Can Marchionne do what Lee Iacocca did for Chrysler?
Friday, November 20, 2009 at 12:11PM In 1979, Chrysler, its market share at an all-time low and its reputation for poor quality products high, was on the brink of going out of business, when a charismatic and passionate savior named Lee Iacocca, recently fired from his job as president of the Ford Motor Company, took over as CEO at Chrysler. Virtually single-handedly, but with substantial government financial aid, he turned things around and returned the company to profitability through the 1980s, retiring in 1992. Today, Chrysler is emerging from bankruptcy after nearly going out of business, has a terrible reputation for quality, owes the government billions in bailout money, and desperately needs a savior. Is that savior Sergio Marchionne, a lawyer and chartered accountant with dual Canadian-Italian citizenship who also happens to be CEO of Fiat SpA?
Marchionne's big plans for Chrysler
CEO Marchionne has ambitious plans for the troubled US automaker, but they have not impressed everyone. Former Republican presidential candidate Senator John McCain of Arizona quipped that if there was anyone out there who thought the company would survive, he'd like to meet him. Industry analysts are wondering how Marchionne can turn things around and make the company profitable again, given that its market share has fallen to 9 percent in 2009 and its sales were down a whopping 39 percent. The company is dogged by its image as a maker of poor-quality vehicles that nobody wants. The challenges facing the company would be considered insurmountable even without factoring in the desperate situation in the global auto market, which is operating at 20 percent over-capacity and shedding jobs and sales.
Yet, in his recently revealed five-year plan for the company, Marchionne has projected a 4 percent market share increase as a key benchmark in Chrysler's recovery. The plan, which some say is wildly unrealistic, calls for worldwide sales to increase from 1.3 million in 2009 to 2.8 million if 2014, an increase of 115 percent. These sales would make the company profitable by 2011 and allow Chrysler to pay back government loans by 2014, with revenues projected to rise by 20 percent a year until then. The plan also calls for Chrysler to introduce eleven new or "refreshed" vehicles by 2014 and says three-quarters of the lineup will have substantial improvements within 14 months. By 2012, every single vehicle will have been overhauled or replaced.
Midsize cars are key to revival
But the obvious question is: where are these new sales going to come from? Dealers have very little new product to sell this year and buyers have turned away from what they have in record numbers. Uneven product quality has plagued Chrysler for decades, and the new team has made quality a top priority, but Chrysler, Dodge and Jeep cars and trucks have been rated poorly in numerous surveys, and consumers have been scared away. Sebring sedan sales have plunged 70 percent while Avenger is down 45 percent, according to Autodata Corp. Next year dealers will have the heavy-duty Dodge Ram, the new Jeep Grand Cherokee and the Chrysler 300, but customers will have to wait for the full, new and improved line of eleven vehicles Chrylser is promising. Will they wait?
Marchionne is betting they will, and he is placing the recovery squarely on the midsize segment. "Unless you are present in the (compact and midsize) segments in the U.S. you are nobody," Marchionne said last week after presenting Chrysler's five-year plan. "The problem with this organization is it does not have competitive cars in this segment." The last time Chrysler had credible midsize contenders was in the early 1980s when, under the leadership of another charismatic savior, Lee Iacocca, the Dodge Aries, Chrysler LeBaron and Plymouth Reliant accounted for 10 percent of the segment, and sold 350,000 to 385,000 units a year from 1981 to 1986.
It is to maintain its scant presence in this segment that the Sebring and Avenger will be revamped with new interiors and exteriors, though some consider revamping such notoriously poor performers as a waste of money. The Sebring will be replaced altogether in 2013.
In 2012 and 2013, the Chrysler brand will get four all-new vehicles based on Fiat architecture, while Dodge will get three Fiat-based passenger cars. Today, midsize models account for 23 percent of Chrysler's 1.3 million vehicle sales worldwide, but the company plans to increase that to 28 percent of 2.8 million vehicle sales in 2014, according to Joseph Veltri, Chrysler's vice president of product planning.
Quality is job one
Can Marchionne do it? He is acknowledged to be charismatic and something of a miracle worker for his turnaround of Italy's Fiat SpA in 2006. His appointment as CEO of Chrysler was key to the Obama administration's strategy to save the company by installing a new management team at the top. This included turning over 20 percent of Chrysler and control of the company to Marchionne, described by a member of the Obama administration as one of the two or three "best management teams in the world."
Under his management, the issue of quality has been addressed by restructuring and expanding the quality organization. Hundreds of new engineers have been hired and quality teams, organized by area of expertise rather than by vehicle, have been set up to reduce problem-solving time. Improved design will reduce the number of design-related defects in finished vehicles and reduce warranty costs and repairs. Mistakes on the plant floor are being addressed with the adoption of Fiat's "World Class Manufacturing" system, which includes intense auditing of all aspects of assembly.
And there is the fact that Chrysler has fallen in the past, twice dropping to an even lower market share of 7 percent in the 1980s and 90s and both times coming back to take market share in the teens. (Chrysler was on the verge of going out of business in 1979, when Lee Iacocca, recently fired by Ford, went to Congress and asked for a bailout. He then brought to Chrysler the "Mini-Max" project, which, in 1983, introduced the hugely successful Dodge Caravan and Plymouth Voyager.)
Marketing his way to success?
Another component of Marchionne's strategy is marketing. To get through the lean times, the company will rely on advertising and marketing, and plans to double the marketing budget by 2011, according to Richard Palmer, the chief financial officer who came from Fiat. Chrysler's long-time advertising agency of record, BBDO, however, is shutting down its Detroit operation in January, affecting about 485 employees, because the carmaker is not renewing its contracts. Chrysler will instead award advertising contracts to a variety of agencies, possibly on a brand-by-brand basis. A Dallas agency, Richards Group, has the Dodge Ram truck brand contract and GlobalHue of Southfield scored Jeep.
Still, marketing can do only so much. As one industry watcher put it, no amount of marketing will save the Sebring.
Highlights of Sergio Marchionne's five-year plan for Chrysler
- Return to operating profit next year, and full profitability in 2011
- Pay back government emergency funds by 2014
- Increase sales from 1.3 million vegicles this year to 2.8 million in 2014
- Increase market share from 9 percent to 13 percent in five years
- Introduce 11 new or refreshed models to the market by 2014
- Immediately upgrade interiors of major models
- Focus on lifestyle and not as much on high performance
- Overhaul multiple models and eliminate some
- Introduce new small Jeep in 2011
- Add midsize crossover, new compact sedan and new subcompact
- Overcome quality problems with Fiat's World Class Manufacturing system
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