Chrysler Transformed by Winds of Change

Special Report

2007 Year in Review

In 2007, the Chrysler pentastar spun like a windmill in a category-5 hurricane.

Decades-old labor practices were swept away and model lines disappeared along with senior executives, whose replacements seemingly fell from the sky.

The institution, itself, was overturned, going from Chrysler Group – an arm of Germany-based DaimlerChrysler AG – to Chrysler LLC, the first major modern-era auto maker to operate under private-equity’s protective umbrella.

However, unlike a hurricane’s destructive effects, the winds of change that blew through Auburn Hills, MI, spawned hope, even relief, as summed up by none other than United Auto Workers President Ron Gettelfinger.

On Aug. 6, Gettelfinger stepped up to a microphone before thousands of workers outside the auto maker’s headquarters and declared, “Welcome home, Chrysler.”

Smiling behind him was Tom LaSorda who, in the day’s most stunning development, was replaced as CEO by retailing guru Robert Nardelli.

While Chrysler’s dramatic turn culminated on a single day in mid-summer, storm clouds had been gathering for six months.

Amid growing shareholder unrest over a severe 2006 inventory glut that contributed to a full-year $1.4 billion loss, DaimlerChrysler AG Chairman Dieter Zetsche convened a news conference to reveal the outcome of a highly anticipated operations review, dubbed internally as “Project X.”

Renamed the “Recovery and Transformation Plan,” it called for 13,000 job cuts – 11,000 hourly and 2,000 salaried. A capacity decrease of 400,000 units annually also was ordered and Chrysler said it would achieve this through shift reductions at three truck plants – St. Louis; Warren, MI; and Newark, DE – and a minivan plant in St. Louis.

The auto maker also announced that Newark, planned production site for Chrysler’s first hybrid-electric vehicles, would be mothballed in 2009. In addition, Chrysler said it would idle a parts distribution center in Cleveland and explore the sale or outsourcing of non-core operations such as transportation.

Then came the first hint that 2007 would be unlike any other since the Chrysler Group was formed with the 1998 “merger of equals,” involving Daimler-Benz AG and the former Chrysler Corp. Zetsche did not deny a European media report that DaimlerChrysler was contemplating the sale of its under-performing American division.

“Our thinking does not exclude any options,” he said.

Zetsche’s words resonated like thunder.

There was immediate speculation that General Motors Corp. – fresh from its exploration of a merger with the Renault-Nissan Alliance – was pursuing Chrysler, enticed by its domination of North America’s minivan market and the allure of its Jeep brand. But GM Chairman and CEO Rick Wagoner quickly quashed the speculation.

However, in the weeks that followed, several would-be buyers emerged. They included Kirk Kerkorian’s Tracinda Corp., Canadian mega-supplier Magna International Inc. and equity firms Ripplewood Holdings LLC, The Blackstone Group and Cerberus Capital Management LP.

In May, Cerberus, guided by former Chrysler Chief Operating Officer Wolfgang Bernhard, emerged as the winning bidder, acquiring an 80.1% stake in a new privately held company, Chrysler Holding LLC, for €5.5 billion ($7.4 billion). The remaining 19.9% was retained by DaimlerChrysler, which changed its name to Daimler AG two months after the deal was closed in August.

The complex transaction actually left Daimler on the hook for €500 million ($677 million). But in return, Daimler was absolved of all pension obligations, which were transferred to the new company.

The price tag on those obligations: $19 billion.

Zetsche eulogized the failed DaimlerChrylser venture this way: “The synergies between premium (vehicles such as Mercedes models) and volume (Chrysler models) are limited. We overestimated the impact of Mercedes technology on Chrysler. The American volume customer was not willing or able to pay significant premium prices, and accordingly the brands couldn’t develop as much incremental equity as we had hoped.”

The sale would be finalized in August, DaimlerChrysler executives said. But over the intervening months, there was rampant speculation of an impending management shuffle, fueled, in part, by visits Bernhard made to Chrysler’s sprawling Auburn Hills command center.

The celebrated car guy, whose fingerprints were on the Chrysler 300 that launched to considerable acclaim in 2004, reportedly had pulled the plug on plans to build a production version of the Chrysler Imperial. The fullsize sedan concept, which debuted at the 2006 North American International Auto Show in Detroit, was to share the same platform as the 300.

The about-face sent shock waves that reverberated into Canada, where workers, following rancorous debate and two votes, agreed to a pay cut to secure Imperial production for the auto maker’s assembly plant in Brampton, ON.

Enter Cerberus Chairman John Snow, who parachuted into Michigan where he quelled fears of sweeping change and, more importantly, that Chrysler was targeted for a breakup, with its pieces intended for sale to the highest bidders.

Cerberus was in business for the long haul, Snow said after addressing a Detroit Economic Club luncheon. “We never buy a company with an exit strategy,” he explained.

As for Chrysler management, Snow expressed confidence in the auto maker’s executive talent and said Bernhard was serving only as “a sounding board.”

Tom LaSorda <i>(left)</i> symbolically throws switch on ‘New Chrysler’ with Ron Gettelfinger <i>(center)</i> and Bob Nardelli.

Fast-forward five weeks to that sunny day on the front lawn under the giant pentastar that adorns Chrysler headquarters. Standing beside Gettelfinger and LaSorda was Nardelli, the mercurial protégé of business guru Jack Welch who boosted General Electric’s power systems revenue from $6 billion to $15 billion.

After leaving GE, Nardelli transformed Home Depot Inc. into a retail juggernaut.

Absent from the stage was Bernhard. The auto maker said he declined to accept a new role with Chrysler “due to personal and family reasons.”

Nardelli’s appearance marked the end of an executive search that went to the highest levels of Cerberus. So secretive was the process that the auto maker – three days after Cerberus officially took control – e-mailed invitations for news media to join “CEO Tom LaSorda” at an event to mark the birth of “The New Chrysler.”

LaSorda later explained Cerberus founder and CEO Stephen Feinberg had consulted him about the executive search. LaSorda told the financier: “If you think there’s a better executive to help this company, I’m going to put myself second.”

And after meeting Nardelli, Lasorda told Feinberg: “I’m part of the team.”

Nardelli was introduced as chairman and CEO, while LaSorda became vice chairman and president.

“What I bring is a fresh set of eyes – a new perspective, if you will,” Nardelli said before revealing his first car was a Dodge Dart. “I loved that car. I thought I was (NASCAR legend) Lee Petty when I was driving that thing.”

Asked if there would be additional moves, LaSorda said: “You can never say, ‘Never.’”

He was right. Within 90 days, Chrysler raided the ranks of its competitors and snagged an all-star lineup of executive talent:

Gone was COO Eric Ridenour. The auto maker gave no hint that it would replace him.

With Cerberus, there also came an end to much of the transparency at Chrysler. As a private company, it was no longer compelled to report earnings.

The last peek at Chrysler’s books revealed a $1.25 billion net profit through the first six months of 2007 – a $1.7 billion swing compared with the same period of 2006 – though December media reports of impending collapse prompted Nardelli to say Chrysler was “not only meeting, but in many cases exceeding, its financial targets heading into 2008.”

Chrysler previewed ’09 Dodge Journey CUV.

In a nod to its place in the industry, the auto maker promised to continue sales reporting. In a challenging market, Chrysler recorded a 3.1% full-year sales decline in the U.S., according to Ward’s data, having launched seven new models in 2007: the Chrysler Town & Country and Dodge Grand Caravan minivans; Jeep Patriot cross/utility vehicle and Liberty SUV; Dodge Avenger midsize sedan, and Caliber SRT4 small car; and the Chrysler Sebring convertible.

With a view to increasing sales in international markets – having recorded a 6% boost in Canada, a slight gain in Mexico and a 15% jump outside North America – Chrysler took the wraps off the Dodge Journey CUV, which it planned to build in Mexico and sell in first-quarter 2008 as an ’09 model. But the U.S. was expected to be the vehicle’s primary market.

Chrysler also announced in January 2007 it would end production of its short-wheelbase Dodge Caravan. And in November, under a Nardelli-led drive to axe poor-selling vehicles, the Dodge Magnum CUV and three Chrysler-brand products – the Pacifica CUV, PT Cruiser convertible and Crossfire 2-seater – were chopped from the auto maker’s lineup.

The November announcement was paired with news that shifts would be eliminated at five assembly plants as Chrysler targeted a reduction of 8,500 to 10,000 additional hourly jobs through 2008.

The move stunned many because it came hard on the heels of the most contentious labor talks in decades. Chrysler and the UAW negotiated a milestone cost-saving agreement that created a 2-tier wage structure of lesser- and higher-paid workers, based on their duties, and transferred responsibility for employee benefits from the auto maker to an independent fund.

Reached after a 6-hour walkout called by the UAW, the 4-year deal was approved by a slim margin of hourly workers, with 56% voting in favor.

However, Chrysler also committed to considerable investment in its operations: $15 billion at 55 of its 59 manufacturing sites through the life of the agreement, with $3 billion earmarked for powertrain development.

Central to Chrysler’s powertrain strategy, the auto maker said, was its new Phoenix family of engines. It was designed to reduce Chrysler’s V-6 architectures from four to one.

Scheduled for production at plants in Trenton, MI; Kenosha, WI; and Saltillo, Mexico – each of which was expected to have an annual capacity of 440,000 units – the Phoenix engines would come in displacements of 3.0L, 3.6L and 4.0L. Chrysler said it planned to roll out the engine by 2009.

Chrysler also announced it would “in the next few years,” offer a mild-hybrid powertrain in one of its vehicles, while also promising to expand availability of its “2-mode” full hybrid system destined for its’08 Chrysler Aspen and Dodge Durango SUVs.

In addition, the auto maker made news on the diesel front. After introducing, to considerable fanfare in Washington, a new 6.7L Cummins V-8 for its heavy-duty Dodge Ram pickups, Chrysler said it was exploring development of a 4-cyl. diesel for North America and – in a sign that it would continue to share technology with Mercedes-Benz – a Bluetec emissions-mitigation system would be featured on its diesel-powered Jeep Grand Cherokee SUV.

Meanwhile, Chrysler said it would continue to be a partner in the hybrid-development deal its former parent negotiated with GM and BMW AG.

In some ways, it was as if the winds of change had blown right over.

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