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Sell Your Product, Don’t Lease Them

Rental car agreements = exposure to Chrysler products but there was a problem! Chrysler was not selling cars to Hertz and Avis (car rental companies in the US) but leasing them and then subsequently buying those vehicles and selling them as used. The used-car losses at Chrysler were $88 million in the first year Iacocca took over (1979/1980). The change Lee Iacocca implemented was to sell models to Hertz and Avis at a lower margin so that Hertz and Avis had to deal with selling the used cars. In the process, Hertz customers get to try out the Chrysler vehicles.

This is a synopsis & analysis based on Iacocca: An Autobiography and other miscellaneous research sources. Enjoy.

Lee Iacocca: A Company Needs A System Of Financial Controls

In late 1979, when Iacocca dived deeper into understanding Chrysler, he realized that nobody in the company fully understood what was going on in terms of finances and projections. Finding out the return on investment for each plant was rather difficult because no one took responsibility at Chrysler. Lynn Townsend ran Chrysler and according to Iacocca, he focused on oversea expansion (to enhance the companies valuation) rather than quality vehicles at home. Townsend aggressively expanded in Europe and in the process made himself very wealthy but Iacocca maintains that Townsend did not understand the fundamentals of the car business. That was because Townsend was a banker. So much so that Chrysler was running a marginal or losing operation around the world.

This is a synopsis & analysis based on Iacocca: An Autobiography and other miscellaneous research sources. Enjoy.

Lee Iacocca: Be Careful Of Which Job You Choose

On November 2, 1978, Lee joined Chrysler and on the very same day, the company announced a 3rd quarter loss of almost $160 million, the worst deficit in its history. The organizational structure alone made Iacocca cringe. Chrysler was structured as a cluster of smaller departments loosely connected to the center. There was no system of meetings to get different parts of the company in order to regularly communicate with each other. Chrysler needed to embrace the idea of Newton’s Third Law of Motion – that every action has an equal and opposite reaction. The engineers failed to interact with the manufacturing division so they were not able to understand how a product could work. Manufacturing and engineering need to work together. Riccardo and Bill McGagh the treasurer were constantly running from bank to bank in order to ensure that the Chrysler loans were intact. Even worse, the Chrysler cars were lousy, the morale was bad and the factories were deteriorating. If Iacocca had known all this going in, he would not have joined Chrysler as its CEO.

This is a synopsis & analysis based on Iacocca: An Autobiography and other miscellaneous research sources. Enjoy.

Lee Iacocca: Discredit the Person Who Fired You

The lesson Iacocca teaches here is that you should never fail to return a punch in politics or in business. Chapter XI of Iacocca’s autobiography called “Trouble In Paradise” explains in great detail why Henry Ford II (who fired Lee Iacocca in July of 1978) was a complete buffoon:

  • According to Iacocca, Ford II was homophobic, racist and would fire people for superfluous reasons;
  • Ford II believed that keeping employees anxious and off-balance was the best way to manage them;
  • Ford II was security obsessed because his grandfather had sheltered him throughout his entire life worrying about kidnappings, then in 1946, Henry Ford was ousted from Ford Motor Company by the very grandson he swore to protect, ie Henry Ford II. No one is to be trusted;
  • Ford II was extremely paranoid, if he saw two top managers speaking in a hallway he would want to know the conversation, he would never put anything in writing, and in fact burnt most of his documents believing his grandfather’s maxim that “History is bunk”;
  • Ford II did not believe that building smaller cars was the way forward despite the oil crisis in 1973 and ignored the growing market of cheap imports coming from Japan which were considered too small to warrant demand in the US market. Ford II wasn’t willing to gamble on a $500 million refitting of a plant to created the Ford Fiesta in the US;
  • When Iacocca started a deal with Mr. Honda to use their motorbike engine in a new fuel efficient car for the US at a cheap price tag of $700 per car, Ford II famously stated that “No car with my name on the hood is going to have a Jap engine inside!”;
  • Ford II behaved like a member of the royal family and regularly talked about moving to Europe;
  • Ford II did not want Iacocca to tout the Ford Motor Company stock on Wall Street even though Ford was a publically traded company as of 1956. Any positive press directed at Iacocca for his leadership was seen as a threat by Ford II.
  • Ford II was never accountable to shareholders and apparently rarely had to pay taxes because his lawyers moved the money into special paper companies. Ford II never spent his own money and shareholders revolted at one point in the 1970s and sued Ford but he managed to avoid culpability through an out of court settlement;
  • For Iacocca, Ford II spearheaded “the abomination that was the Renaissance Centre” (according to Iacocca) in downtown Detroit which was designed to rejuvenate the city. It was a monument to Henry Ford II’s own ego according to Iacocca.
  • Ford II even set up a bribe with an Indonesian Military General through a low level manager at Ford and when it was exposed the manager was blamed.
  • Iacocca believes that Ford II fired him because of a concern for the future of the Ford family within Ford. He tried to humiliate Iacocca into quitting the Ford Motor Company even though 1978 was a profitable year at a revenue of $2 billion.
  • While Iacocca was on vacation in 1975, Ford II ordered $2 billion of R&D in small cars and front-wheel drive to be halted because of the OPEC situation. Ford II even compared himself to Sewell Avery (http://en.wikipedia.org/wiki/Sewell_Avery) who also thought that the US was going under and made many cuts in the run up to World War II but did not invest in future plans or projects leading to a collapse of Montgomery Ward.
  • Ford II gave a wild speech to top management where he said “I am the captain of this ship” and that others were going about things all wrong, 1974 was a loss year of $12 million.
  • Ford II initiated a private investigation against Iacocca in 1975 in order to discredit him and pin him to an association with the Italian mafia which cost Ford $2 million dollars to prosecute. The investigation produced no evidence and therefore was a huge embarrassment to Ford II.
  • Ford II did not have the character to fire people himself.
  • Iacocca’s salary was $970,000 per year at Ford so he decided to stay even though Ford II did not want him in that role. Ford II tried to fire people closely associated with Iacocca. Ford II fired Hal Sperlich because of his association with Iacocca and because Sperlich wanted to build smaller cars. Ford II had Iacocca fire Hal Sperlich because of a ‘feeling he had’.
  • Ford II brought in McKinsey to restructure the company so that there was a troika with Iacocca as the 3rd in command thus eroding Iacocca’s authority in a socially acceptable manner and then put Iacocca in 4th position under Bill Ford, Henry’s more stable younger brother.
  • Ford II couldn’t convince the board to fire Iacocca because Lee had been responsible for 3 major successes: the Mustang, the Mark III and the Fiesta, and was loyal to the company;

 

  • Ford II was good at spending money but he didn’t know how to make any according to Iacocca;
  • Famously, Ford II’s explanation for firing Iacocca was that “Sometimes you don’t like someone!”
  • Ford II later ran into Iacocca and his wife at a social event and instead of saying hello, Henry Ford II walked away abruptly i.e. he lacked character.
  • Years later, Chrysler would be posting amazing profits while Ford struggled.
This is a synopsis & analysis based on Iacocca: An Autobiography and other miscellaneous research sources. Enjoy.

Relevant Lee Iacocca Articles

Lee Iacocca: Don’t Elaborate Much On Your Deadly Mistakes

In his autobiography, Iacocca slips in a small discussion of the Fort Pinto. The Ford Pinto was infamous for having been a deadly vehicle in the case of a rear-end accident. If struck from behind, it would burst into flames within seconds. The problem was that the fuel tank was behind the axle + the filler neck on the fuel tank would rip out on impact and then would spill or spray raw gas out. Perfect for starting a fire. In 1971, for $2,000, the Pinto was an affordable compact.

Joan Claybrook (one of Ralph Nader’s protégés) believed that the Pinto was not an engineering problem but a PR disaster in the making. Internal memos at Ford have been exposed with having weighed the safety risks over the cost saving for customers. Despite the famous Pinto 1973 memorandum, Iacocca denies this stating: “there is no truth to charge that we tried to save a few bucks and knowingly made a dangerous car” (162, Autobiography). Ford voluntarily recalled 1.5 million Pintos in June of 1978, a month before Iacocca was fired.

The Ford Pinto Memorandum 

The following figures are drawn from the 1973 memorandum* written for and circulated amongst senior management at the Ford Motor Company concerning cost-benefit analysis of retrofitting or altering production of autos and light trucks susceptible to fires from leaking gas tanks after a hypothetical roll-over.


Fatalities Associated with Roll-Over-Induced Fuel Leakage and Fires

Expected Costs of producing all US cars and light trucks with fuel tank modifications:

  • Expected unit sales: 12.5 million vehicles (includes 11 million cars and 1.5 million light utility vehicles built on same chassis)
  • Modification costs per unit: $11.00
  • Total Cost: $137.5 million
    [= 12,500,000 vehicles x $11.00 per unit]


Expected Costs of producing vehicles without fuel tank modifications:
  • Expected accident results (assuming 2100 accidents): 180 burn deaths 180 serious burn injuries 2100 burned out vehicles
  • Unit costs of accident results (assuming out of court settlements): $200,000 per burn death** $67,000 per serious injury $700 per burned out vehicle
  • Total Costs: $49.53 million
    [= (180 deaths x $200k) + (180 injuries x $67k) + (2100 vehicles x $700 per vehicle)]

Thus, the costs for fixing the roll-over problem was $137 million, while the computed cost of cases where injuries occur was only $50 million.


*”Fatalities Associated With Crash Induced Fuel Leakage and Fires,” by E.S. Grush and C.S. Saundy, Environmental and Safety Engineering.

**By the way, the $200k and $67k figures for the average value of a lost or injured adult life is drawn from the NHTSA (National Highway Traffic Safety Administration) calculation of the estimated costs to society of automobile accidents. It is not a low-ball figure fabricated by Ford. (For example, the $200k for death was calculated by adding estimated direct costs of $163k — such as loss of future earnings, plus $37k of indirect costs — such as hospital and insurance costs, legal and court costs, victim pain and suffering, funeral costs, and property damage.) This is the calculation typically used by the U.S. Federal government for performing cost-benefit analyses of highway construction projects (e.g. determining how safely we should build our roads and highways). Even today, such figures are commonly used by many state and local, as well as federal, government agencies to weigh costs of various tax-supported programs.

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