Chrysler almighty!

Fiat has a radical plan to save Detroit’s weakest link. And it just might work.

Washington’s industrial-policy wonks raised more than a few eyebrows when they supported the shotgun wedding of Chrysler to Fiat earlier this year. Critics pointed to the Detroit automaker’s failed alliance with Mitsubishi in the early ’80s, not to mention the company’s messy breakup with Daimler this decade, and noted that the smallest of North America’s ever-shrinking Big Three doesn’t do so well in relationships.

Fiat seemed a particularly odd partner for Chrysler, which was forced to seek Chapter 11 bankruptcy protection during the financial crisis after racking up massive losses tied to dismal product-quality ratings and sky-high production costs. Consumers tend to have long memories, especially car lovers, and the naysayers gleefully pointed out that Fiat retreated from North American markets years ago because angry customers joked that the company name stood for “Fix it again, Tony.”

The Italian automaker is also forever linked to the Soviet-era Yugo, which was basically a Yugoslavian Fiat. Dubbed “the Mona Lisa” of crappy cars, it spawned plenty of jokes of its own. Time once noted caustically that the Yugo’s rear-window defroster was made to keep your hands warm while you pushed it.

The heart of Chrysler’s problems have been the same for a while now. It is stuck trying to sell tarnished products to wary consumers during the worst downturn to hit the auto sector since the Great Depression. As a result, its market share is being devoured by competitors, including General Motors, which also recently emerged from bankruptcy protection after receiving billions of dollars in emergency loans from U.S. and Canadian taxpayers.

Chrysler started the year with about a 10% share of the U.S. market. By September, when it posted a 42% decline in sales over the same month in 2008, the company held just 8.3%. In October, while the flat U.S. market was running at an annualized rate of 10.5 million units, GM and Ford both managed to squeak out sales gains (of 4.7% and 3.3% respectively). But Chrysler’s performance dipped 30%, and its share of the market slipped further to 7.9% — below the crisis level that forced former Chrysler CEO Lee Iacocca to request U.S. government loan guarantees in the early ’80s.

But crisis is nothing new here. In 2004, after DaimlerChrysler executives had spent three long years attempting to steer their battered U.S. subsidiary back to profitability, Barron’s announced Chrysler had hit its “day of reckoning” under German control. That projection, like many in the auto sector, was way off. Five years later, Chrysler is still around, fuelled by government assistance for the second time. The Daimler crowd is long gone. Now it’s the Italians driving the storied American company through its make-or-break period, and they are off to a better start than anyone expected.

Hundreds of analysts, suppliers and journalists attended an all-day state-of-the-restructuring address at Chrysler’s Auburn Hills, Mich.–based headquarters in early November, and were shocked to hear the company report it had generated positive earnings of US$200 million during the third quarter (before interest, taxes and depreciation). The automaker’s cash position is also healthier than expected, currently sitting at US$5.7 billion. That money and much more will be invested in rebuilding Chrysler and its culture from the ground up.

After the Italian job, company officials insist, nothing related to the company — including its products, commercials, promotions, brochures, websites, dealers, supplier relationships and customer experience — will ever again be seen as second best.

How this story turns out will mean a great deal to Canada and its citizens, especially Italian-Canadian auto executive Sergio Marchionne. When it comes to the union of Fiat and Chrysler, he knows the challenges ahead better than anyone, and not just because he is now CEO of both companies.

“When I lived in Toronto, I owned a Fiat,” Marchionne says. “And back then, if you told me that I’d one day run the company, I’d have called you crazy.” Nevertheless, he is now staking his own reputation on using Fiat to restore Chrysler’s.

Marchionne vows to save the Detroit industrial icon by running it parsimoniously, and by transforming every one of its assembly plants into a state-of-the-art operation that churns out world-class products — ones his designers say will “stimulate men better than Viagra.” He insists the new Chrysler “will break even on an operating basis in 2010 and produce net profits the following year.” He promises the company will dramatically expand globally and more than double sales by 2014. By then, he says, it will have paid back the $16-billion debt owed to North American taxpayers.

“Some of you are going to walk out of here totally skeptical,” he told the room of industry watchers and suppliers. “Some of you will be outright incredulous. I understand. I’ve been here before.”

True enough. Anyone who doubts that Marchionne can pull it off should note he managed a similar turnaround at Fiat. Forget about Tony. When it comes to Chrysler, the question is: Can Sergio fix it again?

Once the most profitable automaker in Detroit, Chrysler spent years developing a solid reputation for innovation and engineering. But its management record is spotty at best. The company certainly wasn’t on Iacocca’s radar in the ’70s when he ran Ford. In his autobiography, he says Chrysler products “didn’t even show up on the monthly sales sheets that measured how well our cars were doing against the competition.” When Chrysler offered him the CEO job in 1978, he wasn’t even sure how to find the head office.

The ups and downs of Chrysler, of course, have always been important to Canada. Two Canadians — James Holden and Tom LaSorda — have served as the company CEO over the past decade. In 2000, after watching their U.S. division post massive unexpected losses in a booming market, the Germans sent a skilled axe man named Dieter Zetsche to oust Holden. LaSorda replaced Zetsche in 2006 after Chrysler’s US$36-billion “marriage made in heaven” to Daimler-Benz hit the rocks. In 2007, Chrysler was unloaded to Cerberus Capital Management for US$7.4 billion, and Robert Nardelli was brought in as CEO.

Chrysler’s various Canadian connections have done little to protect Ontario operations from pain however. Back in 2000, when out-of-control incentive spending pushed annual U.S. auto sales to a record 17.5 million units, the company was still promising major expansions to Canadian operations. But when Zetsche took over, Chrysler quickly nixed a proposed $1.5-billion investment that was supposed to save a full-sized van plant in Windsor from being shuttered. In total, the Germans closed six North American assembly plants and slashed 26,000 jobs, including 4,300 in Canada. Nardelli also axed employees, cutting more than 1,000 jobs in this country. Chrysler’s Canadian operations currently employ roughly 9,100, compared to 17,147 when the decade started. But in the grand scheme of things, Canada has got off relatively lightly in the seemingly endless string of restructurings. The company still operates two Ontario assembly plants — one in Windsor, which produces minivans; the other in Brampton, where the 300C sedan is built. And the future of those operations looks brighter, thanks to the union with Fiat.

According to Marchionne, Chrysler’s made-in-Canada products are “sacred cows” that will not be going anywhere. Furthermore, in return for the emergency loans handed out by Ottawa and Ontario, Chrysler has guaranteed this nation a 20% share of its vehicle production. “That assured Canadian footprint, combined with this turnaround plan,” says CAW president Ken Lewenza, “opens the real possibility that we could actually see job gains in Chrysler’s Canadian operations by 2012.” But that’s if Marchionne — who got his MBA at the University of Windsor — is successful.

To understand the size of the hill that the Italians must climb, it helps to understand where the Germans went wrong. When Zetsche and the Daimler boys arrived at Chrysler, it was widely seen as a foreign occupation, so the German’s put a lot of thought into public relations. The company’s “Ask Dr. Z” ad campaign tried to make a virtue of the CEO’s wooden public image. But with his walrus mustache, he ended up coming across like a puppet version of Pinocchio’s papa. Under his leadership, however, the company pulled off a brilliant PR move in 2002, when it restored an old Detroit fire hall.

Chrysler claimed the restoration was a tribute to the heros of 9/11. But at least part of motive was winning over American journalists. During the party-packed media days that typically kick off the Detroit Auto Show, Chrysler’s Firehouse was turned into a posh press club, one sporting everything a tired scribe could want, but no cash registers. And since most journalists need a good excuse to accept free beer, the joint was staffed by Chrysler bar keepers.

During the opening night, Wolfgang Bernhard, Zetsche’s COO, was working the taps. He took the job seriously. At one point, he appeared out of nowhere to scold a U.S. executive for serving a pint of foam to a Canadian reporter. Bernhard apologized for the quality gaffe, then he pointed to a production line of perfectly poured beers waiting for the journalist in question. “That’s how Daimler will save this company from the Yanks,” he said, not joking.

The Germans firmly believed they could save Chrysler by force-feeding it the Daimler culture and sweetening it with German engineering and a few Mercedes parts. But Zetsche couldn’t make the marriage work well enough to finance enough hit products. The 300C was a clear step in the right direction. Designed by a Chrysler team led by Montreal-raised Ralph Gilles, who Marchionne has kept on as design chief, it twice made Car and Driver magazine’s 10 Best list, while Automobile Magazine placed it on its list of the Top 20 Vehicles of the Past Twenty Years.

Dressed in white (or what Chrysler calls “cool vanilla”), the 300C attracted the Bentley crowd, while black versions proved popular with consumers who like blasting 50 Cent or Snoop Dogg, both early 300C owners. This mass appeal gave DaimlerChrysler’s North American division a much-needed boost to the bottom line. “The 300C and Hemi engine sales did it for Chrysler,” says U.S. auto analyst David Healy. “They went from something like a minus 7% operating profit margin in 2000 to a small but respectable margin of maybe 2% in 2005.”

After the events of September 2001, however, GM initiated the Keep America Rolling 0% loan program, which launched yet another of the costly incentive wars that were eating away at Big Three profitability long before sky-high oil prices and the global financial crisis forced GM and Chrysler to cry for help. By 2006, with about 70% of its sales generated by pickups, minivans and SUVs, Chrysler had skidded back into the red, thanks to the U.S. market shift toward fuel-efficient smaller cars.

In 2007, after Cerberus took over Chrysler and its associated liabilities, insiders say Nardelli and his private-equity number crunchers “went into cost-cutting overdrive,” leaving the new product cupboard totally bare. And that’s where Chrysler finds itself today.

Marchionne knows what he is up against. Still, he says, fixing Chrysler comes down to finishing what the German’s started — merge the best of two automotive worlds and deploy economies of scale to produce profitable products that don’t require incentives, or what Zetsche called making “dolphins among whales.”

Fiat already appears to be a more committed partner than Daimler. In return for its 20% stake in a failed company, the Italian automaker is handing over unfettered access to billions of dollars in technology “for free.” In the short-term, Chrysler will conduct an on-the-fly makeover on as many current models as possible while working to combine Fiat’s vehicle platforms, engineering and fuel-efficient engines (including diesels) with Chrysler’s design DNA and truck know-how to produce a totally refreshed product lineup. The Fiat 500, along with Chrysler-made compacts, will also be offered as soon as humanly possible.

“Seventy-five per cent of the current vehicles will have been touched in the next 14 months,” Marchionne promises, “and 100% will be renewed by 2012,”

The company is beefing up its engineering bench strength and has dedicated 1,500 quality experts toward raising the bar. “We are not in denial,” manufacturing executive Doug Betts says, noting Fiat’s proven quality-control system is being put in place because under previous Chrysler management it took an average of 71 days just to get someone to look at an identified problem. Similar cultural changes are being made on the shop floor, where union workers say they are being engaged like never before.

Under Marchionne, Chrysler will conduct hybrid research but focus on gas-powered products until alternatives prove profitable. The PT Cruiser will eventually disappear. So will the Dodge Viper, although something Ferrari-like might eventually replace it. Jeeps will be pushed globally. Ram trucks will be supported by their own stand-alone brand that Texan division head Fred Diaz insists “would make John Wayne proud.”

Meanwhile, Gilles will re-mojo Dodge cars, and the dented Chrysler image, which already has a new logo, will get a complete makeover by European design whiz Olivier François, who promises to produce vehicles that consumers “want to make out in again.”

In total, the company plans to invest US$23 billion over the next five years to rehabilitate its damaged products and brands. To help pay for this ambitious program, Chrysler is watching every penny and consolidating spending with Fiat, which will give the two automakers a combined purchasing power of more than US$60 billion, more than twice Chrysler’s current US$28-billion budget. The end game is to share about two-thirds of the firm’s suppliers and save Chrysler US$3.4 billion in materials costs.

The new CEO of Chrysler oozes confidence — both in himself and in his plan. And he can afford to boast after his results at Fiat.

Earlier this decade, industry watchers were highly skeptical when Marchionne presented his five-year plan for the Italian company at a similar all-day event. They simply didn’t believe it when told to expect the company to start producing a net profit of US$15 million every day by 2010, instead of the US$6.5 million that it was bleeding daily at the time. The critics were getting ready to eat their words before the global financial crisis hit. Fiat was well on its way to doing what Marchionne promised — despite a slew of problems similar to the ones faced now by Chrysler. The global slump tossed him an unexpected curve, but Fiat only experienced two quarters of losses. During the third quarter, it posted aUS$31-million net profit.

The hookup with Fiat appears to be off to a good start. The Germans talked a good game, but Daimler never really consummated the relationship with Chrysler. Detroit executives felt betrayed and abused. A Daimler designer doesn’t bother to disagree. He simply insists the Chrysler crowd got what they deserved because “they were lazy Americans.”

Things appear different this time round. Chrysler insiders say the Italians are workaholics like the Germans, but they are “less critical.” The American workers, of course, might just be happy to be married to anyone after almost losing everything in the bankruptcy adventure. But whatever’s behind it, the relative lack of cultural friction is positive because analysts expect Marchionne to hit far more bumps while driving Chrysler’s restructuring than he did turning Fiat around. Unlike Chrysler, when the Italian company was on the ropes, it maintained a significant share of its home market. It also had decent products in the pipeline, such as the Panda minicar and Punto subcompact. And thanks to investments in Brazil, Fiat was in a position to benefit from rising emerging-market demand.

According to Canadian auto-sector consultant Dennis DesRosiers, success in the car business always hinges on three things — “product, product and product.” Under Iacocca, Chrysler was saved by the mininvan, which was a revolutionary new niche offering in North America at the time, and the K-Cars, which were a hit with consumers because they were the only fuel-efficient vehicles on the road designed to carry six passengers. But those kinds of product solutions are not in the cards today. Niche products are out because everyone in the game is targeting consumers in every market segment imaginable. And something like the K-Car would not fly today. “That vehicle made this company a lot of money,” Gilles told Canadian Business in 2006. “But the designers laughed about it. They knew it wasn’t the kind of car shown at a car show.” And the market now only accepts showstoppers.

When asked to describe Chrysler’s primary problem, DesRosiers is blunt and brutal. “Everything,” he says, adding the biggest challenge is having the weakest product lineup and “not the billions to fix this issue.” Furthermore, while each of the Big Three now talk about being wage competitive thanks to recent union concessions, DesRosier says “a careful analysis indicates that there is some spin in the numbers.” Chrysler, GM and Ford, he says, “likely need to cut another 10 bucks an hour to be labour-cost competitive.”

Meanwhile, incentives remain a big part of the game, and Marchionne insists he won’t go after market share by offering them. “Chrysler’s been through the car wash,” he says. “There’s no need to go get muddied up again” by overprducing vehicles, dumping them on dealers and discounting profits away. So while DesRosiers finds Chrysler’s plan to pick up business from competitors “interesting,” it leaves him thinking, “From whom?”

The answer, if Marchionne gets his way, is everyone. He knows quick cosmetic changes to existing Chrysler products will not slaughter the competition. But if all goes as planned, the short-term facelifts will keep the company running until its Viagra-on-wheels lineup appears on dealer lots by 2012. Simply put, the Italian job at Chrysler is a two-part contest, starting with a brutal war of attrition. If Chrysler survives that hurdle, it then moves on to a talent show that will let consumers decide if Sergio Marchionne goes down in history as a one-hit wonder or the auto sector’s new Mr. Fix It.