The Chrysler Post

In the news today, it has been announced that Daimler Chrysler is moving to “undo the most expensive and one of the least successful mergers in auto industry history” and “dump the money-losing Chrysler unit which it paid $37 billion for nine years ago” as CNN Money puts it.

This sounds like a sensible business move, a major company divesting itself of an unprofitable division. But all is not as it seems here. To tell the story correctly, we have to go back almost thirty years.

In 1978, the Chrysler Corporation was a publicly held company in severe danger of going under. It was led by a couple of accountants who didn’t really understand the auto industry, and although it was one of the “Big Three” American car companies, it lagged badly behind General Motors and Ford in both market share and profitability.

So when Lee Iacocca – generally regarded as the best car man in the business- became available in July of 1978, Chrysler moved aggressively to secure his services. Iacocca had just been fired as president of Ford despite the two previous years being the best in Ford’s history. Unfortunately for Iaccoca, his successes perversely harmed his reputation with Ford CEO Henry Ford II, who feared Iacocca would succeed him as Chairman.

So Iacocca instead became Chairman and CEO at Chrysler, and turned the company around. Iacocca and his top design man Hal Sperlich created the K car, a small front wheel drive family car that was perfect for a recession plagued country. The new CEO modernized Chrysler’s operations, improved relations with dealers, secured loan guarantees from the federal government, appeared in commercials for the company, and above all, built better cars. By 1983, Chrysler posted a $925 million profit, by far the best in the company’s history.

Iacocca’s dramatic turnaround of Chrysler and the fame he gained from being in company advertisements gave rise to speculation that he would run for president in 1988. In fact, a 1987 poll showed Iaccoca defeating Vice President George Bush in a hypothetical matchup. Although Iaccoca declined to run, he remained popular and Chrysler remained profitable. Before retiring in 1992, Iacocca introduced the minivan, which was a huge success and quickly copied by other automakers. He also acquired American motors, whose Jeep line remains Chrysler’s most profitable division, as well as buying Lamborghini and developing the Dodge Viper.

Although Chrysler struggled somewhat after Iaccoca’s retirement, by 1998 they remained an enormously profitable company. Then, in a stunning move, the company announced a merger with DaimlerBenz, the German manufacturer of Mercedes-Benz automobiles.

The deal was presented as a merger of equals, and was entered into by Chrysler officials who claimed the merger would be the best protection against a potential hostile takeover.

Over time, however, it became clear that the “merger” was a sham, and that DaimlerBenz had essentially purchased Chrysler. This came as a tremendous shock to the auto industry, but there was little that could be done. Still, what happened is incredible. Entering into a merger of unequals to avoid a hostile takeover is like approaching a criminal and giving him your car keys in the hope of avoiding a carjacking.

The dubious circumstances of the “merger” would have ultimately been forgotten if DaimlerChrysler succeeded, but in the last nine years Chrysler has struggled, despite the strong sales of the PT Cruiser and Dodge trucks. There have been rumors of a sale for months, and today it finally happened. Daimler will sell Chrysler to a private equity firm. Although the “sale” price is $4.7 billion, Daimler will not see any of that money. They are essentially paying to dump Chrysler and retire the debt they’ve accumulated.

So what happened? How has Chrysler fallen so far? For starters, they have the same problems that all American carmakers have. Labor problems, unfair trade policies with Japan, and legacy costs. The cost of health care for retirees is killing American automakers. Toyota, for instance, pays $200 per car in retiree health care. General Motors pays $1500 per car. That's a pretty significant disadvantage.

But that's not Chrysler's real problem. Their greatest handicap is that they haven’t had a competent management team since Lee Iacocca retired. During the 90’s, faceless bureaucrats ran Chrysler with no practical strategy for competing with Japan. Then the company was sold to foreigners who don’t really understand how to run an American car company.

Many people expected the Daimler success to rub off on Chrysler, but it doesn’t work that way. Manufacturing and selling a Mercedes in Stuttgart is a lot different from doing the same thing with a PT Cruiser in St. Louis. It’s like expecting a world class violinist to be able to effortlessly play jazz piano. It’s still music, but the process is slightly different.

Chrysler succeeded in the 1940’s because it’s founder, Walter P. Chrysler, understood the American market. The company enjoyed a brief renaissance in the late 60’s and early 70’s when they captured the street racing market with the Charger and Challenger. And obviously Iacocca knew his customers. He created the best selling car in the history of the automotive industry, the Ford Mustang, by recognizing the emerging buying power of the baby boomers and building a car that they would buy in droves.
That's how you run an American car company.

But now Chrysler is going to be the property of Cerberus Capital Management. They’re going to operate as a private company wholly owned by an equity investment firm that knows nothing about the car industry.

That’s not the worst part. We’ve seen what happens to car companies when the wrong people run it. Well, guess who runs one of the international divisions of Cerberus?

DAN QUAYLE!

So, Chrysler owners, dealers, suppliers, take note: you might want to bookmark the website bankruptcydata.com for your convenience. You’ll be needing it soon!