Chrysler: the cat with nine lives

Living on the edge is nothing new for Chrysler Corp.

The $1.5 billion federal loan guarantee of the early '80s and the subsequent turnaround led by Lee Iacocca are good examples.

Then there was the waiting-for-LH cab-forward-cars era of the early '90s. The awkward succession of Mr. Iacocca and the stunning courtship of Robert J. Eaton, who agreed to leave General Motors-Europe to take Chrysler into the 21st century. Mr. Eaton's deft pas-de-deux with Kirk Kerkorian, who finally abandoned his unfinanceable $22 billion buyout scheme is merely Chrysler's most recent flirtation with disaster.

Believe it or not, the company that is now the envy of the North American auto industry started out from the ruins of someone else's failure.

Officially it all began in 1924 with the Chrysler Six, featuring a high-compression engine and 4-wheel hydraulic brakes, gleaming in the lobby of New York's Commodore Hotel. But Walter P. Chrysler really launched his own company in March 1920 when he stormed out of GM founder William C. Durant's office and resigned as president of Buick.

"I remember that day," recalled Alfred P. Sloan, whose office was next to Mr. Durant's. "He banged that door on his way out, and out of that bang came eventually the Chrysler Corp."

Already a multi-millionaire at the age of 45, Mr. Chrysler was simply fed up with Mr. Durant's meddling. Not knowing that the board of directors would oust Mr. Durant eight months later, Mr. Chrysler was ready to go it alone. Ever since the headstrong Kansan (Mr. Eaton coincidentally is also a Kansan) left school at age 14 to become a railroad mechanic, he always found a better opportunity.

By the summer of 1920, the post-World War I boom that had seen car prices skyrocket by 57% from 1917 to 1920, came to a crashing halt.

At the request of several New York bankers, Mr. Chrysler next focused his attention on Willys-Overland, a company on the precipice of bankruptcy with $50 million in outstanding debt.

He demanded a $1 million salary, a suite at the Biltmore Hotel and total autonomy. His first act: cutting owner John Willys' salary in half from $150,000 to $75,000. Then he recruited a trio of engineers -- Frederick Zeder, Carl Breer and Owen Skelton -- who became to the early days of Chrysler what Robert Lutz, Thomas Gale and Francois Castaing have been to its most recent history.

Indeed, Messrs. Zeder, Breer and Skelton were already well on the way to building the car that would become the 1924 Chrysler Six. But Mr. Chrysler over-played his hand with a transparent attempt to take over Willys-Overland, a move other shareholders resisted by forcing the company into receivership. At an auction in June 1922, Chrysler found himself bidding against both GM and his old nemesis, Mr. Durant, who was now without a company after being forced out by the du Pont interests at GM in 1920.

Mr. Durant was still a gambler, and his bid of $5.25 million prevailed.

Most importantly, Mr. Chrysler had secured the trust of the New York bankers. Their Willys losses contained, they asked him to clean up the finances of Maxwell-Chalmers, another struggling carmaker trying to survive the traumatic shakeout transforming the industry in the early '20s.

The good news was that Messrs. Zeder, Breer and Skelton proceeded with their new high-performance car, with financial backing from both Mr. Chrysler and Mr. Durant. The bad news was that the bankers had pulled the plug on Maxwell's credit just as they were ready to take the Chrysler Six to the 1924 New York Auto Show.

"We were pretty close to ruin before we had made a start," Mr. Chrysler wrote in his autobiography, Life of an American Workman. "We had stretched our credit to the snapping point."

The car never did make it to the exhibition floor in New York. Rather, Mr. Chrysler displayed it in the lobby of New York's Commodore Hotel where bankers lurked in the background, skeptically measuring the public's reaction.

By the end of the first day, Mr. Chrysler raised $5 million. Six months later workers at the old Chalmers plant began building 150 Chrysler Sixes a day. First-year sales reached 32,000, then a record for any new car's first year. It was enough to discontinue the Maxwell line altogether.

Although the company grew rapidly in the mid-'20s, its 1926 production totaled 130,000, rather marginal next to Ford' 1,137,000 and GM's 892,000.

To grow, Mr. Chrysler needed a car for the masses, something to compete with the Model T and Chevrolet. So in 1928 he bought Dodge Brothers for $170 million from the widows of pioneers Horace and John Dodge via the Dillon-Read & Co. investment banking firm, and quickly introduced the Plymouth and the DeSoto.

Ironically, for a company that was to face several brushes with failure later in the century, Chrysler came through the Depression nearly unscathed, thanks largely to a $600 Plymouth introduced in 1931. In 1933 it was the only manufacturer to sell more vehicles than it had in 1929. Chrysler's market share climbed to 25.8% in the U.S., the highest it ever reached; it's now around 16%.

Chrysler's labor relations got off to an even more bitter start than either Ford's or GM's. Although it escaped the first round of sitdown strikes, when the UAW began organizing Chrysler workers in 1936, management dismissed 3,000 workers suspected of sympathizing with the union.

On March 7, 1937, more than 46,000 workers at five Detroit area plants suddenly stopped work. Four days of frantic negotiating failed to resolve the strike. Then on April 6, 1937, roughly a month after the sitdown strike began, Chrysler recognized the UAW as its workers' bargaining agent.

Meanwhile, during the early '30s the Zeder-Breer-Skelton trio had cooked up a styling statement that flopped miserably. Codenamed "Project Q," the aerodynamic De Soto and Chrysler Airflow models were years ahead of their time. Shaped like a bug, the car took streamlining to a new extreme, boasting balanced weight distribution, chair-high seating and a one-piece curved glass windshield.

But it looked like a split-level igloo on wheels. The marketplace voted thumbs down following its 1934 introduction. Sales were woefully short of projections. The Airflow, now a museum classic, quietly went out of production after the 1937 model year.

By the mid-30s, Kaufman Thuma (K.T.) Keller, a crusty, profane and autocratic engineer whom Chrysler recruited from GM in 1926, began taking more control, becoming president in 1935.

Maybe Mr. Keller wanted to avoid the Airflow debacle. Practicality was his obsession. Chrysler's family sedans defied the longer, lower trend competitors were setting.

Mr. Keller ordered the 1949 Plymouths to be an inch-and-a-half higher than the `48 model to accommodate customers who preferred to wear their hats while enjoying a Sunday drive. "Chrysler builds cars to sit in, not piss over," Mr. Keller scornfully declared.

In the wake of the 1950 strike, Lester Lum Colbert, a burly Harvard-educated Texan who had run the Dodge Div., struggled to contemporize Chrysler's styling, improve its quality and get a grip on its bloated costs.

Chrysler's costs were far above either Ford's or GM's. So Mr. Colbert lopped 30,000 blue-collar workers from the payrolls in one draconian swipe. Shocked by the mass firings, remaining workers ignited an unprecedented series of wildcat strikes throughout the mid-'50s. Quality collapsed. A heavy rain shower would soak seats and flood floorboards. Body panels rusted at a staggering pace. In 1958, the company lost $34 million and untold goodwill.

Mr. Colbert was succeeded by William Newberg, who promptly became embroiled in a vicious kickback scandal and soon departed. The board of directors identified Lynn Townsend, a cost-conscious accountant, as their turnaround architect. Among his first moves: laying off 7,000 white-collar workers to save $50 million.

Meanwhile, Chrysler went for the low-slung-body-with-high-sweeping-fins look to counter its post-Airflow legacy of stodgy styling. Then Mr. Townsend approved development of a gas-turbine engine under the leadership of Chrysler engineer George Huebner.

Although a 1956 Plymouth with a gas turbine survived a coast-to-coast odyssey several years earlier, Mr. Huebner's ambitious plans never panned out. During a 1963 press preview at a Long Island racetrack, two gas turbine cars stalled before they could leave the parking lot. One was repaired and driven into Manhattan where it broke down at the peak of rush-hour traffic, leaving company officials to hail a taxi.

By the dawn of the Lee Iacocca regime in November 1978, Chrysler -- led by Townsend protege John J. Riccardo -- was on the brink again. Financial and quality controls were in disarray. Each division seemed a fiefdom unto itself. Many managers weren't clear to whom they reported. In one of his darker days within his first weeks in Highland Park, Mr. Iacocca grumbled, "This company took 25 years to become decadent -- I mean rotten to the core."

Luring key Ford executives and retirees such as Gerald Greenwald (as controller), Paul Bergmoser (to head purchasing) and Hans Matthias (to grapple with Chrysler's quality problems) -- (former Ford associate Harold Sperlich was already at Chrysler). -- Mr. Iacocca began slashing costs everywhere except in future product development.

By June 1979 Chrysler decided to shutter its fading flagship factory, Dodge Main, which once employed 35,000 workers.

By the fall of 1979 Mr. Iacocca had cut $360 million in costs, slashed white-collar rolls by 8,500, but left a $13.6 billion future product budget untouched. Keeping the compact K-cars on schedule, not to mention Mr. Sperlich's concept of a minivan, was absolutely crucial to Mr. Iacocca's survival plan.

But by the middle of 1979, after the company reported a second-quarter loss of $207 million and rumors of a merger with Volkswagen AG were fading, it was time to seek help from Washington, DC.

Loan guarantees were nothing new. Penn Central Railroad, Lockheed Aircraft and even New York City benefitted in the early 1970s from federally guaranteed loans that provided a cushion from total financial collapse.

Chrysler initially limited its requests for government aid to relief from emission, fuel economy and safety regulations. But there was no appetite in Congress for exempting one company from rules that would continue to apply to its financially stronger competitors.

Stronger medicine was needed. As Mr. Iacocca learned more about the depths of Chrysler's woes, he rationalized the need for government help by arguing that regulations such as the Corporate Average Fuel Economy standards and costly changes dictated by the Clean Air Act of 1970 had made the crisis worse. "Government helped get us into this mess, so government should be willing to help us get out," Mr. Iacocca reasoned.

Chrysler told its Capitol Hill allies that it expected to lose $1.07 billion in 1979, another $482 million in 1980 and turn the corner to profitability by 1981. In reality the pain would run much deeper. The losses continued from $1.1 billion in '79, to $1.7 billion in '80 and $475 million in '81. Black ink didn't begin flowing until the first-quarter of 1982.

Those K-cars, the Dodge Aries and Plymouth Reliant, may have seemed uninspired, generic and boxy in retrospect, but they presented value in a market rebounding from the devastating downturn of the early '80s. In August 1983, Chrysler paid off the loan guarantees seven years early, yielding the government a $350 million profit on its investment. By the end of '83, Mr. Sperlich's minivan was ready for the road and a new era of family transportation had begun.

Master salesman Iacocca then concentrated on raising money for the Statue of Liberty restoration and set his sights on the bold move that allowed Chrysler to survive its next crisis, the 1987 acquisition of American Motors Corp. and the priceless brand equity of its Jeep nameplate.