AUBURN HILLS – A meeting of topGroup executives dissolves in a chorus of guffaws – forced laughter, perhaps – as they file out of a conference room.
One by one, the suits disappear into adjacent corridors here in’s sprawling headquarters until only Tom LaSorda remains.
Despite his considerable 6-foot-plus frame, LaSorda is dwarfed by a pentastar-shaped skylight that looms over his shoulder. And the symbolism is crystal clear.
As president and CEO, LaSorda is charged with ensuring Chrysler’s star burns brightly. But he is besieged by monstrous challenges, such as crippling employee health-care costs, elevated material prices and the lingering shadow of a summer that saw production run amok.
Insiders confirm LaSorda has said his job is on the line following Chrysler’s $1.5 billion third-quarter loss, which broke a streak of 12 consecutive profitable quarters. The shortfall occurred largely because the auto maker had misjudged the market and accumulated 100,000 unsold vehicles – in addition to its reported inventory, Ward’s revealed in October.
Soaring pump prices quashed demand for the auto maker’s high-margin light trucks, yet it ran plants at full throttle, sometimes even paying overtime.
Says an assembler at Chrysler’s minivan plant in Fenton, MO: “It was working overtime that was strange to us. Everyone was wondering, ‘What the hell is going on?’ They were parking vehicles all over the place.”
Industry observers were shocked as airports and shopping center parking lots were transformed into storage yards for new Chrysler SUVs and minivans.
“Never put a car in a sales bank,” says Thomas Stallkamp, industrial partner at Ripplewood Holdings LLC and former president of DaimlerChrysler Corp. “It’s absolutely written in stone. (Chrysler) just went nuts on inventory build.”
Adds Earl Hesterberg, president and CEO of mega-dealerAutomotive Inc., “(Chrysler is) not one of the more attractive franchises at the moment due to the inventory issues and the lack of retail activity.”
Through October, Chrysler Group sales were down 8.6% vs. 2005.
In a very public September mea culpa before analysts, LaSorda took the heat for the auto maker’s build-and-bank strategy. One month later, he did so again in private meetings with dealers.
“I walked through that; told them what had happened; and I took responsibility,” LaSorda says, vowing the sales bank will be empty by year’s end.
Then a look of grim determination washes over the usually affable executive.
“We’ll ride this thing down,” he says in a low, quiet voice that vaguely resembles a bulldog’s growl. “I don’t want to be debating on inventory and this or that. There’s been so much written…that’s something I’m not going to talk about.”
Clearly, LaSorda wants to move on. In a wide-ranging interview with Ward’s, he reveals his checklist for 2007, which includes “slightly” fewer new-product introductions and examining prospects for expanding Chrysler’s manufacturing footprint to Russia and/or Brazil.
However, efficiency gains in North America are top of mind. And LaSorda admits market conditions likely will prevent Chrysler from reaching his 100% capacity utilization goal any time soon.
“Capacity’s all driven based on volume,” LaSorda says. Percentage utilization “still should be in the high 90s. I mean, that’s where you’ve got to be.”
The most recent Harbour Report on manufacturing efficiency rated Chrysler’s capacity utilization at 94%, good for third place behindMotor Corp. and Motor Co. Ltd., with 106% and 95%, respectively.
“The down weeks for inventory adjustments don’t help,” he adds, referring to the auto maker’s second-half production cut of 135,000 units.
Backed by a team of Mercedes-Benz division executives, led by the brand’s chief operating officer Rainer Schmueckle, LaSorda and other top Chrysler leaders are chasing a per-vehicle cost reduction of $1,000.
Extrapolated over a full year, the value of such an achievement is estimated at $2.8 billion, which would mark a significant step forward as LaSorda pursues his primary mandate of returning Chrysler to sustainable profitability.
Corporate parent DaimlerChrysler AG has said Chrysler could suffer a full-year loss of $1.28 billion, a $3.2 billion swing compared with 2005’s $1.9 billion profit.
But obtaining the $1,000 per-vehicle cost reduction will require “a balancing act,” LaSorda says.
“If you have a vehicle that’s only going to live for another year, the opportunity to get $1,000 out of the vehicle in a year vs. one that’s just getting going is a little different.”
Gone in 2007 are niche products such as the Dodge Ram SRT-10 and the diesel-powered Jeep Liberty CRD, but Chrysler is mum about which other vehicles might be chopped from its lineup. The Chrysler Pacifica cross/utility vehicle, as first reported by the Detroit Free Press, appears near death, with suppliers being told to stop work on the next generation.
Still, savings potential appears significant because a substantial share of the auto maker’s ’07 showroom is new. The all-new ’07 Chrysler Sebring boosts the core brand’s profile in the crucial midsize car segment; while Jeep redesigns the Wrangler to include a 4-door model; upgrades the Grand Cherokee with a diesel engine; and adds two nameplates: the Patriot and Compass.
Meanwhile, Dodge boasts its first midsize SUV, the Nitro, plus a small car, the Caliber, which has racked up nearly 76,000 sales through October.
Trimming cost from the Caliber program is more challenging than cutting into a high-margin product such as the Dodge Durango SUV, LaSorda acknowledges. “Just do the math,” he says.
So, how is Chrysler going about the task? Through more intelligent design, LaSorda says, referring to the auto maker’s ongoing strategy of consolidating components, which streamlines assembly.
Right out the gate, the bill for Caliber production was $300 million lower than the cost of building its predecessor, the Chrysler Neon.
The auto maker also is vigorously benchmarking the competition, LaSorda adds.
“When you compare and tear down competitive fleets and find out there’s differences between our company’s specifications and other companies’ specifications, those you can put in place pretty quickly,” he says, adding engineers are reviewing “anything that plays into the variable cost of the car.”
“Part of the variable cost is transportation,” LaSorda adds.
This would seem to shine a spotlight on Chrysler’s assembly site in Newark, DE.
Two hours from the eastern seaboard, Newark is home to the Durango fullsize SUV and its new-for-’07 platform-mate, the Chrysler Aspen. And slow demand for SUVs – Ward’s data show total segment sales were down 13.3% through October – has Newark operating on one shift.
But LaSorda is mum on the likelihood of closing this or any other Chrysler plant.
Analysts suggest his hands are tied. With Chrysler’s current level of manufacturing flexibility, the auto maker would be hard-pressed to consolidate production at a comparable site, such as Warren Truck Assembly, home of Dodge Ram and Dakota pickups.
“There isn’t the flexibility in other plants to integrate that product without (major) expense,” says David Cole, chairman of the Center for Automotive Research.
Further complicating this scenario is the scheduled production of a Durango hybrid-electric vehicle, which is expected to begin next December at Newark.
“We have to keep that going,” LaSorda says. “You can’t take a short-term financial hit and change your overall powertrain strategy.”
The Durango HEV will benefit from technology developed in a joint venture withCorp. and AG.
Negotiating a plant closing with the United Auto Workers union will be a challenge, Cole says, because Chrysler is a victim of its past success. Due to its 12 consecutive profitable quarters, the “urgency” to move quickly has not trickled down to the plant floor the same way it did at GM and, he explains.
Reeling from a string of multi-billion-dollar losses, Chrysler’s crosstown rivals were able to negotiate cost relief, especially in the troublesome area of health care. But despite invoking the law of pattern agreements, Chrysler failed in a similar bid that would have reduced its per-vehicle health-care obligation from $1,400 to $600.
“(Chrysler was) not in the swamp withand GM,” Cole says. “Now, they’re in the swamp. They’ve got to work their way out of it. So it puts enormous pressure on LaSorda to do that.”
LaSorda, the son of a UAW leader, is resolute on this issue.
“I was discouraged by the fact we didn’t get the (UAW) arrangement,” he says. “But I think the data suggests we need to push ahead to try to get the deal because (of) the competitive disadvantage; we cannot sustain that.”
Dialogue continues with union leaders, he adds, but no formal talks are scheduled.
Similarly, no formal meetings arose from a November meeting between Detroit’s three auto makers and President Bush. Representing Chrysler, LaSorda pushed to get steel prices on Washington’s radar as the nation’s six largest auto producers fight for repeal of a tariff they claim is artificially inflating prices for the all-important commodity.
Chrysler pays $797 per ton for hot-dipped galvanized steel, Ward’s is told. That’s down from 2004’s peak price of $845, but nearly double the 2002 level of $400.
“Steel is still a challenge,” LaSorda says. “We still see precious metals relatively high. Even aluminum is up.”
The cost of resin-based products has moderated because of declining oil prices, but LaSorda warns: “There’s big headwinds in material.”
This picture is encouraging him to expand Chrysler’s horizons.
“If you look at our volume and our sales in the NAFTA (North American Free Trade Agreement) region, you’re looking very close to 90%. One of the things we’ve got to look at is, what is the global growth strategy and what (other) regions would you look at?”
Chrysler 300 production has begun in China, in conjunction with the auto maker’s joint venture with Beijing Automotive Industry Corp. And that plant will see “other products,” LaSorda adds.
In addition, Chrysler is studying trends in other markets. “Russia being one potential; one we’ve spent a lot of time on,” LaSorda says. “South America is another region.”
Simultaneously, Chrysler is examining its product portfolio to see what fits and what doesn’t in such markets.
“Our (Caliber) is pretty big compared to what (Asian consumers) consider a small car,” he says. “So we almost have to look at those markets and say, ‘Do we become a niche player with midsize cars or SUVs?’” Either way, Chrysler’s current prospects are “very limited,” LaSorda says. This underscores the importance of finding a partner with which to develop a B-car, a process that remains on track, he says.
“We said end of the year, and I’m still confident that we should be able to do something,” he says, confirming Chrysler would also bring the subcompact to North America.
Meanwhile, LaSorda barely can contain his excitement about Chrysler’s next-generation minivan, expected in late 2007.
“Our design team, our styling team did a great job,” he says, singling out Chrysler design chief Trevor Creed and Vice President Jeep/Truck and Component Design Ralph Gilles.
Chrysler defined the segment when it launched its “Magic Wagons” in 1983. The auto maker still leads, but the segment was down almost 10% through October, and sales of competitive products such as theSienna and Odyssey are going strong.
“Growth is going to come from the fact so many (competitors) are walking away from it,” he says, in an obvious swipe at Ford, which is abandoning minivans in favor of CUVs modeled after its Fairlane concept vehicle.
LaSorda dismisses the stigma against minivans with characteristic self-assurance.
“There’s probably no better people-mover, or totally functional vehicle, than a minivan. Let’s be honest. When somebody goes on vacation, how many people are taking minivans?”
Based on the task at hand, it’s a sure bet LaSorda won’t be vacationing any time soon.
– with Tom Murphy