BUSINESS

Going for it all

Chrysler bets its future on a stylish new car

JOHN DALY August 26 1991
BUSINESS

Going for it all

Chrysler bets its future on a stylish new car

JOHN DALY August 26 1991

Going for it all

BUSINESS

Chrysler bets its future on a stylish new car

After working on automobile assembly lines for 25 years, Alexander Berger says that his future prospects and those of his employer now hang on a single thread— the fate of a new car that only exists in a demonstration model. Berger works at a huge Chrysler Canada Ltd. plant that produces the slow-selling Eagle sedan in Bramalea, Ont., 25 km west of Toronto. The plant often operates at well below half of its capacity, and for Berger, 48, his 42-year-old wife, Louise, and their two daughters, aged 19 and 27, that has meant frequent layoffs and continued uncertainty. For Chrysler, sluggish Eagle sales are part of the reason the automaker is suffering its worst losses since it narrowly avoided bankruptcy in the early 1980s. But next spring, the Bramalea plant will be converted into the sole North American supplier of Chrysler’s new, more stylish and roomier midsize LH sedan, which both Berger and company executives predict will spark a dramatic turnaround. Added Berger: “They’re putting everything into the car that they can to please the public. We’re trying to survive—and the company is trying to survive.” In betting a substantial portion of his corporate resources on the LH, Chrysler’s flamboyant 66-year-old chairman, Lido (Lee) Iacocca, is following a daring strategy similar to the one he used to bring the company back from the brink of extinction a decade ago. After securing rescue loans from the U.S. government and

extracting wage concessions from unionized workers in the early 1980s, Iacocca channelled all available funds into the development of Chrysler’s so-called K-car sedans and its minivans. Both lines proved to be hugely popular. Since then, however, North America’s thirdlargest automaker has failed to bring any major new models to market, and an industry-wide sales slump that began last year has exposed the gaps and weaknesses in the company’s product line.

To halt its slide in midsize sales, which in North America account for the largest part of total automotive sales, the company is spending an estimated $2.5 billion over 3lA years to develop the LH, a prototype name, in a veil of military-like secrecy. Despite losses of $923 million on revenues of $15.5 billion in the first six months of this year, Chrysler has tenaciously maintained its LH developmental budget. Chrysler Canada president Yves Landry, for one, acknowledges that the strategy is risky. But he adds: “We’re expecting big things from this car.”

Despite their optimism, Iacocca and his executives are scrambling to raise the $18.7 billion that Chrysler says it needs over the next five years to weather the current downturn and carry through with its ambitious development programs. The $2.5-billion LH program, which began in 1989, is the critical first step in Chrysler’s plan to redesign all its car and truck

models by the end of the decade. But raising enough money to maintain the project has strained the company’s resources. In February, several New York City debt rating agencies downgraded their evaluation of Chrysler’s bonds to levels equivalent to high-risk junk bonds. Unable to borrow money on favorable terms, Chrysler last month took the embarrassing step of announcing a public stock offering of 33 million new shares. While the issue will likely net the company about $450 million, Chrysler is selling the shares at a time when its stock is trading at half the price the company paid to buy back 87.7 million of its shares over the past seven years. Last week, Chrysler’s shares closed at $12.13 (U.S.) on the New York Stock Exchange, compared with the average price of $21.13 (U.S.) Chrysler paid to buy back the shares from 1984 to 1990.

Although he is now past Chrysler’s customary retirement age of 65, Iacocca appears determined to lead the campaigns to sell both the share issue and Chrysler’s new models. The tough-talking, cigar-smoking Iacocca is one of the most successful salesmen in the history of the auto industry. But analysts express concern over his overall leadership of the struggling company. They say that he created many problems after he rescued Chrysler from bankruptcy in the early 1980s: in 1985, he bought Gulfstream Aerospace Corp., a defence and aerospace subsidiary, for $825 million, only to sell it off in 1990 for the same price as part of a cost-cutting drive. As well, they say that his celebrity status, gained in part by publishing two best-selling autobiographies and supervising the restoration of New York’s Statue of Liberty, has diverted his attention from the car business. Says Dennis DesRosiers, president of Toronto-based DesRosiers Automotive Research Inc.: “As he grew in ego and stature, he became more distracted.” Whatever their assessments of Iacocca’s recent performance, analysts who have driven LH prototypes in private sessions are almost unanimous in their praise for the cars. The front-wheel-drive vehicles have rounded exteriors—in contrast to the boxy shapes that characterized the Chrysler K-cars and other similar models—and their so-called cab-forward design allows for greater interior space than current North American models of comparable length. The LH cars will be introduced in August, 1992, and compete in price primarily with such midsize automobiles as Ford Motor Co.’s Taurus and General Motors Corp.’s Pontiac Bonneville, which now cost between $17,000 and $30,000. As well, the LH’s socalled design platform will also be used for higher-priced luxury sedans. “It’s a dynamitelooking car and it moves them ahead of Ford and General Motors, at least for a while,” says Joseph Phillippi, an auto industry analyst for the New York-based brokerage firm Shearson Lehman Bros. “I think it’s going to be a real success.”

Both company executives and union officials are counting on the LH to revitalize the underused Bramalea factory in the same way as the highly successful minivans gave Chrysler Canada’s Windsor, Ont., assembly plant a new lease on life. In 1983, Chrysler spent $400 million to retool the well-worn two-storey factory, parts of which date back to 1928. The plant currently employs 4,000 workers on two shifts.

By contrast, the bright and spacious singlelevel facility in Bramalea now operates just a single shift, employing 1,000 workers and managers. But the company will transfer to Bramalea all 1,000 workers from a nearby Jeep plant scheduled to close next year. Chrysler also hopes to hire another 1,000 workers and operate three shifts around the clock if LH sales meet expectations of up to 250,000 cars a year. For his part, Landry confidently predicts that “the LH in the 1990s will be what the minivans were in the 1980s.” Adds Terence Gordon, president of Local 1285 of the Canadian Auto

Workers Union, which represents workers at the Bramalea plant: “The union is behind this thing 100 per cent.”

But while analysts largely agree that the LH is an appealing car, they say that it will be difficult to duplicate the marketing success of the minivans. Phillippi, for one, notes that when Chrysler introduced the minivans, they were a totally new type of automobile with no competition. With the LH, however, Chrysler is trying to re-establish itself in the midsize market, where its outdated K-car models have given way to competing models produced by Ford,

General Motors and Japanese manufacturers.

In order for the LH to reverse the cash drain at Chrysler, however, analysts say that the company will have to be able to sell it without offering the discounts, cash rebates and other profit-killing incentives that now are commonplace in the auto industry. They add that they have concerns about the company’s so-called peekaboo campaign to build interest in the LH by offering only a few analysts, executives and automotive journalists a full look at prototypes. “I’ve heard that it’s a great car,” says Wayne Vickar, sales manager at Randy Gauthier’s Royal Dodge Chrysler Corp. in Winnipeg. “But I don’t have any specifications or pricing.” Indeed, Chrysler has refused to release photographs of the car to its own dealers, although earlier this year the U.S.-based magazine Popular Mechanics published unauthorized “spy” photos of the car.

Even if the LH leads Chrysler out of its latest crisis, however, analysts say that the 66-yearold company’s long-term future is still cloudy. DesRosiers, for one, says that although Chrysler emerged from its difficulties in the 1980s as one of the lowest-cost producers in the industry, it simply lacks the size to compete effectively with global giants such as General Motors and Toyota Motor Corp. Adds DesRosiers: “There’s no doubt that Chrysler is a sick puppy internationally. It’s hard to imagine managing through the 1990s in their present form.” Last month, Chrysler spokesmen declined comment on reports that Iacocca approached former Ford chairman Donald Petersen last fall and told him that Chrysler would welcome a merger offer from its rival.

For now, however, lower-level Chrysler executives and assembly-line employees like Alexander Berger can scarcely afford any time to mull over the company’s global survival strategy. Their goal is simply to keep the assembly lines full.

JOHN DALY in Bramalea