Case Study: Turbulent History of Chrysler Corporation

In 1920, the president of Buick and Vice President of General Motors (GM) resigned his positions in the GM Corporation following political differences with founder and then-president of General Motors William Durant. This former automotive Vice President was promptly approached by a group of investors to focus his business acumen in the fledgling automotive industry on a small, financially troubled New York company called Maxwell Motor Corporation. The one-time automotive vice president was installed as president of Maxwell Motor Company. The man’s name was Walter Percy Chrysler.

In short order, Walter Chrysler brought the Maxwell Motor Corporation out of bankruptcy. The financial improvement was due in large part to Mr. Chrysler introducing a new Maxwell model- the Chrysler Six. This car was very well received by the automobile buying public and went on to sell 32,000 units in its first year, generating a profit of over $4 million for the small company. On the heels of the success of the Chrysler Six, Walter Chrysler changed the name of the Maxwell Motor Corporation to the Chrysler Corporation. Capitalizing on the success of the initial Chrysler model, Walter Chrysler introduced 4 additional Chrysler models know as the Chrysler 50, the Chrysler 60 the Chrysler 70 and the Chrysler Imperial 80. Interestingly the model numbers were derived from the top speed of these new vehicles as gauged on level ground. As a point of reference, Ford’s Model T was, until the introduction of the new Chrysler models, the fastest road car with a top speed of 35mph. It was these new Chrysler models that caused Henry Ford to notoriously shut the doors of the Ford Motor Company for nine months to create a replacement for the Model T. By the time Ford closed its doors to redesign its offering, Chrysler had established itself as formidable competition. With sales of 192,000 of these new models, Chrysler officially became the fifth largest automobile manufacturing company in the industry.

Case Study: Chrysler's Turbulent History

Walter Chrysler determined that to achieve the greatest manufacturing cost efficiency, he would have to build his own plants to produce the various parts needed for his vehicles. The capital expenditure required to do this was estimated at $75 million. While successful, the Chrysler Corporation could not afford this capital expense and so Walter Chrysler contacted the banking firm of Dillon Read and Company in New York; a firm that fatefully had just purchased the Dodge Corporation from the widows of the late Dodge Brothers. Dillon Read and Company was eager to do business with the well known Chrysler Corporation. As part of the arrangement, the Dodge Corporation became a division of the Chrysler Corporation. This merger effectively increased the size of the Chrysler Corporation fivefold. Shortly after the merger, the Chrysler Corporation unveiled its new, low cost Plymouth and Desoto models.

In a reversal of strategy, Walter Chrysler ended his drive to bring all manufacturing in-house. He was wise to see that the speed with which the automotive industry was growing demanded greater flexibility that in-house manufacturing could provide. Outsourcing automobile components was more expensive but allowed for greater flexibility and a more rapid development cycle in designing new models. In this same period, Walter Chrysler made research and development a budgetary priority. Research and Development persevered at the presidency of Chrysler was This foresight allowed Chrysler to weather the Great Depression and emerge in a more sound financial position than many others in the automotive industry. In 1931, Joseph E. Fields assumed the presidency of Chrysler from Walter Chrysler and in 1936 Walter Chrysler fully handed of the daily operation of the company.

At the beginning of the 1940s the Chrysler Corporation, along with most other large American manufacturers switched to wartime production. The Chrysler Corporation’s Dodge, Plymouth and Chrysler models were put on hold while the company contributed to the production of wartime necessities including small ammunition, submarine nets and, perhaps most notably, B-29 bomber engines.

As American industry adjusted to post-war production needs, the Chrysler Corporation started to falter and performance began to wane. The vivacity and forward momentum that Walter Chrysler imparted to the company were no longer present. After the automotive technology boom of the 20s and 30s, the rate of innovate in the industry began to slow. Post-war America’s tastes began to change toward streamlined, nontraditional models and, at times, at the expense of reliability and built quality. To some extent, flashy advertising was influencing buying decision more than quality, features and nameplate. Chrysler was detrimentally slow to react to this new America.

In 1950, a long-time legal counsel for the Chrysler Corporation by the name of L. L. Colbert became president. He immediately took the reins of the company to institute managerial reforms with the help of a professional management consulting firm. Colbert concentrated on three areas; expanding into international markets, centralizing corporate management and refocusing the engineering department on innovation. Despite his decisive changes, Colbert’s efforts did little to improve Chrysler’s position in the industry. In two short years, Colbert was replaced as head of Chrysler by Lynn Townsend.

In charge of the struggling company, Townsend proved to be more successful in his revival attempt. He sold, closed or otherwise divested of unproductive manufacturing facilities and downsized the labor force thereby improving efficiency. He purchased a single early model IBM computer which helped workforce reduction efforts by eliminating the need for almost 800 employees. The early 1950s saw the dawn of Total Quality Management Theory lead by pioneers in the field including W. E. Deming and A. V. Feigenbaum. Townsend seemed to take notice of this movement as his most notable achievement was a focused quality improvement effort that did boost sales and allowed Chrysler to offer a warranty unprecedented in the industry thus far. To further the momentum,. Townsend undertook an aggressive marketing campaign touting the new, improved quality of Chrysler vehicles. Where Colbert had failed, Townsend succeeded; Chrysler was again a stable, financially healthy and expanding corporation.

As might be expected, with this new success came growth. In the midst of the American space age of the 1960s, Chrysler expanded to include an aerospace division and became a principal subcontractor for NASA’s Saturn rocket program. Townsend’s consistent push to grow international business resulted in Chrysler plants in 19 countries by the end of the decade.

At the onset of the 1970s, the American car market was feeling the effects of a rising consumer price index, increasing competition from foreign auto manufacturers, and the first signs of the crude oil crisis. In 1969, Chrysler reported losses of almost $5 million dollars and, with an infrastructure to support he growth of the 1960s, was operating at only 65% of capacity. Chrysler met this changing market climate with a product stable that included large, expensive, gas thirsty vehicles as well as smaller more economical cars. The company seemed more content to contend with the traditional American competition than to assess the changing market demand and consequently, Chrysler was faced with an excess inventory of the vehicles the market wasn’t buying and a severe shortage of the vehicles the market was demanding.

Despite significant price reductions to move its excess inventory, Chrysler’s financial fortune continued to slide. Chrysler’s presidency was assumed by John Riccardo. Ricardo, with an accounting background was intent on cutting operating costs. Total employment, payroll and individual budget area were affected by the cost cutting measures. This period also marks the first efforts to import and sell vehicles manufactured overseas.

Chrysler’s shortsightedness with regard to market demand was not over. Despite the inconsistency between what the company was manufacturing and the market was demanding, Chrysler continued to make larger, less efficient models right into the Arab oil embargo. In 1974, Chrysler reported an unprecedented budget deficit of over $50 million. In 1975, the damage was five times as great at over $250 million in losses.

The American auto market was severely impacted by several factors including inflation and the Arab oil embargo but Chrysler’s significant foreign interests were still showing a profit. This profit served to offset the domestic losses however, in 1978 Chrysler again reported losses of over $200 million. Riccardo continued to cut costs, consolidate the various divisions of the Chrysler Corporation and direct manufacturing efforts toward smaller, more efficient vehicles but the Chrysler Corporation’s financial health continued an unsustainable slide.

Chrysler ended the 1970s on the brink of bankruptcy. The company was spared bankruptcy proceedings by federal intervention in the form of a $1.5 billion lifeline loan guarantee. This loan came with conditions including the requirement that Chrysler raise $2 billion in additional money on their own and they make significant management changes. This last requirement ended the tenure of J. J. Riccardo as president of Chrysler. Riccardo was replaced by charismatic industry veteran Lido Anthony “Lee” Iacocca. Where Riccardo was an accountant, Iacocca was adept at public relations and marketing. He employed these skills in communicating to both the workforce at the Chrysler Corporation and the public at large the need for federal intervention.

During the early 1980s, Iacocca’s skills as a superb television salesman were of crucial importance as Chrysler lost nearly $1.8 billion in 1980–the largest loss ever for a U.S. company–and another $475 million in 1981, before returning to the black in 1982. In August 1983 Chrysler was able to pay off the government loan guarantees seven years early, with the government making a $350 million profit on its investment. By the mid-1980s, the company was back on track and stronger than ever before. Chrysler benefited from the combined impacts of strong industry demand and shifting consumer preferences toward pickup trucks and minivans, products that dominated Chrysler’s lineup. Chrysler’s road to recovery was a difficult one, demanding the closure of several plants and the reduction of the company’s workforce. Once restructured, Chrysler scrapped its plans to diversify and divested the Gulfstream Aerospace unit it had purchased five years earlier, selling it to a New York investment firm for $825 million in early 1990. Two other units in the company’s Chrysler Technologies subsidiary–Electrospace Systems and Airborne Systems–were slated for divestiture as well, which underscored Iacocca’s intent to create a leaner, more sharply focused company. Meanwhile, there were two key developments in the 1980s that helped form the foundation for the 1990s resurgence: the introduction of the minivan in 1984 and the acquisition three years later of American Motors Corporation and its Jeep brand for $1.2 billion.

Reorganized as such, Chrysler entered the 1990s braced for a full recovery, but the economy did not cooperate. The decline in automotive sales during the fourth quarter of 1989–the company’s first fourth quarter decline since 1982–portended a more crippling slump to come, as an economic recession gripped businesses of all types, both domestically and abroad. Net income in 1990 slipped to $68 million, then plunged to a $795 million loss the following year, $411 million of which was attributable to losses incurred by the company’s automotive operations. Mired in an economic downturn, Chrysler appeared destined for more of the same, rather than headed toward recovery as Iacocca had hoped, but part of the reason for 1991’s losses also led to the company’s first step toward genuine recovery.

Partly to blame for the $795 million loss in 1991 were the high preproduction and introduction costs associated with Chrysler’s new Jeep Grand Cherokee and increased production costs at the company’s St. Louis minivan plant. These two types of vehicles–minivans and sport utility vehicles–represented the key to Chrysler’s recovery. The popularity of these vehicles, coupled with significant price advantages over Japanese models, fueled Chrysler’s resurgence. In 1992, Chrysler turned its $795 million loss the year before into a $723 million gain. It was a signal achievement, accomplished in Iacocca’s last year as CEO. Taking over during 1992 was Robert Eaton, who was hired away from GM, where he was head of European operations. Chrysler then went on to enjoy its most successful year ever, with 1994 earnings of $3.7 billion on revenues of $52.2 billion.

The good news at Chrysler continued into the late 1990s, after the company managed to fend off a $22 billion buyout proposed by billionaire investor Kirk Kerkorian in 1995. The long prosperity and low gasoline prices of the middle to late 1990s created a huge demand for large vehicles, and Chrysler was producing hot models in each of the hottest segments: the Dodge Ram pickup truck; the Town & Country minivan; and several sport utility vehicles–the Jeep Grand Cherokee, the Jeep Wrangler, and the Dodge Durango. Questions about the quality of Chrysler products continued to pop up, but the company’s share of the U.S. auto market reached as high as 16.7 percent in 1996, the highest level since 1968. In 1996, the year Chrysler moved into new headquarters in Auburn Hills, Michigan, sales reached $61.4 billion.

By 1997, Chrysler reported annual sales of 2.9 million vehicles, record revenues of $61 billion, and record earnings of $2.8 billion. Chrysler’s year-end market capitalization was $22.8 billion and its US market share crossed over 16%. Chrysler had become one of the most profitable automotive companies in the world – and had roughly $7.5 billion in cash on hand. Nick Colas, an analyst with Credit Suisse First Boston, declared: “Chrysler has a better business model for building and selling cars than General Motors and Ford do.”

As profitable as Chrysler was, however, the company was not capitalizing on the growth of the global automotive industry. Since the company had made limited investments in overseas markets up to this point, finding a partner made the most strategic sense.

On May 7, 1998, Chrysler merged with Daimler, the leading German luxury car manufacturer, for $36 billion of Daimler stock, the largest trans-Atlantic merger in history. The merger was orchestrated in order to create an efficient and lean automotive powerhouse that would better compete in the global marketplace. The transaction was reported as a “merger of equals” in the business press. The combined company would have a market capitalization close to $100 billion.

In 1997, Daimler reported revenues of $62 billion and net income of $1.8 billion. Though Daimler was soundly profitable and had a strong foothold in the European market with its Daimler, Mercedes-Benz, and Smart Car brands, Daimler’s US market share was less than 1%.4 Daimler’s management hoped that Chrysler would give the company greater inroads into the lucrative US automotive market with its extensive dealership network and powerful brand name.

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