A talk with Chrysler's turnaround team
CEO Nardelli and top execs LaSorda and Press on Cerberus and Chrysler's turnaround.
(Fortune Magazine) -- What timing! Cerberus Capital Management agreed last May to buy 80% of Chrysler from its German parent, then known as DaimlerChrysler. But by the time the deal closed in early August, global credit markets had convulsed and the U.S. economy was slowing down.
It was too late to turn back, so Cerberus brought in a couple of managerial ringers: Robert Nardelli, a standout at General Electric (GE, Fortune 500) who had gone on to run Home Depot (HD, Fortune 500) for six tumultuous years, became CEO, and James Press, head of Toyota's (TM) U.S. operations, became a vice chairman and co-president. (Tom LaSorda of Chrysler stayed on as the other vice chairman and co-president.) Their mission: to make Chrysler profitable. So far they've axed models, consolidated dealerships, and announced 20,000 job cuts. The company lost $1.6 billion in 2007, but Nardelli says it met all the Cerberus metrics and is on plan for 2008. Chrysler's leadership troika talked recently with Fortune's Geoff Colvin about learning from consumers, improving quality, surviving against giant competitors, and much else. Here are edited excerpts:
Let's start with the news. Is the turmoil in the financial markets good or bad news for Chrysler?
NARDELLI: Obviously, we're very sensitive to the economic news. Toward the end of last year the three of us took a hard look at the economy and the industry and put together a conservative plan. We pegged the industry at about 15.5 million [U.S. vehicle sales in 2008, down from 16.1 million in 2007 and 16.6 million in 2006]. Tom did a heck of a job in resizing the footprint. Jim has been working very hard on pruning the portfolio.
PRESS: Good news or bad news, it's how you play the hand. We all have the same economy. We are doing everything we can to strengthen the organization, the dealers, our products, and our marketing muscle. The saying goes that the strongest steel comes from the hottest fire. It's a good fire right now.
What's your economic forecast?
LASORDA: I think of being in the bathtub curve: We're at the bottom, still rolling along to the other side. We're operating the business as if it will continue that way a little beyond 2008. If it rebounds, we can respond very, very quickly.
What if gas goes to $4 a gallon?
LASORDA: We're looking at the portfolio as if it were $4 a gallon. How do we remix the segments? Later this year we'll be launching some of the biggest SUVs, but [these are] full hybrids with a 40% improvement in fuel economy. You'll see us getting into smaller vehicles to compete, but of course we'll have to get fuel economy across the plate.
NARDELLI: We understand, and Tom has built in, the economics of inflationary forecasting. Jim has been working on the product portfolio.
What's the role of Cerberus?
NARDELLI: Stephen Feinberg [chairman of Cerberus] is a true patriot and is absolutely committed to supporting the return to profitability of Chrysler. Cerberus brings a plethora of financial experience. They have one of the most sophisticated consulting groups, bringing in key executives from across the industry. They're there if we need them. Other than that, they have entrusted us with this huge responsibility. Each of us brings a unique skill and a differentiated background. We all know what we're each doing. We share openly and freely. There is healthy debate, not top-down control.
Chrysler is two businesses: a finance business that makes money and an auto business that loses money. Can the auto business be made profitable?
NARDELLI: Yes. And we're on track.
LASORDA: Absolutely. That's our mission in life. On the supply side, it's how we right-size our manufacturing footprint, how we look at mergers, acquisitions, partnerships, or alliances around the world, the whole procurement side of the business, and labor relations. We now have a UAW contract that reshapes what the cost structure will be on health care and things of that nature. My area is making sure our cost structure is competitive worldwide. Jim tells us what to build, and then we send it to him to go sell it.
PRESS: There's Mr. Supply [indicating LaSorda] and Mr. Demand [indicating himself]. The key driver of profitability will be that the focus of the company isn't on profitability. Our focus is on the customer. If we can find a way to give customers what they want better than anybody else, then what can stop us? We're nimble. We're fast. With Wall Street not looking over our shoulder, we work for the customer. Nobody else does that in Detroit.
Chrysler was not, frankly, known as a customer-centric company. Is that what you found when you got there?
PRESS: You can't change history, and you never know why people did what they did. I think the company has a great foundation.
NARDELLI: I think we're the first auto company to have a chief customer officer [Douglas Betts, hired from Nissan]. His job is to represent the customer internally. In the first 60 days we approved 260 unique items where we had engineering working on enhancements to our products that were based upon real customer-data feedback. That list has now grown to 500 items. Our products are probably not as bad as they're written about and not as good as they're going to be. When Jim talks about working for the boss, it's not me; it's the customer.
In the latest Consumer Reports ranking, four of the ten worst vehicles were Chrysler vehicles.
PRESS: That reflects a lot of the past; it doesn't reflect what we are doing today. More important, it's the herd mentality, when everybody is jumping on. You're never as bad as they say when things aren't good, and you're never as good as they say when things aren't bad. The reality is - ask the customers. They love the cars. Ask our dealers. The level of quality improvement that has already been built in is quantums above where it was.
Chrysler has a U.S. market share of 12.9%. How do you compete against companies that have much more scale and volume?
LASORDA: It's like the little car company that could - we'll focus on what we're good at. And where we need an opening, we'll try to do that through an alliance or partnership. In Southeast Asia, India, or South America, we're going to need a small-car platform. We'll do that through an alliance with a partner that has the scale. We cannot compete on our own in every region because of our size.
Even with the new UAW contract, some competitors still have a cost advantage. How do you compete?
LASORDA: In 2010, after we go through the VEBA [voluntary employee benefit arrangement, which will shift some liabilities to the UAW] and all the other restructuring, our labor costs will be within about $4 to $5 per hour [of lower-cost competitors]. The difference used to be much bigger - $24 an hour or so. The gap has really closed. We have a two-tier wage system for certain operations, which will close it even further. So now it's about picking the products, picking the segments, and moving quickly.
PRESS: We're not in the commodity business. Some of the competitors are selling appliances; we're really looking at fulfilling the customer's dreams. That gives us a different position in the market.
Buying a car is not a purely rational decision; it's also about what's cool, what speaks to people. Any thoughts about that?
PRESS: We see ourselves as the reinvention of an American dream machine, especially for those who have a special affinity for driving a car that has some emotional reward. Engineering is our bag. When you put those two things together, I think we can let people have their dreams come true in a way that others can't; that's why our size is an advantage. The other thing that we want to do is offer cars that are green, safe, and easy on the pocketbook, and that really satisfy all the needs. It's sort of like a soufflé with low calories.
We have a number of new products coming out that reflect this. There is the Journey, a crossover SUV. That's the base of the business. Then we get dessert - the new Challenger, a muscle car. It's really fun to drive, and it gets great mileage. And then we have a new truck coming out - the meat and potatoes. The hybrids are the veggies.
Bob, you're famous for rigorous evaluations of employees. How's it going?
NARDELLI: I think it's going very well. Chrysler was an unbelievable company, with its own culture. Then it became a division of a much larger corporation. And then we went through the de-merger, so it's kind of like a $60 billion startup. The most important thing the three of us do is resource allocation - for physical capital reinvestment and also for human capital reinvestment. We're going through page by page, looking at our talent. Where can we provide enhancements? How do we provide rotation? How do we make sure we have the right individuals in the right jobs? We're trying to create a learning environment, an open environment. We're not saying, "Check your brains at the door. We'll tell you all the answers."
What targets are your top managers expected to hit?
NARDELLI: Ebitda and cash. And underneath that, of course, is quality. There are measurements relative to Consumer Reports and the first six months, nine months, 12 months [of vehicle ownership].
No private equity firm wants to own any portfolio company forever. So what's the timetable?
NARDELLI: Cerberus has asked the three of us to focus on returning Chrysler to profitability. Steve Feinberg and the Cerberus team and the investors will focus on the other part. We're not being asked to do anything other than reestablish this wonderful company.
What will the global auto industry look like in ten years?
LASORDA: There will still be tremendous growth, especially in the developing world. You'll see fewer players, because there are a lot of auto companies in China and India. There is tremendous overcapacity from a company perspective. You'll see more alliances and partnerships as we migrate into new technology. In areas that are very capital-intensive, you'll see more companies moving together. You're seeing it now, but it'll be much more prominent in the future, where somebody's building a car for somebody else. [Chrysler recently agreed to buy cars made by Nissan that will sell under the Chrysler name in Brazil.] You will see growth in smaller cars - that could be profitable if you do it right.
PRESS: I think we're going to have four, five, or maybe six big players that will run the huge bulk of the market. They will take maybe 15% to 20% [market share each], and they will be dominant in certain parts of the world. But then below that is a layer of companies that will be suited to providing individual needs to customers in ways that others can't. That's what opens the door for us.
NARDELLI: Vehicles will evolve dramatically. The interior will have many creature comforts and more connectivity, and also be much more serene. From an environmental standpoint, we'll not only be driving for oil independence, but you'll continue to see the materials inside the vehicle be much more environmentally friendly.
If company X is making a car being sold by company Y, does that create a branding issue?
PRESS: It depends on what level of customization you do. But the fact is, these investments, especially for CAFE [corporate average fuel economy], are so huge that no single company can pull them off. You have to share resources. If you're using a power train from one, or radiator supports or the wiring harness from another - the DNA is how it's all synthesized and put together. That means the design, the driving feel, the experience, and the dealer.
Tell me why you think Chrysler can make it.
PRESS: The future of this business is unbelievably good. We are on the edge of a golden age because of population growth and the needs, wants, and desires that we can satisfy.
NARDELLI: Chrysler has been knocked down but never knocked out. It's always been able to come back tougher and more aggressive. That's what gives me hope about our ability to do this again and reposition Chrysler for America, for the auto industry, and certainly for Detroit.