1990, Iacocca acknowledged that his biggest sin was trying to diversify. He saw GM and Ford moving into defense, aerospace and financial services, and figured that was the wave of the future.

For fifteen months before February 1990, Chrysler closed three assembly plants forfeiting the capacity to build 675,000 cars a year. The closure cause Chrysler to lose $664 million for the fourth quarter of 1989, the largest quarterly deficit in its history. In May 1990, Jerry Greenwald, Iacocca’s right-hand man and heir apparent, chose to become the CEO of United Airlines for a $5 million signing bonus, and an additional $4 million if the employee buyout could not be completed. In June 1990, Ben Bidwell as Chairman of Chrysler Motors, confirmed his impending retirement.

With Greenwald gone, Chrysler board panicked and gave Iacocca a 15% salary hike for 1990, to $4.6 million, to stay on the job until 08 December 1991. He launched a draconian cost-cutting campaign which eliminated 11,000 white-collar workers, more than 30% of Chrysler’s total. In October 1991, Chrysler was force to sell new stock to bolster its battered balance sheet. In September, Greenwald launched his campaign to return to Chrysler as chairman, after collecting his $9 million fee after the UA buyout fell through. But the board elected Robert J. Eaton, the president of General Motors Europe, as Chairman and CEO of Chrysler on January 1993.


The story of Chrysler much revolved around Iacocca, who reigned from 1979 to 1993. With respect to GSHL, Pramod Mittal is the Chairman of Global Steel Holdings Ltd. While Iacocca turned around Chrysler and reaped benefits from it, could the same be similarly said for GSHL?


Notes:

Ingrassia, Paul & White, Joseph B. (1994). Comeback: The Fall and Rise of the American Automobile Industry. New York: Simon & Schuster, 1994. pp. 61-68, 80-87, 192-199, 203-208. back to text

White, Joseph B. (2009). How Detroit’s Automakers Went from Kings of the Road to Roadkill, Imprimis. 38:2. Hillsdale, MI.: Hillsdale College, February 2009. Adapted from a speech delivered at Hillsdale College on 26 January 2009 at a seminar, “Cars and Trucks, Markets and Government,” co-sponsored by the Center for Constructive Alternatives and the Ludwig von Mises Lecture Series. back to text

Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 LicenseDisclaimer: The posts on this site do not necessarily represent any organization’s positions, strategies or opinions; and unless otherwise expressly stated, are licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 License.

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1 Comment »

  1. Hey there everyone i was just introduceing myself here im a first time visitor who hopes to become a daily reader!

    Comment by neapeNapbeece — 2009.November.15 @ 05:20 | Reply


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