Lee Iacocca: the most famous CEO of Chrysler
The son of Italian immigrants, Lido (Lee) Anthony Iacocca was born on October 15, 1924, in Allentown, Pennsylvania.
Growing up, Iacocca’s father gave him many words of wisdom, including always writing down the amounts of loans and never getting involved in a capital-intensive business. He earned an industrial engineering degree from Lehigh University in Bethlehem, Pennsylvania, and a Master’s in engineering from Princeton. In 1946, he began working in the automotive business at Ford as an engineering trainee and later became Ford’s president. He had two daughters with his wife, Mary: Kathryn and Lia.
After being fired from Ford in 1979, Iacocca received a phone call from John Riccardo, then-chairman of the board, who said he and Dick Dilworth wanted to meet with Iacocca to discuss coming to Chrysler. During the meeting, the three agreed that Iacocca would join Chrysler as president and move up to CEO and chairman on New Year’s Day the next year. However, Riccardo resigned from his position early, and Iacocca became the boss in September. He joined Chrysler not knowing much about the company’s origins and history.
Shortly after Iacocca joined the company, Chrysler Corporation announced its worst deficit in the company’s history – a $160-million loss in the third quarter. Iacocca was about to discover the deep aspects of Chrysler’s condition, and within a few months, the Iranian and energy crises and the biggest recession in 50 years hit.
He discovered Chrysler had security leaks and bad overall morale. It lost 7% in owner loyalty in a two-year period; it was at 36% when Iacocca joined. Other automotive companies were doing fairly well at the time. Chrysler’s products were seen as boring, and there were quality issues terribly harming the company’s reputation, especially with the Volare and Aspen.
During his first week, he started taking cars out of production. He attended an informal meeting in which 10,000 cars were taken out; during a formal meeting, 50,000 cars were taken out. There were no dealer orders nor room in Chrysler’s inventory, and when inventory was full, Chrysler held fire sales at the end of each month. These sales banks gave some dealerships incredible package deals, but made it impossible for Chrysler to get full price for its cars, many of which were damaged by the open-air storage.
Iacocca decided that the program needed to be permanently eliminated so the company could become profitable. He made it a point that cars would no longer be built without dealer orders, and that the dealerships – not Chrysler – would hold inventory. Meanwhile, Iacocca also learned Chrysler was a huge leasing company, and that instead of selling cars to rental car companies, Chrysler was buying them back after six months; Iacocca wrote off $88 million in used-car losses during his first year.
Iacocca also replaced people who he thought were clueless about their jobs, with experienced fast movers. His highest priority was creating a system of financial controls; he hired Gerald Greenwald, who looked into Chrysler’s $350 million in warranty costs per year. He also hired Hans Matthias out of his retirement to be a quality control consultant, and, though Chrysler nominally couldn’t afford to do it, they hired 250 quality control personnel at the request of Matthias and George Butts.
Iacocca also hired a new marketing team, Kenyon & Eckhardt. One of the first things the firm did was to bring back the ram logo and the “Dodge trucks are ram tough” campaign; Dodge’s trucks were soon seen in the same light as Chevrolet’s and Ford’s. They also created the money-back guarantee campaign, in which customers could return a car within 30 days if they didn't like it, for the full cost minus a $100 depreciation charge; it included no-cost maintenance for two years and two years of emergency towing.
Costs had to be cut from somewhere to keep Chrysler alive; Iacocca closed the trim plant in Lyons, Michigan, and the ancient Dodge Main (Hamtramck) plant in Detroit. He also created a “just in time” inventory system with Chrysler’s suppliers so parts would keep coming in, even if the company couldn’t afford them. Delivery of parts and supplies was sped up by switching from trains to trucks.
To raise capital, the company sold about $90 million worth of real estate, half of which was bought back later at twice the price. And even though it had a guaranteed income of $50 million a year, Iacocca sold much of its highly respected Chrysler Defense division to General Dynamics for $348 million. Chrysler Marine was also sold in 1980.
There were also mass layoffs: in Iacocca’s first two years, thousands of blue and white-collar workers were laid off. In April 1980, he saved Chrysler $200 million a year by getting rid of 7,000 white-collar workers. And a few months later, 8,500 salaried employees were gone. Through these layoffs, he cut yearly expenses by $500 million.
Finally, he sold Chrysler Europe, bundling together the money-losing Rootes Group in England with the highly profitable Simca in France; Peugeot bought both, and then supplied Chrysler with Chrysler-designed engines for the Omni and Horizon.
In 1978, Iacocca teamed up with Alejandro de Tomaso, then-CEO of Maserati. Together, Maserati was to contribute its tuning and design knowledge, and Chrysler was supposed to provide its sales and engineering skills. Together, the companies created the Chrysler TC by Maserati, which was supposed to be introduced two years before it was; it instead was introduced after the Chrysler LeBaron.
The loan guarantees
Soon, though, Iacocca had exhausted all of his options and reluctantly decided to ask the federal government for loan guarantees. After many arguments, the House voted 271 to 136 to help Chrysler, and the Senate voted 53 to 44; the bill passed just prior to Christmas. A loan guarantee board was to provide Chrysler with up to $1.5 billion in loan guarantees over the next year, and all of Chrysler’s assets were held as collateral by the government – about $6 billion worth. The first installment of the loan guarantees was distributed on June 24, 1980. Iacocca also had to get an additional $2 billion in unguaranteed loans, and states that had Chrysler plants provided direct loans to avoid increases in unemployment. The PSA even lent $100 million to Chrysler.
Iacocca knew he also needed to make a statement with his employees. He reduced his own salary to $1 a year, calling it “equality of sacrifice.” Other executive salaries were cut up to 10%, and lower-level salaries were cut, too, with the exception of those of secretaries. He eliminated the stock incentive plan, and closed more plants.
When the loan guarantees were approved in 1979, Chrysler was in debt to banks to the tune of about $4.75 billion, and the banks wanted the corporation to declare bankruptcy. Chrysler had lenders of all types; there were loans to Chrysler, Chrysler Canada, and Chrysler Financial. There were different interest rates on loans that were far overdue and on loans that wouldn’t be due until 1995. Steve Miller, who Iacocca hired in 1979, developed a compromise plan with the banks, which included $660 million in interest deferrals and reductions, $4 billion in loans at a 5.5% interest rate, and a four-year extension. Surprisingly, all the banks accepted the plan.
The K car, and more obstacles
The K car was already in development when Iacocca became a part of Chrysler. The fuel-efficient, front-wheel-drive car was purposely designed to be under 176 inches in length so that more could fit on rail cars – another way to cut costs.
The Reliant and Aries were rated at 25 mpg in the city and 41 mpg on the highway, and were light enough to maintain its superior fuel economy while carrying a family of six; yet, their internal dimensions were almost as great as the Volare and Aspen they replaced. Buyers could easily fit into parking spaces designed for much longer cars; the length was a mere 179 inches, versus Chrysler’s prior “smallest car” at 206 inches.
Despite the high mileage, their light weight resulted in acceleration similar to the slant six Volare/Aspen, too — with 0-60 times ranging from 10.6 to 14 seconds recorded by enthusiast magazines (driving automatics), and a lone outlier of 16 seconds recorded by Consumer Reports. The standard Toyota Corolla, in contrast, was tested at 14-16 seconds by the enthusiasts, with the “hot” SR5 (automatic) at 12 seconds.
|(inches; 4-doors)||1972 Valiant||1977 Volare||1986 Reliant|
|Front shoulder room||55.2||56.3|
|Rear shoulder room||55.2||56.7|
|Trunk (cubic feet)||14||16||15|
In 1981, Motor Trend awarded the Aries and the Reliant its “Car of the Year” Award; the cars were created expressly for American conditions, while imports tended to have far less torque and a less compliant ride, and were considered both better to drive and more reliable than GM’s and Ford’s equivalent cars. In 1981, they sold over 300,000 K-cars — a number they kept up through 1988, the year before the K cars were replaced; had they remained in production, they might well have remained at that level. Things were starting to look up for Chrysler.
Chrysler still had to draw another $400 million in loan guarantees in 1981, and each time Chrysler went back to the government for help, sales dropped. In desperation, Iacocca attempted a merger between Chrysler and Ford in 1981. Ford would have been the surviving company and Chrysler, Plymouth, and Dodge would have become divisions under Ford. The top bankers in New York liked the plan, but Ford quickly declined.
Later in the year, on November 1, Iacocca found that Chrysler only had $1 million in its bank account. Some suppliers stopped shipping items, and Iacocca shut down the Jefferson Avenue plant for a couple days. But payroll was never missed, and suppliers, although sometimes paid slowly, always saw their money.
Soon, Iacocca signed print advertisements that Kenyon & Eckhardt were putting out, and began appearing in television commercials, including the famed “if you find a better car – buy it” campaign. The turnaround started to become obvious, and as the front man, Iacocca was subject to a “draft Iacocca for President” campaign, which he put to rest by signing a three-year contract with Chrysler in 1983.
Lee Iacocca leads Chrysler’s recovery
The break-even point was reduced from 2.3 million units in 1979, to 1.1 million units in 1982. Chrysler earned the best profit in its history, $925 million, in 1983. Plants had been modernized with the latest technology, and employment was maintained for half a million workers.
Iacocca brought back the convertible in 1982 with the Chrysler LeBaron. He skipped market research, and in its first year, 23,000 were sold – much more than the 3,000 Chrysler thought they would sell [full story], and Chevrolet and Ford trailed with convertibles of their own. And two years later, the T115 minivan was brought into the spotlight. Chrysler was leading the crowd.
The minivan’s design process had started in the early 1970s, when front-wheel-drive technology was virtually non-existent. With the arrival of the Horizon from Chrysler Europe, and then the larger, more suitable K-cars, Chrysler could go to front-wheel drive, dramatically increasing interior space with the same small outer dimensions. Iacocca was immediately enthused, and gave the “go ahead,” even though Chrysler didn’t have the money to produce the new vehicle. The whole project cost an estimated $700 million, and Iacocca received $500 million to get the project going. The minivan was highly successful, with 209,895 sold in 1984 — not a large number compared with the K-cars, but they were sold at a higher margin.
On July 13, 1983, exactly five years after he was fired from Ford, Iacocca announced the payback of the loans at the National Press Club. He presented a huge check to bankers in New York, written for $813,487,500.
Less than four years later, on April 23, 1987, Chrysler Corporation purchased Nuova Automobili F. Lamborghini for an estimated $25 million. The idea was to use the exotic-car maker to add credibility in the sport and luxury end, since Chrysler was seen as being weak in both. Chrysler was reported to take up 40% of the Italian automaker’s production, and set up an import center in Florida to complete the final certification process of cars going to U.S. buyers. Chrysler’s lack of expertise with the cars and Lamborghini’s own quality issues (especially with the 1990 launch of the Diablo in 1990) hurt the effort, and in 1994, Chrysler sold Lamborghini to Indonesian investors; over the course of seven years, owning Lamborghini was estimated to have cost Chrysler $60 million.
Linking up with Maserati also failed to provide desired results — having some luxury/sport rub off on Chrysler from ownership. One more solid plan, launching a hot new sports-luxury car (the Chrysler TC by Maserati) and then adopting its “look” for a more mainstream car (Chrysler LeBaron coupe and convertible), failed when the TC came out late, and seemed to be aping the look of the LeBaron instead of the other way around. The company also had a poorly thought out purchase of Gulfstream (maker of private jets) and a better-fated buyout of two rental car agencies.
A far better deal was the linkup with American Motors Corporation, which was then owned by Renault; in 1987, Chrysler acquired AMC and Jeep. The AMC cars were quickly shut down, except where contracts with Renault demanded their continued production; a new Eagle division was created, handling those cars and Japanese imports; but Jeep was rationalized, with quality targeted. At least one AMC veteran claimed that AMC took over Chrysler as much as Chrysler took over AMC, as the AMC engineering team was given power at the larger company. AMC had been working with far fewer resources, and their platform-team approach was transplanted to Chrysler Corporation, directly resulting in the hugely successful LH cars, Viper, 1994 Ram series, Neon, and “cloud cars.”
Another happy marriage was arranged between Shelby Automobiles and Chrysler; Lee had worked with Carroll Shelby while at Ford, and Shelby had his people rework various Dodge cars and re-issue them as Shelby cars or Shelby editions. While the changes were nothing that could not have been done within Highland Park or Auburn Hills, the Shelby name lent an aura that Chrysler could likely not have achieved on its own — and certainly gained attention from auto writers. The Shelby editions, particularly the Omni GLHS, gained Chrysler some street credibility.
Meanwhile, the core K-cars continued to be refined and reshaped. First they had extended-wheelbase versions; the minivan was based on the same chassis and architecture, as would be “luxury” cars, sports cars, family cars, a whole range of vehicles, stopping just short of trucks and Jeeps (though the latter was tried and nearly succeeded). This strategy may have worked, had Chrysler put more time and money into upgrading its engines and suspensions.
Under Iacocca, Chrysler combined compulsive cost-cutting with far-sighted investments. The cost savings from using a standard engine package, without recalibration for particular cars, resulted in less than optimal results from the 2.2 and 2.5 liter four-cylinders, but he supported the new, world-class research and development center, the Chrysler Technical Center, even when the company dropped into losses in 1991 [inside story]. The company slowly adopted fuel injection, and even more slowly went to multiple-port injection — though other American automakers were also reluctant to spend money on the pricey injectors.
Even as the company continued to work on reformulations of its original Aries and Reliant architecture, without sufficient investment in refining its suspension and chassis components, Iacocca allowed the revolutionary LH platform to move forward. Iacocca’s leadership was not without paradoxes, the leading one being that after rescuing Chrysler, he nearly allowed it to fall into bankruptcy again. Chrysler’s stock was trading at under $4 per share when the New York Times devoted two full pages to the upcoming LH cars — and within a week, it was at $12. From there until the end of the Chrysler Corporation, profits and sales soared along with critical acclaim.
Lee Iacocca retired from Chrysler in 1992, at the age of 68, just before the company’s dramatic turnaround.
Post retirement and Daimler-Benz
While most people believed Robert Lutz was the best CEO candidate, Iacocca appointed Robert Eaton. After Eaton took over, the top 12 design engineers reportedly quit their jobs in opposition. Eaton later mandated price cuts, “brow-beated” suppliers, voided contracts, and shared confidential information between suppliers to get better deals. Most damaging, Eaton brought about the Daimler-Benz takeover in 1998 – a $38 billion deal — after Iacocca and a “greenmailer” tried to retake Chrysler.
“Eaton panicked,” said Iacocca. “We were making $1 billion a quarter and had $12 billion in cash, and while he said it was a merger of equals, he sold Chrysler to Daimler-Benz, when we should have bought them.” The merger was disastrous for Chrysler, resulting in repeated rounds of cost-cutting, large declines in sales and profitability, sales of the valuable Huntsville division, and the loss of Beijing Jeep and the Graz plant; in 2007, after being sold to Cerberus, Chrysler was bailed out by President George W. Bush before going into bankruptcy and being rescued by the United States and Canada.
Iacocca was inducted into the Walter P. Chrysler Legacy Circle in 2010. He also won the American Patriot Award in the same year. He considers the minivan to be his career’s greatest accomplishment.