chapter 1

Closing Case: The Best Laid Plans – Chrysler hits the Wall

In 1998, after Germany’s Daimler Benz acquired Chrysler, the third largest U.S. automobile manufacturer, to form Daimler Chrysler, many observers thought that Chrysler would break away from its troubled U.S. brethren, Ford and General Motors, and join ranks with the Japanese automobile makers. The strategic plan was to emphasize bold design, better product quality, and higher productivity by sharing designs and parts between the two companies. Jurgen Schrempp, the CEO of the combined companies, told shareholders to “expect the extraordinary” and went on to say that Daimler Chrysler “has the size, profitability and reach to take on everyone”.

The grand scheme proved extraordinary, but for all of the wrong reasons. In 2006, Chrysler saw its market share fall to 10.6% and the company announced that it would lose $1.26 billion. This shocked shareholders, who had been told a few months earlier that the Chrysler unit would break even in 2006.

What went wrong? First, Schrempp and his planners may have overestimated Chrysler’s competitiveness prior to the merger. Chrysler was the most profitable of the three U.S. auto companies in the late 1990s, but the U.S. economy was very strong and the company’s core offering of pick up trucks, SUVs and minivans were the right product for a time of low gas prices. After the merger, the Germans discovered that Chrysler’s factories were in worse shape than they had thought, and product quality was poor. Second, sharing design and engineering resources, and parts, between Daimler’s Mercedez Benz models and Chrysler proved to be very difficult. Mercedez was a luxury car maker, Chrysler a mass market manufacturer, and it would take years to redesign Chrysler cars so that they could use Daimler parts and benefit from Daimler engineering. Nor did Daimler’s engineers and managers seem enthusiastic about helping Chrysler, which many saw as a black hole into which a profitable Mercedes Benz line would poor billions of euros.

To be fair, the new cars that Chrysler did produce, including the 300C sedan and the PT Cruiser, garnered good reviews. Sales of the 300C were strong, but not strong enough to shift the balance of Chrysler’s business away from the small truck segment.

Despite several years of financial struggle, by 2004 it looked as if things might finally be turning round at Chrysler. In 2004 and then again in 2005, the company made good money. The company actually gained market share in 2005. Dieter Zetsche, then Chrysler’s German CEO, hoped to capitalize on this with the introduction of a new SUV, the seven seat Jeep Commander. Launched in mid 2005, the timing of the Commander could not have been worse. In 2005 the price of oil surged dramatically as strong demand from developed nations and China combined with tight supplies (which were made worse by supply disruptions caused by Hurricane Katrina). By mid 2006 oil had reached $70 a barrel, up from half that just 18 months earlier, and gas prices hit $3 a gallon.

To make matters worse, Ford and General Motors, who themselves were hemorrhaging red ink, were engaged in an aggressive price war, offering deep incentive to move their own excess inventory, and Chrysler was forced to match prices or lose much share. Meanwhile, Japanese manufacturers, and particularly Toyota and Honda, who had been expanding their U.S. production facilities for 15 years, were gaining share with their smaller fuel efficient offerings and popular hybrids.

In September 2006, Chrysler announced that due to a build up of inventory on dealers’ lots, it would cut production by 16%, double the planned figure announced in June 2006. In addition to slumping sales, the new CEO, Thomas LaSorda revealed that the company was facing sharply higher costs for its raw materials and parts, some of which were up as much as 60%. Chrysler was also suffering from high health care costs and pension liabilities to its unionized workforce. Scrambling to fill the gap in its product line, Chrysler announced that it might enter into a partnership with China’s Chery Motors, to produce small fuel efficient cars in China, which would then be imported into the United States.

Chrysler’s woes, however, continued, and in February 2007 Chrysler announced a dramatic restructuring plan, including the closing down of a factory and laying off 13,000 employees. Executives at Daimler concluded that its plans for Chrysler had failed and announced that the company might be sold. This transpired in May 2007, when Chrysler was purchased by Cerberus, a private equity group, for $4.7 billion. Cerberus bought in a new CEO for Chrysler, Bob Nardelli, formally CEO at Home Depot and before that at senior executive General Electric. Under Nardelli, Chrysler is exploring potential alliances with foreign car makers to design cars that Chrysler will build, the company it taking steps to merge its Chrysler and Dodge brands, poorly performing dealers have been culled from the company’s network, the powerful Jeep Brand is being refocused on its rugged outdoor image, and Chrysler struck a deal with the Union of Auto Workers under which retiree health care liabilities, a major source of costs, have been transferred to an independent trust.[i]

Discussion Questions

  1. What was the planned strategy at Daimler Benz for Chrysler in 1988?
  2. In retrospect, Daimer Benz’s plans for Chrysler seemed over optimistic. What decision making errors might Daimler Benz have made in its evaluation of Chrysler? How might those errors have been avoided?
  3. What opportunities and threats was Chrysler facing in 2005 and 2006? What were Chrysler’s strengths and weaknesses? Did its product strategy make sense given these?
  4. Why did Chrysler get its forecasts for product sales and earnings so badly wrong in 2006? What does this teach you about the nature of planning? What must Chrysler do now if it is to regain its footing in this industry?

[i] M. Maynard and N. Bunkley, “A reversal of fortune at Chrysler too”, New York Times, September 20, 2006, page C1. Gail Edmondson and K. Kerwin, “Stalled: Is the Daimler Chrysler deal a mistake?”, Business Week, September 29, 2003, pp 55-56. N. Boudette and S. Power, “Gearing down: Chrysler turnaround falters as unsold gas guzzlers fill lots”, Wall Street Journal, September 20, 2006, page A1. “Divorced: Chrysler”, The Economist, May 19th, 2007, page 72. B. Simon, “Chrysler’s Shift in Strategy Accelerates”, FT.com, October 11th, 2007, page 1.