For years, Chrysler had been building lousy cars, according to Iacocca, but it is in a company’s interest to catch problems at the factory, it would cost about $20 on hour to fix versus $30 when under warrantee. The designer has to 1) ensure the part is low weight since heaviness affects mileage, 2) ensure the part is low in cost, 3) and ensure that it is easy to manufacture: when an assembly line only does two pieces versus three it is better. Understanding what customers want is difficult because you don’t want to compromise on other things that were lost in innovations. Air conditioning is the classic Iacocca example, when you pay $700 more for air conditioning, you want your money’s worth. The problem is air conditioning has to work fast because most rides end within 30 minutes but at the same time you don’t want the car to be loud and noisy so that they customer can’t hear his radio. It’s a tough job but this matters to customers.
In business, you need to be like an Army surgeon. You might have 40 injured people, but you only have 3 hours to save them. You need to pick the ones who have the best chance of survival. At Chrysler, there was no time to study a marginally performing car plant, you have to axe it immediately. You need to have discipline.
First, Iacocca’s team at Chrysler had to close plants in Lyons, Michigan and Dodge Main in Hamtramck, which was the Polish district of Detroit. There were major protests over these plant closures but Iacocca had no choice.
Next, Iacocca’s team at Chrysler had to reassure suppliers that they were going to be paid on time. They needed to demonstrate that Chrysler was not going into bankruptcy even though suppliers knew their business and Chrysler’s well.
Then, Iacocca’s team at Chrysler brought in just-in-time inventory delivery. The Japanese had been doing this for years but as far back as the 1920s, Ford’s River Rouge Plant had taken ore from the boats, converted it into steel and then turned that into engine blocks within 24 hours. Ford Motor Company had just in time but with the boom years fro 1945 to 1978, the US car industry fell into old habits and lethargy.
Next, Iacocca’s team at Chrysler designed the K-cars to be 176 inches long (14’ 8’’) so that they could fit into a standard freight car. Even the financial report for 1979 was printed on cheap document paper.
Then, Iacocca’s team at Chrysler sold all the dealership real-estate they owned to ABKO from Kansas. The cash came to $90 million, which was desperately needed (timing matters), then later Iacocca had to buy back half of that property at twice the original price!
Next, Iacocca’s team at Chrysler sold all their non-North American businesses. Peugeot bought their European operations for $230 million and a 15% stake in Peugeot. They sold their military tank operations for $348 million to General Dynamics. Interestingly, the union negotiations at the time forced workers to $17 per hour instead of $20 per hour, so General Dynamics got a cheaper labour force when the contract was signed between Chrysler and General Dynamics.
Then, there were major layoffs in waves from 1970 and then 1980, both blue and white collars. This saved Chrysler $500 million in annual costs. Iacocca admits that some of firings were tragic and mistakes. Firing people is never a positive experience.
Next, Iacocca’s team at Chrysler fired the staff who had integrated the work of the line managers into a workable system. These were the Harvard Business School graduates who had never run anything, but were now telling the line manager who had done the job for 30 years how it ought to be done. Iacocca always trusts people with a dedicated background in the industry over elite educated people.
Then, Iacocca went shopping for people to buy into Chrysler. This included Volkswagen which was a very serious discussion because Chrysler was dying. The stock jumped form $11 to $14 upon the news that Volkswagen would buy for $15 shares but this was a false story.
Finally, there was the big government bailout.
Blame Government: Poor management had a lot to do with Chrysler’s situation in 1980, but government regulation was also used as justification for seeking a government loan guarantee for Chrysler. Government prevented the Big Three from coming together to develop more fuel-efficient cars or improve safety even though the Japanese took the opposite approach. It was illegal for GM and Chrysler to share their research according to Washington. In addition, Iacocca states that the Motor Vehicle Safety Act of 1966 protected motorists at a cost of $19 billion and the spread of that cost was over 5 million GM cars, 2.5 million Ford cars and only 1 million Chryslers. So, if GM’s research into seatbelts cost $1 million and sold 100,000 cars, each customer paid an extra $10. If Chryslers R&D into seatbelts was $1 million and sold 20,000 cars then the cost was $50 more for each customer. Then the cost of manufacturing was much worse for Chrysler since GM’s volumes were much higher. The EPA paperwork in 1978 was 228,000 pages!
Loan guarantees had already occurred at a total of $409 billion for chemical companies, railroads, farmers, electric companies, shipbuilders, college students, and airlines. So despite public outcry, Chrysler was just following what others had done. In August 1979, G. William Miller left as chairman of the FED to become secretary of the treasury. He supported government intervention in the Chrysler case. Iacocca argued that the other two big car companies were soon to be in trouble and loosing money and that this was a problem facing American industry.
Ideologically, Iacocca could understand why others were against supporting Chrysler since he had always been against much in the way of safety regulations: It was survival of the fittest, water seeks its own level, gov’t weakens the discipline of the marketplace, changing the rules in the middle of the game, etc. The basic view was that the market would work itself out, and Chrysler would have to go bankrupt and reorganize itself. BUT Iacocca disagreed….
Iacocca went to House Subcommittee on Economic Stabilization of the Committee of Banking, Finance, and Urban Affairs to ask for a $1.5 Billion loan guarantee. The reasons to support the Chrysler Loan Guarantee “Government Bailout” were the following:
- Yes, Chrysler: a) should not have built products on speculation, b) should not have been in the used-car business, c) should have worked on quality rather than overseas expansion but the energy crisis, regulations and the recession were to blame.
- Government had regulated Chrysler into its current mess because the company was investing the bulk of its capital into meeting government regulations;
- The Chrysler bailout is not a new precedent since others had already occurred at a total of $406 billion dollars worth;
- Bankruptcy is not practical because it would likely lead to liquidation this is because the car servicing of Chrysler models would mean that re-sale values of models would drop, future warrantee coverage would lapse, orders would be cancelled so bankruptcy would be the end of Chrysler and was not a realistic alternative to a government bailout;
- Free-enterprise has adapted since the industrial revolution, it is flexible and organic and nobody is playing in a laissez-faire system;
- Competition would be weakened without Chrysler especially with Japanese manufacturers entering the US market, Chrysler could not build only small cars because the profit margin is too low at $700 each. Big gas guzzlers are like steaks and small cars are like hamburgers;
- The specific congressmen should know how a bankruptcy of Chrysler would effect their constituencies because 600,000 jobs were at stake and the unemployment rate was projected to sore costing unemployment insurance of $2.7 billion during the first year.
Chrysler won its bailout money in Congress with a 2 to 1 margin at 271 to 136. The Senate voted 53 to 44 for the bailout. So the loan guarantee was $1.5 billion. $400 million in new credit and $100 million in discounts on existing loans, and Chrysler had to sell $300 million in further assets. State and local governments had to provide $250 million, $50 million in new stock were issued, and non-union employees had to contribute $125 to pay cuts.
Chrysler was valued at $6 billion and at liquidation would be worth $2.5 billion in 1980 according to the US government.
Lee Iacocca: Don’t Go Quietly, Address Criticism With Strong Responses
During the government negotiations over a Chrysler bailout, K&E put ads together to emphasize that Chrysler was in trouble but that America would be worse off if Chrysler no longer existed. The goal was to restore faith in Chrysler directly to the public. People had questions about Chrysler’s future and these newspaper ads addressed those concerns.
Lee Iacocca: Sacrifice Comes From the Top Down
People are willing to accept pain if they know that everyone else is also accepting that pain. After getting the government loan guarantee, Iacocca reduced his salary to $1.00 per year because he believed that leaders should set an example. By doing so (for good pragmatic and cold reasons makes sense) Lee could say that he too was feeling the sacrifice at Chrysler.
With unions, Iacocca put it bluntly that he had “a shotgun to their heads”….there are either thousands of jobs at $17 an hour and none at $20. Over Chrysler, the average working person lost up to $10,000 per year. Meanwhile at GM, Roger Smith cut his own salary by ONLY $1,620 a year while the worker benefits dropped by $2.5 billion. During the downsizings, Iacocca would go to each plant and deliver a speech to those who were loosing their jobs. Chrysler employees made $2.00 less than Ford or GM employees as a result. Even with workers pay cuts of $2.00 an hour the retirees did not get a reduction in benefits because Chrysler could not renege on the pension plan therefore current workers had to suffer. Iacocca even brought Doug Fraser (who was a Union leader) onto the board at Chrysler even though he was a ‘fox in the henhouse’ ie he wanted to squeeze management and margins for worker compensation.
Chrysler Motor Company had traditionally been a heavily leveraged company and borrowed heavily from banks. When heavily leveraged, good times are amazing and bad times are suicidal. To dissuade banks from trying to support a bankruptcy, Jerry Greenwald made it clear that all loans would be tied up for 5 to 10 years before banks could access them again so the banks smartened up. Banks did not want to cooperate much because their survival did not rely on Chrysler. There were outstanding loans with low-interest rates of 9% and others ranging for 12% to 20% then back down to 11% when the loan agreement was finalized. According to Iacocca, ironically, whenever banks were in trouble in foreign countries, the bankers received bailouts without question because the FED is full of bankers itself. There is a double standard with banks that is totally unfair. To get the Canadian banks on side, Chrysler agreed to have Canadians as 11% of the North American Chrysler work force which was easy because the Chrysler New Yorker was being built in Canada.
Negotiating with banks was complicated but Steve Miller used charm and humour to disarm the banks: the result was a total of $660 million in interest deferrals and reductions with a 4 year extension of $4 billion worth of loans at 5.5%. BUT all the banks had to agree to cooperate so everyone got a raw deal. One small bank threatened to screw up the entire loan even though they only had a $75,000 loan with Chrysler. However, finally, all of the banks signed documents and those signatures had to be collected together through a conference call where all banks were present. Finally on June 24th, 1980 the first cheque for $500 million was chased. All of this occurred with Salomon Brothers taking their $13,250,000 off the top immediately leaving $486,750,000 for Chrysler.
Chrysler had big suppliers knocking on their door with accounts payable at $800 million per month. Chrysler couldn’t just say that they would be slow to pay their suppliers but they had to say they wanted more spend per month. If this starts to come undone, the suppliers get nervous and act in their own interests, which is a problem. The solution is to always keep suppliers happy.
By the mid 1980s, Chrysler was in a strong position thanks in part to the build up of credibility that Iacocca had earned through his leadership. It also helps if you appear in TV commercials to get your message out. Iacocca did not want to do the ads at first because it would be time consuming. The logic of wheeling out the CEO was that a) Iacocca was well known, b) after you make the commercial, customers know you have to go back to work to improve the cars you just mentioned on air.
The best lines from the ads were: “If you can find a better car – buy it!” When the 1981 commercial came out, people thought that Iacocca was running for president because he was talking about Made in America, and the better days were ahead of us. Iacocca became a major celebrity and would be routinely stopped in the streets. Fame is fleeting for Iacocca. He spent a lot of time denying that he wanted to be president of the United States of America. Across the US, the television set was on an average of 42.7 hours per week. So committing to advertise on TV made huge sense for Chrysler.
In 1970, GM employees went on strike for 67 days in the US and 95 days in Canada, the 400,000 workers lost $760 million in wages,and GM failed to produce 1.5 million vehicles resulting in a loss of $5 billion in profits. When Chrysler had a 104-day strike in 1950, Ford was able to overtake Chrysler. Strikes were devastating. In 1914, Henry Ford famously paid his workers $5.00 in order to create a middle class that could afford his automobiles. Today, the issue between United Auto Workers and management is not wages but fringe benefits. According to Lee Iacocca, the fault lies with management at Ford, GM and Chrysler who focused on expediency, profits for the next quarter and earning large bonuses for themselves instead of worrying about the long-term impacts of unsustainable benefits for union workers. Regularly, when the UAW threatened to strike, they played management hard and convinced them to accept their demands for better benefits so that short-term management goals could still be maintained.
Management gave in on three areas that has effected the US auto-industry deeply. They gave in because they were focused on the short-term rather than the long-term objectives…
- The Cost-Of-Living Allowance (http://en.wikipedia.org/wiki/Cost_of_living): COLA causes run-away inflation since millions of autoworkers and regular Americans benefit from it because it pins the worker’s salary to the Consumer Price Index. Ironically, it was Charlie Wilson of GM’s idea in response to inflation when government lifted price controls in 1946. When the US was booming in the 1950s and 1960s the COLA was not an issue BUT when inflation soared as productivity declined the real problem was revealed.
- Thirty And Out: early retirement takes away qualified specialists and then leave the Big 3 to pay their $800 per month pensions (1984 numbers) while they sit at home being unproductive. In reality, the retired guy would work as a cab driver illegally on the side. This results in the best electricians ending up driving cabs. The policy was an UAW driven idea to make way for younger people to take on new jobs but the reality was people live longer than thirty years these days.
- Medical Benefits: the Big 3 pay $3 billion per year for hospitals, medical, surgical and dental insurance. This cost means $600 per car sold at Chrysler per year. Iacocca believes that there is immense abuse of the system where a podiatrist had charged Chrysler workers a total of $400,000 a year. There were over 240,000 blood tests done for only 60,000 employees.
For Iacocca, reforming and clawing back on union power and management weakness is imperative for the future of the US auto-industry. UAW never fought automation because it was a way to be more productive.
- Play dumb when you have to: In December of 1960, McNamara pressured Henry Ford to promote Iacocca to head of the Ford Division, Lee was told to play it cool when being taken to Henry Ford’s office and when offered the position. The reason was that Ford II wanted to make the offer as though it was his own decision and surprise Iacocca.
- Use common sense and experience in management: Iacocca relays this message about common sense that he picked up from Charlie Beacham (top sales guru) from Iacocca’s Chester, Pennsylvania days; “if you can’t tell the difference between a scope of horse crap and vanilla ice cream then there is no hope for you.” Common sense is something you have to be born with. Logical reasoning is a kind of common sense.
- Be decisive as a manager: To act is the one key. The most important decision in a company is made by individuals and not by committees. Decisions by committee take dialogue, which is not what you need when you are trying to shoot a moving object like a duck, according to Iacocca. You need to look at the facts as far as you are able to outline them and make decisions accordingly. Too many MBAs will wait until they have 100% of the facts. The problem is that too much education leads managers to over analyze their courses of action. For Iacocca, timing is everything, getting the right decision at the right time is the difference between success and failure.
- A leader takes a leap of faith: 1) even the right decision is wrong if it’s too late; 2) there is no such thing as certainty so stop trying to create it; 3) don’t be the little boy with the big dog that leads the boy wherever he wants.
- Always be careful of those who may be jealous of your success: Iacocca had no real credentials when he was made head of the Ford Division. He was an ideas guy not a product guy, you need to have a major success in order to prove your worth, hence Iacocca spearheaded the development of the Mustang…
US states are being played off of one another in a competition for Japanese auto factories in the US. Iacocca believed in 1984 that the Japanese were outcompeting the US because of the close ties between management and government officials in Japan. Like China today, Japan according to Iacocca in 1984 was manipulating the yen by pegging it to the US dollar.
In 1984, Iacocca believed that the US was a free trade bastion and Japan had many restrictions for US trade. Japanese car prices fluctuate based on where they are being sold around the world for example in Paris a car would sell at $10,500, San Francisco at $7,200 and $9,000 in Frankfurt, there was no free trade policy in Japan in the 1980s. Iacocca advocates for economic nationalism and protectionism by restricting the number of Japanese cars sold in the US market (with the benefit going to Chrysler, of course). Iacocca believes in dependency theory when he asks: “Question: What do you call a country that exports raw materials and imports finished goods? Answer: A colony.”
By 1983, the operating profit of Chrysler was $925 million, which was the best performance in Chrysler history. A new stock offering of 12.5 million shares was made. Within the first hour, 26 million shares were sold with a market value of $432 million. Since any new issue of equity dilutes the existing outstanding shares the price typically dips but at $16.63 the shares then surged to $25 and then $35 per share.
Fortunately, Chrysler was in a position to repay its government loan guarantee that was made from 1980 in 1983 which was 7 years earlier then expected. Unfortunately, the government could force Chrysler to issue 14.4 million shares at $13 at anytime until 1990, this also includes the interest rates of 24%. When Iacocca asked the government to not impose this indecent profit that it had been privy to, the public outcry was massive. Chrysler ended up buying back the warrants at $350 million and the government used those funds not help laid off workers (which might have been appropriate) but rather towards the US deficit.
The final cherry on top for Chrysler was the production of the world’s first minivan. Hal Sperlich developed the Mini-Max at Ford with initial R&D of $500,000 in 1974. There were 3 rules for its creation. 1) the step up height had to be low, 2) the car to fit in a North American-style garage, 3) there had to be ‘nose’ with an engine up front to protect the occupants in the event of an accident. Unfortunately, Henry Ford shot the idea down because he did not want to experiment. So Chrysler released the mini-van in 1984 with major traction and Ford and GM quickly scrambled to develop their own minivans.
Hal Sperlich and Lee Iacocca had initiated the K-car series in 1977 with the intention of bringing these four cylinder, 25 miles per gallon vehicles into market. The Aries and the Reliant were genuine sellers for Chrysler. All new cars were derived from the K-car platform including the LeBaron, Chrysler E Class, the New Yorker, Dodge 600 etc. Instead of creating a car for the different price ranges in the 1980s every car was built on the same chassis to save money. Building a new car off of the old was common in Detroit, considering the Mustang was a retooled Falcon.
Initially, these K-cars were priced at $5,880 but with options that would hike the price up to $8,000 or $9,000. This triggered sticker-shock for consumers because too many Chryslers were released with multiple-options. Also, in 1980, the interest rates were as high as 18.5% and as low as 13.5%. And because the government loans came in 3 installments the publicity was bad every time a cheque was carved. For the last loan, Chrysler had to find more concessions from banks. The government even made Chrysler sell the private jets even though they were used to get a top manager from plant to plant quickly. The corporate jet was not a perk but rather a necessary tool for completing their work.
When the Shah fell in January 16th, 1979, the price of gas doubled. Gas guzzlers like RVs were the first to stop selling. The myth that the Big Three could have anticipated the spike in gas prices is foolish according for Iacocca. Until 1979, the customers wanted big V8 engines and demand was very high. Iacocca argues that small cars do not sell well in good times. The customers were leading the way. In 1978, Chrysler had small car but customers did not want to buy them. Period.
Customers were not interested in small cars before 1979 as evidenced by Honda and Toyota who were not performing well in the US. The fact is that Toyota and Honda built nothing BUT small cars so whenever the shift occurred they would benefit. Everything changed when 700,000 Toyotas were sold at black-market prices with $0.65 per gallon price tags. There was a 15% rise in demand for small cars in the first 5 months of 1979. This is a catastrophic shift. In one day, van sales fell by 42%. Iacocca was ready with plans for his K-car but the recession nosedived Chrysler towards a brutal destruction.
In the early 1980s, Iacocca removed BBDO from Chrysler and brought on Kenyon & Eckhardt instead which had developed the “Ford has a better idea” campaign. K&E had also helped with the Lincoln-Mercury division with the sign of the cat. Iacocca made sure that K&E was brought in on the early details of production of new models so that the $100 million investment on production received extensive thought on marketing. Trying new things with old friends was what Iacocca was all about when he brought K&E in. One gimmick used was to have customers consider a Chrysler with a test drive, and if they then decided to buy a competitors car, they would get $50 bucks for at least testing a Chrysler. The dealers thought this would be gamed but it worked. There was also the money back guarantee ‘buy a Chrysler and if you don’t like it after 30 days, then bring it back for a full refund.’ The paperwork alone would have killed Chrysler but fortunately, most people play fair and only 1 percent of customers would bring their car back.
You need to bring cohesion and unity into the company. Fire people that don’t know what they are doing, and replace them with experience quickly. Iacocca didn’t fire the board immediately because they didn’t have much information (although he was tempted). They were excluded from understanding the true situation at Chrysler. For Iacocca, the vice presidents were all square pegs in round holes. The entire company was in shambles and very poorly managed.
In order to ensure better communication between departments, Iacocca initiated quality circles so that the plant workers are more involved in the building process. If the design is super but building it is not possible, then that idea is really bad. Iacocca brought in Hans Matthias who would pull five units off the line at random to test quality. He would also get a new Toyota into a Chrysler plant and ask the assembly line team to look at the difference between their product and Toyota’s. Quality and productivity are part of the same product so Matthias brought in 250 new improve quality control people even though Chrysler could not afford it. When quality is higher, your warrantee costs go down as a company.
Iacocca went through his notebooks from Ford in order to poach the best and brightest. Lee brought in Jerry Greenwald who was running Ford in Venezuela. Greenwald told Henry Ford II that he was quitting to help out with an ailing giant (ie. Chrysler) which was similar to what Ford II himself had done in 1945 to save his grandfather’s company. Immediately, Greenwald centralized accounts and controls. At the time, no one knew who was responsible for controlling costs therefore no one was responsible. In order for Greenwald to get promoted, he brought in Steve Miller to be the CFO, as a replacement for himself.
There was no centralized financial data system. Iacocca purged the old guard at Chrysler and looked for young talent that had ‘fire in their eyes.’ Hal Sperlich was fired by Henry Ford II in 1977 and become one of Iacocca’s right hand men at Chrysler. Gar Laux was brought in to repair the relationship between Chrysler headquarters and dealers throughout the country. Dealers were upset about the quality of the cars and the expectation that they could sell them. Gar Laux helped the dealers to sell Chrysler in a new way: to love the customer the moment he/she walks through the door. Dealing with customer’s takes knowledge, time and patience.