Throughout its 85-year history, the Chrysler Corporation has often found itself engaged in a coquettish flirtation with doom. Although Chrysler sometimes led the American industry in engineering innovation, a combination of ill-considered product choices, quality problems, and misguided management have put it on the ropes more than a few times. The list of disasters is long: the brilliant but commercially moribund Airflow of the 1930s; the catastrophic quality-control issues of the late 1950s; the ill-fated “downsizing” of 1962. The one on everyone’s mind of late, however, is the late-seventies financial crisis that sent ostensible free-market conservative Lee Iacocca to Washington, hat in hand — looking for a bailout.
How did Chrysler end up in such sorry position? Lynn Townsend, Chrysler president from 1962 to 1966 and chairman from 1966 through 1975, had steered a conservative course, eschewing innovation in engineering, styling, or product planning in the name of fiscal restraint. Unfortunately, that strategy left Chrysler ill equipped to compete in a changing marketplace.
As the popularity of imported small cars skyrocketed, Townsend resisted the industry push to subcompact cars, relying instead on badge-engineered Hillman and Mitsubishi models that were no match for Volkswagen, Toyota, or Datsun. Chrysler retreated from the lucrative pony car market after ten years of indifferent results and it had failed to even enter the booming personal-luxury segment. Chrysler’s only really successful new product of the early 1970s was the Plymouth Duster, which, as we have seen, was developed largely off of the corporation’s radar.
These failings might have been less problematic if the corporation’s bread-and-butter big cars had sold well, but their sales had been slipping since 1969 and the OPEC oil embargo of 1973-74 put them into a tailspin. The only bright spot in Chrysler’s portfolio was the aging A-body compact line (the Dodge Dart and Plymouth Valiant/Duster), which, after years of corporate neglect, unexpectedly became Chrysler’s saving grace.
Confronted with falling sales and spiraling inflation, Townsend decided to slash costs, raise prices, and institute a number of desperate measures. All proved short-sighted. The price hikes hurt sales even more, and earned Chrysler public derision from the White House. The cost cutting led to a nearly 40% reduction in Chrysler’s capital investments — which meant fewer new products and no new equipment. To avoid having to idle its factories, Chrysler created a “sales bank,” building cars that no one had ordered and simply stockpiling them until dealers could be browbeaten into accepting them. To clear the stockpile, the corporation began the then-novel practice of offering cash rebates: paying customers to buy their cars. Despite all these efforts, the company’s cash flow remained poor and the unpaid bills began to mount.
FINGER IN THE DIKE
Townsend retired in 1975, replaced by John J. Riccardo. Like a lot of Chrysler executives of the time, Riccardo soon found himself in over his head. Townsend had believed that a competent executive could go a good job in any area, regardless of experience. As a result, many of Chrysler’s 30-odd vice presidents were in jobs for which they were ill-suited. Despite Townsend’s own accounting background, his tenure had led to a near-total breakdown of Chrysler’s financial controls and internal communications, to the point that its leadership had little clear idea of how much trouble they were actually in.
Still, Riccardo and new president Gene Cafiero took steps in the right direction. Cafiero ordered the development of Chrysler’s much-belated first small car, an American version of the European Horizon, which debuted to great acclaim in late 1977. Chrysler finally entered the personal-luxury market with the intermediate Cordoba, which soon accounted for around 60% of all Chrysler-badged cars. They also got a non-automotive windfall in 1976, when Secretary of Defense Donald Rumsfeld awarded Chrysler Defense the contract for the Army’s new XM1 main battle tank (which emerged as the M1A1 Abrams) despite strong objections from the Army. In 1978, Riccardo announced that Chrysler would invest billions in new products and new factories, modernizing its entire lineup in the early 1980s.
Despite these moves and the general recovery of the auto industry in the latter half of the seventies, Chrysler remained on very shaky ground. The corporation’s F-body compacts (the Dodge Aspen and Plymouth Volare), introduced for 1976 to replace the A-bodies, were the subject of an expensive and embarrassing recall campaign that further tarnished Chrysler’s reputation for quality control. Long-term debts mounted, reaching almost $1 billion by 1979, and financial institutions became increasingly wary of lending to Chrysler. The corporation was forced to sell a number of assets to remain solvent, including its entire European division.
Whatever John Riccardo’s failings as chairman, he was willing to acknowledge when he needed help. In 1978, he demoted Gene Cafiero to the largely symbolic post of vice chairman and hired Lee Iacocca as Chrysler’s new president and chief operating officer.
FINAL DAYS AT FORD
As we have previously seen, Lee Iacocca was a senior executive at the Ford Motor Company, a former engineer who made a name for himself in sales before ascending to general manager of Ford Division in late 1960. He had won considerable acclaim for the hugely successful Ford Mustang and a series of astutely timed new products like the Lincoln Continental Mark III, Mercury Cougar, and Ford Maverick.
In December 1970, Henry Ford II named Iacocca president of Ford Motor Company. Iacocca kept Ford profitable during the trying times of the mid-seventies, despite limited resources and the challenge of new federal regulations.
The more Iacocca’s reputation grew, however, the more antagonistic his relationship with Henry Ford II became. Although Ford was a public company at least in name, it remained very much a hereditary dynasty and its aging monarch was deeply suspicious of ambitious, charismatic outsiders like Iacocca. Henry’s trust in Iacocca gradually eroded, particularly after Iacocca attempted to strike a deal with Honda to provide engines and transmissions for Ford’s new subcompact Fiesta, something Henry considered unthinkable. According to author David Halberstam, by 1976, Iacocca and Ford no longer spoke directly, relying on intermediaries to carry messages back and forth.
In 1977, Henry effectively demoted Iacocca by appointing Phil Caldwell to a newly created position as deputy chief executive, apparently hoping the move would drive Iacocca to quit. When Iacocca did not budge, Ford compounded the humiliation by naming his own younger brother, William Clay Ford, as the company’s new chief executive. Iacocca had borne the initial demotion reluctantly, but the latest step was too much. According to Halberstam, in June 1978, Iacocca went over Henry’s head to Ford’s board of directors, telling them that the company needed leadership that only he could provide. Furious, Henry fired Iacocca days later. Despite Iacocca’s friends on the board, no one at Ford was willing to seriously challenge the grandson of the founder.
That Lee Iacocca came to Chrysler after his dismissal was largely at the behest of his old friend Hal Sperlich. Sperlich had been a product planner at Ford, one of Iacocca’s protégés and leading allies, but he had been fired in 1976 after clashing too many times with Henry Ford II. Sperlich joined Chrysler in early 1977 and played an influential role in convincing Iacocca to follow him. Riccardo approached Iacocca in August 1978 and that November, Iacocca accepted the position of president and chief operating officer.
Iacocca wrote later that he was immediately stunned by the disastrous condition of Chrysler’s management and finances. He recognized that Chrysler had made a series of bad business and product decisions, but he had underestimated the systemic nature of its malaise. Hal Sperlich responded ruefully that if Iacocca had understood how bad things had become, he never would have accepted Chrysler’s offer.
Popular mythology has credited Lee Iacocca with many things during his time at Chrysler, including the introduction of the popular front-wheel-drive K-cars and the federal bailout that made them possible. The truth is that the K-cars were already in development by the time Hal Sperlich arrived in 1977 and the difficult decision to build them was made not by Iacocca, but by John Riccardo. The same was true of the federal bailout, which was conceived by Riccardo; the idea of it made Iacocca very uncomfortable.
Perhaps Iacocca’s greatest real contributions to Chrysler were his salesmanship and his reputation. Within a few months of becoming president, he had convinced a host of Ford executives (many of them retired) to join him. Just being able to entice talented people to join Chrysler at that time was no small feat. Chrysler’s reputation had been sinking for years and by early 1979, as its financial losses grew, the stench of death was heavy in the air — not something that generally entices talented employees.
By the summer of 1979, Iacocca had razed Chrysler’s corporate culture, written off a number of the more disastrous management decisions, and instituted new financial controls to give him a more realistic understanding of the company’s position. That understanding was a grim one: Chrysler’s losses for 1979 totaled $1.1 billion, and its market share had dropped from 11.3% to 10.1%. The sales bank, meanwhile, had a stockpile of 110,000 unsold cars, many of which had languished so long that they required hundreds of dollars of work to make them salable.
Chrysler pursued a variety of rescue scenarios, including a mooted financing deal with notorious Saudi arms dealer Adnan Khashoggi and a proposed merger with Volkswagen, but these potential saviors withdrew once they learned the extent of Chrysler’s financial predicament. Riccardo finally decided that they had to seek federal aid.
MR. IACOCCA GOES TO WASHINGTON
Iacocca may have been deeply reluctant about asking for government assistance, but as Chrysler’s appointed cheerleader and chief salesman, he threw himself into the task with zeal. He testified before Congress that Chrysler’s collapse — which was by then a matter of when, not if — would be disastrous for the U.S. economy. Iacocca insisted that the company could be saved and presented a five-year plan to restore it to fiscal health.
John Riccardo had originally intended to remain as chairman until at least 1980, but the mood in Washington and on Wall Street demanded a scapegoat and he decided to throw himself on his sword. With Riccardo’s resignation, Iacocca became chairman, finally achieving the position he had been denied at Ford.
By then, Chrysler was functionally bankrupt, surviving mostly by forcing its suppliers to accept IOUs instead of cash. Massive layoffs were instituted among the white-collar staff. Meanwhile, Iacocca negotiated a deal with Doug Fraser of the United Auto Workers (UAW) for $462.5 million in short-term wage concessions, in exchange for which Fraser earned a seat on the Chrysler board. As a symbolic gesture, Iacocca instituted the Salary Reduction Program, making modest cuts in executive salaries (2–10%) for a two-year period. He made a great show of reducing his own salary to $1 a year, although with his director’s fee, signing bonus, and other incentives, his actual cash compensation was still around $360,000.
Late in December 1979, Congress passed the Chrysler Corporation Loan Guarantee Act. It would give Chrysler $1.2 billion in federally guaranteed loans with a modest guarantee fee of 1% per annum. However, to get those loans, the corporation had to issue $50 million in new stock, sell off $300 million worth of additional assets to improve its cash position, and obtain $2 billion of concessions from workers, banks, local governments, dealers, and suppliers. It also had to accept significant federal oversight through the creation of a second board of directors, consisting of the U.S. comptroller general, the secretaries of Labor, Transportation, and Treasury, and the chairman of the Federal Reserve. Fearing that they were losing traction and hoping to sweeten the pot, Iacocca threw in a stack of call warrants, entitling the Treasury Department to purchase 14.4 million shares of Chrysler stock for a fixed price of $13 per share. President Carter signed the bill into law in January 1980.
These were not the only concessions Chrysler received. The Department of Transportation reduced Chrysler’s CAFE target for trucks by 0.8 mpg, while the EPA granted a temporary relaxation of the carbon monoxide emissions standards for the 1981 model year. More significantly, the U.S. began negotiating for trade restrictions on Japanese imports, which culminated in the 1981 Voluntary Automobile Import Agreement signed with Japan, intended to stem the growth of Japanese cars in the American market.
THE CHRYSLER BAILOUT BEGINS
It took Chrysler about six months to meet the conditions of the initial $500 million in federal loans. They were not enough to offset the company’s horrifying losses, which totaled $1.7 billion, despite an additional round of layoffs and cost cutting. Iacocca tried to convince Treasury to give Chrysler quick access to the remaining $700 million in loans, fearing that incoming President Ronald Reagan would kibosh the deal.
Treasury agreed only to a $400 million disbursement, and to get it, Chrysler had to negotiate an additional $1 billion in concessions from its suppliers, workers, and creditors. Most significantly, the banks allowed Chrysler to convert $560 million of its long-term debt into preferred stock and discounted the more than $700 million of the remainder by a whopping 70%.
Despite the launch of the new K-cars in December 1980, the cash burn continued through the end of 1981, leading Iacocca to sell off Chrysler’s last remaining salable asset: Chrysler Defense, the corporation’s tank division. The sale to General Dynamics netted $340 million in early 1982, which was enough to offset Chrysler’s $69 million operating losses for that year.
Still, Chrysler’s immediate future depended on its new car line, introduced in late 1980 as 1981 models. Next week, we’ll look at those — including the one you probably haven’t heard of. Then, in Part Two of this article, we’ll examine the outcome of Chrysler’s federal bailout.
In May 2009, we licensed a condensed version of this story to Clearwire Corporation’s Clear 365 channel. However, Clearwire had no connection with the original article.
NOTES ON SOURCES
Our sources for this article included the Auto Editors of Consumer Guide, Encyclopedia of American Cars: Over 65 Years of Automotive History (Lincolnwood, IL: Publications International, 1996); David Halberstam, The Reckoning (New York: William Morrow and Company, 1986); Lee Iacocca, Iacocca: An Autobiography (New York: Bantam Books, 1984); Charles K. Hyde, Riding the Roller Coaster: A History of the Chrysler Corporation (Great Lakes Books) (Chicago, IL: Wayne State University Press, 2003); Manuel Velasquez, “The Chrysler Loan,” from Chapter 3 of Business Ethics: Concepts and Cases Fifth Edition (Upper Saddle River, NJ: Prentice-Hall, Inc., 2006); James K. Hickel, “The Chrysler Bail-Out Bust,” The Heritage Foundation, 13 July 1983, www.heritage. org, accessed 25 November 2008; and Terry Parkhurst, “Lynn Townsend, Former Chrysler President,” Allpar, n.d., www.allpar. com, accessed 23 November 2008.