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The Third StrikeFirst GM and Ford—now Chrysler's going down the tubes, too.

By Daniel GrossPosted Wednesday, Sept. 20, 2006, at 4:32 PM ET

With all the drama surrounding Ford and General Motors in recent years—criticism from shareholder activists, executive changes, and credit downgrades—the third member of the (less and less) Big Three U.S. automakers has generally cruised along under the radar. Acquired by German automaker Daimler in 1998, Chrysler has generally been regarded as better run and less affected by the labor, competitive, and macroeconomic problems bedeviling Ford and GM.

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As Ford and GM struggled with excessive reliance on SUVs and gas guzzlers, Chrysler had a bona fide hit with the Chrysler 300. As Ford and GM engaged in hostile talks with unions about huge job cuts, Daimler this summer added UAW chief Ron Gettelfinger to its supervisory board. As GM and Ford racked up huge losses, Chrysler scored 12 straight profitable quarters. In the first two quarters of this year, Chrysler notched operating profits in North America of more than $200 million. And as GM and Ford lost ground to Toyota and Honda, Chrysler, with its impressive sales figures, actually gained market share in the United States in 2005.

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In May 1998, James Surowiecki discussed the merger of Chrysler and Daimler. In April 2005, Daniel Gross wrote about the optimism of German executives. Last week, he explained why Bill Ford fired himself. In February 2004, Mickey Kaus identified the Chrysler 300 as one of two cars that was supposed to save Detroit.

And then suddenly—disaster. In July, the company warned that Chrysler would lose up to $600 million in the third quarter. Last Friday, Daimler was forced to revise that figure sharply downward to a $1.5 billion operating loss. Yesterday, DaimlerChrysler CEO Dieter Zetsche, who headed Chrysler from 2000 through 2005, told analysts Chrysler would slash production sharply in the third and fourth quarters, causing it to lose market share.

Until this news, Chrysler had been viewed as a successful effort to fuse the best practices of German and American carmaking—German engineering and American salesmanship, German cooperative labor relationships and American incentives like profit-sharing, German high-performance sedans and American highway boats. No more. By its own admission, Chrysler is stumbling over the same blocks that have tripped up GM and Ford: "excess inventory, non-competitive legacy costs for employees and retirees, continuing high fuel prices, and a stronger shift in demand toward smaller vehicles." And so the old narrative—that Chrysler was saved from the sad fate of its rivals by being tethered to the more worldly Daimler—has given way to a new one. Chrysler's German management and owners have fallen prey to bad American practices in at least three significant ways.

First, perhaps even more than GM and Ford, Chrysler relied too much on big, gas-guzzling cars in an environment of rising gas prices. The Financial Times notes that "pick-ups and SUVs make up about 70 percent of Chrysler's sales—a heavier exposure than GM and Ford to these segments." While Chrysler's parent company is taking steps to introduce the tiny, gas-sipping Smart car in the United States, Chrysler doesn't have any compelling offerings in the growing market for fuel-efficient vehicles: no hybrids or sub-compacts. Chrysler's big introduction for this year was another big car, the Jeep Commander, which is languishing on dealer lots along with other Chrysler vehicles.

Second, Chrysler's German overlords seem to have succumbed to the American disease of excessive optimism. German business leaders are well-known for their dour outlooks; they think things are going poorly even when they're going well. But Chrysler believed things were going well this summer even when they were going poorly. Why did the company need to engage in the credibility-dashing exercising of slashing earnings estimates twice in six weeks? It was hoping for a big turnaround in the summer. As Zetsche put it today: "There's no way around it but to say that we were too optimistic."

Third, Zetsche, who was based in the United States from 2000 to 2005, has gone native by participating gleefully in the only-in-America conflation of the CEO and the brand. This summer, on the heels of a $100 million advertising campaign, Zetsche morphed from a relatively anonymous but highly successful manager into "Dr. Z," a whimsical, funny, entertaining pitchman par excellence. In television advertisements, Zetsche could be seen chatting with drivers about the merits of DaimlerChrysler's engineering and the relative fuel efficiency of the company's cars.

Now, it makes sense for companies to put their CEOs front and center when there's already a clear identification between the name of the pitchman and the company: Think William Clay Ford Jr. and Ford, or Augustus Busch IV and Budweiser, or Frank Perdue and Perdue Chicken. Or when the CEO is an entrepreneurial founder who really does personify the brands, like Virgin's Richard Branson or Dave Thomas of Wendy's. But it's rare for even the most successful manager to become a star of television advertisements. Even at the height of his popularity, I can't recall Jack Welch appearing in television ads for General Electric. And the tactic generally isn't used much in Europe, where CEOs aren't celebrities the way they are in the United States. Yes, Chrysler once used CEO Lee Iacocca in low-concept advertisements, and to great effect. But no viewer doubted that the earnest Iacocca was the real CEO of Chrysler. Zetsche, with his round spectacles, twirly moustache, and German accent, certainly doesn't look, sound, or act like the CEO of an American car company. In one ad, he headed a soccer ball! (Jalopnik shows and comments on some of the ads.) As the Wall Street Journal noted: "The ads left some consumers confused and thinking that Dr. Z was a fictitious character." Remember Chevrolet's lineup of baseball, hot dogs, apple pie, and Chevrolet? Dr. Z presented soccer, wurst, apfel strudel, and Chrysler.

The ad campaign neatly encapsulates the strange amalgam of German and American influences that now dictates Chrysler's future. Is it any wonder Chrysler's business model is kaput?

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Daniel Gross is the Moneybox columnist for Slate and the business columnist for Newsweek. You can e-mail him at and follow him on Twitter. His latest book, Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation, has just been published in paperback.

Photograph of Dieter Zetsche on Slate's home page by Bill Pugliano/Getty Images.

COMMENTS

Remarks from the Fray:

To read this article you'd think that distress in the auto industry is an exclusively American problem. But it's not. It was recently announced that Volkswagen, the automaker with the biggest share of the European market, is also feeling the squeeze with plummeting profit margins. In particular, VW took a $1 billion loss in its North American operations. Meanwhile, Fiat of Italy has been on governmental life support of who knows how long. And as for British auto makers, they've been extinct for a generation. The only major European automaker that seems fairly healthy right now is Renault, which is teamed with Nissan.

--revrick

(To reply, click here.)

People outside of Detroit never grasp the innner machinations of just unionized auto companies work. Gross is utterly wrong about what went wrong at Chrysler, the truth being far uglier than most would like to imagine.

Chrysler's managment knew that its vehicles were slowing, particularly light trucks. The bread and butter Dodge trucks are very long in the tooth, especially now that they are up against a "new" F-150 and soon to be brand new GMC/Chevy. But Chrysler refused to cut production, why?

Chrysler's management also knew that large SUVs were on the decline, but instead of reducing production they increased production of Jeeps and DUrangos rather than hold production steady. If they had held production or cut it slightly in the first and second quarter this "crisis" would have been avoided.

What makes this more interesting is outside of the Jeep plant in Toledo Chrysler could have reduced inventory without significant labor costs. Why? Because primary production of the Dodge trucks is in Mexico, where there are not layoff protections. The same was true for minivans and even the 300. These vehicles are produced in CAW plants with no JOBS Bank provisions (called GEN Pool at Chrysler). The costs for cutting production, early on, would have been minimal.

One has to go back to 2005 to understand why these actions were not taken. In 2005 GM UAW workers agreed to forgo wage increases and accpet higher co-pays on healthcare. Ford workers agreed to the same, but barely (and only after a contested vote). Chrysler UAW officials did not even dare ask its members for the same give backs because it was well known those cuts would not pass a vote.

In order to get the rank and file to agree a crisis had to be created, one that would allow the UAW leadership sufficient cover to ask for similar health care deal from Chrysler workers. Notice in Dr. Z's speach the reference to "rampant healthcare costs" even though at Chrysler the far younger and smaller workforces has healthcare costs that only half as large as at GM or Ford through FY2005.

Chrysler had to have a bad couple of quarters, they need to scare their members into a health concession. Now was this the sole reason, absolutely not, but it is sure is convenient.

--Dharkangell

(To reply, click here.)

DC's problems are in step with Ford and GM – a major problem being too much model diversity. I've said this before, and I'll say it again, there's too much choice out there. Make few things, and make them really good. Niche marketing may work for a smaller company, but not for a giant automaker.

--ohthehumanity

(To reply, click here.)

The ads are clever, funny, and memorable. You walked away talking about them and saying the company name.

The "confusion" point is silly. The confusion about whether he really was the CEO was FUN to wonder about. I am not confused that annoying salesmen for Volkswagon say "happy leasefornuttin" at the dealership. I am not confused that an attractive leggy blond will appear in the passenger seat of my new convertable. It didn't make me confused about these cars either in a troubling way. Who gives a bratwurst who the CEO is - that's the point.

It was an ironic ad, aimed at an ironic audience. It made fun if itself, it made fun of car ads, and made fun of CEOs while simultaneously saying CEOs were fun and so are the cars. It also said that German's "get" our culture.

It gave us the German uber-precision anal performance schtik while flashing the goofy all-American smile.

Despite all this fun, the safety features and other qualities came through (except for the mud ad; which was muddy). The reporter in the crash test was brilliant bit of dancing on the edge of our comfort zone, and flawlessly executed at that. The headed soccer ball was splendidly random.

The ad said: remember us? We merged a while ago and maybe you forgot about us. We're here. Were positive. We're out in front. We're still American.

When you compare this to the tired formulaic approach used by the competition of broads, broods, burly boys, and balloons, I would say this ad was a major refreshing departure.

At a time when the buy-American backlash is ascendant, this light hearted personification of the cross-Atlantic partnership was a masterstroke.

If the company is sucking wind, it is despite this ad, not because of it.

That said, they need to retire it before it tires us. The joke has short shelf life.

--Sarvis

(To reply, click here.)

(9/22)

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