Iacocca on Detroit

BEL AIR, CA – Lee Iacocca twice rescued Chrysler Corp. from the brink of bankruptcy, so he knows something about living on the edge.

He is sympathetic to General Motors Corp. and Ford Motor Co. as they battle to stay afloat and win back market share – and also to the plight of their suppliers, many of whom already have plunged into bankruptcy, most famously Delphi Corp.

And he has some advice for their top managements: Move quickly into a crisis mode where everyone involved – executives, workers, bankers, stockholders – take what he calls “a haircut.”

In his lexicon that means making serious sacrifices from top to bottom.

Interviewed at his Tuscan-style gated mansion here in the hills overlooking the University of California campus in western Los Angeles, it's as though Iacocca has never left Detroit.

Lee A. Iacocca

Trim and relaxed at 81, he still closely tracks automotive issues and personalities, raises millions for his diabetes research foundation, plugs a new book project and dishes the dirt on old colleagues.

Former Chrysler executive and Iacocca business partner Jerome B. York is one who gets caught in the crossfire during a discussion on GM's management. (See related story: Iacocca: York 'Wrong Guy' for GM Board)

York, an advisor to billionaire investor Kirk Kerkorian who joined GM's board of directors on Feb.7 to represent Kerkorian's 9.9% ownership of GM shares held through his Tracinda Corp. is not the best choice as an agent of change on GM's board, Iacocca says unabashedly. (See related story: GM Cuts Top Exec Pay, Dividend, Salaried Benefits)

And few other executives know more about being an agent of change than Lee Iacocca, among the top leaders in U.S. business during the last half of the 20th century.

He spent 32 years at Ford, rising to president and gaining fame as creator of the Mustang. After being fired in 1978 by Henry Ford II, who simply told him “Sometimes you just don't like somebody,” Iacocca then spent 14 years running Chrysler before retiring in 1992.

But Iacocca did not ease out quietly. In 1995, he teamed with Kerkorian, then a major Chrysler shareholder, and York, to make a run at acquiring Chrysler. The takeover attempt failed for lack of financing, and Iacocca points the finger at York.

That set the stage for Germany's Daimler-Benz AG to take over Chrysler in 1998. “They saw the same thing we did,” Iacocca recalls. Chrysler had $12 billion in the bank, which meant it could be acquired with its own cash. “They were fat and happy,” he says.

He has exited his electric bicycle and small electric-car businesses and currently is deciding whether to author a third book tentatively entitled “Where Have All the Leaders Gone?”

Grist for the book would be 616 of his speeches. “I'm playing around with it, but I don't know if I want to do it,” he says. “There are some managers, Harvard-trained people, some case studies but there are no real leaders. What the (bleep) is a leader? Why do guys follow some people and not others? It's not just charisma. You've got to perform, or it catches up with you.”

Besides reviving Chrysler on two occasions, he also was the driving force behind the original Ford Mustang; introduced the first minivan at Chrysler, a segment which now accounts for a million sales each year with Chrysler still holding a commanding 40% share; established the 7-year, 70,000-mile (112,700-km) warranty, designed to support Chrysler's quality claims; and purchased American Motors Corp. in 1987 and with it Jeep, pioneering the subsequent SUV craze.

He does not blame current management for everything that has gone wrong with Detroit, but he clicks off a long list of reasons why U.S. auto makers and suppliers find themselves fighting for survival.

Besides the frequently cited issues of runaway health care and pension costs and poor styling, he says the perceived greed of executives who still draw big pay and bonuses while asking the white- and blue-collar workers to take big hits remains a problem. (In a brief follow-up interview Iacocca did state GM is “on the right track” with its latest round of top executive pay cuts.)

Iacocca also agrees with most industry critics that the concept of a Jobs Bank that pays laid-off United Auto Workers union members nearly full wages for not working has got to go.

He also still gripes that Japanese auto makers remain propped up with interest-free or extremely low interest loans from the Japanese government, while Americans must pay interest at prevailing rates, currently ranging from 5% to 7% and historically running in double digits.

When Chrysler borrowed $1.5 billion to build its new headquarters and technical center in Auburn Hills, MI, in the late 1980s, it had to pay 16.5% interest, he recalls. At the same time Toyota (Motor Corp.) was borrowing from the Bank of Japan, at 0% to .5%, he says.

Even so, many of Detroit's problems are of management's own making over the years, Iacocca says, and he admits to being guilty as well of giving in to UAW demands that sent costs soaring while he was at Ford Motor Co. and Chrysler.

“Yeah, I was part of that (giveaways in union contracts). You always knuckled under because if you took a 2-week strike in the old days it could bankrupt you,” he says.

“But they really had you. I've got nothing against the union because (together) we developed the middle class. But you can't have one union representing everybody and (at the same time) have very few job classifications (that improve) efficiency. And you can't pay a janitor $50 or $60 an hour to sweep the floor. That's a little wacko.”

Asked if disappearing high-paying manufacturing jobs may portend the end of the U.S. middle class, Iacocca shrugs and says “You could write a book about that. That was the American dream…but it's got to be reconstructed. I learned how to get along with the union and I did pretty well. But maybe they went too far with their demands...and we gave them too much.”

Of the Big Two, Iacocca believes Ford's chances of mounting a turnaround may be better than GM's because “Ford has something I don't think GM has: a pretty good distribution system worldwide – probably better than GM's. But that doesn't show up in the books.”

“He (Bill Ford Jr.) represents the tradition of (Ford Motor Co.) and the Ford name and blue oval around the world, which is good. But I think he needs to make sure the team around him isn't 'yes-ing' him at all. Whether he's able to do that, I don't know.”

Both auto makers remain weak in producing appealing cars and trucks, he says, although Ford's new midsize cars are gaining favor. “It starts for me with styling. You've got to have attractive cars. You can have attractive cars that leak and are lousy, too, but the price of admission now is you've got to have styling and good quality.”

He's heard reports Ford may stop making traditional minivans, but thinks that would be a mistake.

“The minivan story isn't over yet. Once the baby boomers get old (they'll want one), and there are still families who've got a nanny and a dog and a couple of kids, and for them there's nothing like a minivan. I have one wherever I have a house.”

If anything, GM's dilemma goes deeper than Ford's, he says. “If (GM supplier Delphi Corp.) went under, what the (bleep) would GM do?” he asks.

“To me, the formula is simple. If you can pull everybody together and say, 'We're not the arrogant big General anymore, we don't rule the world. We used to have 60% of the market and now we're down to 25% or 26%, so everybody better hunker down and take a little pain.”

“You've got to go to the banks and say “You're taking a haircut' and then say to the union, 'You're taking a BIG haircut.'”

And it should start with the executive guys,” and not just at GM, he says.

He singles out Delphi as sending the wrong message. CEO Steve Miller, who worked for Iacocca at Chrysler during the early 1980s and was a chief architect of its federal loan guarantee bailout, recently agreed to take $1 a year at Delphi but didn't give up his bonuses, or special pay guarantees for his management team, Iacocca observes.

“So the union right away said 'I don't think these guys are serious about this (bleep).”

Styling remains a major weakness at GM, he adds. “I don't know what the (bleep) GM is doing. They don't have anything that turns my head,” he says.

When Iacocca saw the much-ridiculed Pontiac Aztec SUV, “I even called Lutz and said, 'Who in the (bleep) approved that son-of-a-(bleep)?' “He (Lutz) said he had nothing to do with it.”

And in fact, Aztec was developed before Lutz joined GM.

Iacocca thinks GM should cut way back on what he calls “too many entities” if it's to regain competitiveness.

“They've got Saab (Automobile) and they've got Opel (AG) – they've got 10 different entities. They've got too many platforms, too many engine combinations, too many marketing entities.”

“I think they need Saab and Hummer like a hole in the head. Toyota has Toyota, Lexus and Scion – worldwide. Somebody asked one day, and I said I'd drop Hummer and take that money and effort and put it in hybrids right away and stop screwing around.”

He also says GM made a mistake in spending billions to build Saturn from scratch to compete with foreign brands. “Why did they drop Olds and keep Saturn? Saturn evolved into the 'no-hassle' franchise, but they should've given that to Chevrolet.”

Despite the UAW's recent agreement to reduce GM's annual health-care costs by $1 billion, health care remains an “albatross” over the company, Iacocca says.

Using GM Chairman Rick Wagoner's numbers, Iacocca says Toyota has a $1,250 per car cost advantage in health care vs. GM – about $250 vs.$1,500 for GM, “and now they're downgraded by Standard & Poors. Japan doesn't worry about that crap” because of cheap money provided by the government, he maintains.

“If you keep bringing that up, they say 'Stop whining.' But you've got to face up to that. Now Canada has probably a 10% to 15% cost advantage if you build the same Chrysler car in Michigan vs. Ontario”, because of subsidized health care in Canada, he says.

Iacocca says when Chrysler was teetering on bankruptcy (“We were really bankrupt, but we just didn't tell anybody,” he laughs) in the early 1980s and sought $1.5 billion in federal government guarantees, UAW President Douglas Fraser told him he had “to take a haircut,” or pay cut, to set an example.

“I said, 'I'll take a dollar a year' and Doug said 'Don't get carried away now. That's too far.' It was symbolic, but it began to make people think we're in this together,” says Iacocca.

Iacocca later made millions, but his rallying cry of “equality of sacrifice” paid off when Chrysler's K-car compacts were introduced in 1981, and the pioneering minivans that followed in 1984 became hits. He borrowed $1.2 billion of the total amount guaranteed, and repaid the 10-year loan seven years early in 1983.

To celebrate the event, Chrysler staged a big luncheon in Washington, and Iacocca held up a huge check with great fanfare. President Reagan did not attend but sent his chief of staff, Don Regan. “He (Regan) said, 'Where's the real check?' and I said, 'I can't give it to you because they (the government accounting office) don't know where to put it,'” Iacocca recalls.

Regan then “went hysterical” Iacocca says. Chrysler ended up earning an additional $10 million in interest on the money because it took the U.S. government so long to figure out how to cash the check. “They didn't know where to put it because nobody had ever paid back this kind of money,” Iacocca says.

Although the airlines, railroads and others had gotten federal loan bailouts, Chrysler's campaign was steeped in controversy. What few knew was that Fraser and the UAW had agreed to $2.5 billion in concessions in advance, Iacocca says, which demonstrated what can happen when your back is against the wall.

“I will go down in history at Chrysler as the guy who didn't know what the word 'concession' meant, and they (the UAW) did. That got played down because we felt it was better to go down to Washington hat-in-hand.”