Eaton Hits A Few Speed Bumps

For decades Chrysler had the reputation of being a boom-bust outfit, prospering during good times and barely holding on through downturns. In trying to change all that, Bob Eaton is no Lee Iacocca-but that’s the good news. Facing softening demand and relentless global competition, Eaton and his talented team, including Chrysler Vice Chairman, Bob Lutz, will need to summon their skills at off-road management.

November 1 1997 by JP Donlon


Coming off 1996, its best year in almost two decades, the nation’s No. 3 auto maker is hitting potholes in 1997. So far this year, sales have been down 7.1 percent, with a market share decline to 15 percent in the first eight months. Grand Cherokee production through the first six months was off 29,000 units, and full-size pickups were off 35,000. Sub par earnings performance was not helped by a strike and rising price incentives. If Chrysler CEO Bob Eaton is nervous, he disguises it well. “Our new models will show our strength,” he says, referring to the new Chrysler Concorde and Dodge Intrepid and the Durango sports utility vehicle launch. These are high-margin vehicles that analysts such as Prudential’s Philip Fricke think will sell well. But Fricke is not as sanguine about minivan and pickup sales, which may weaken further. Other analysts remain wary about the vulnerability of Chrysler’s mix. The $60 billion company sells two trucks for every car. More trucks were sold in North America last year than in any other in history. This plays to Chrysler’s strength, but with everyone from the Japanese to the Europeans now offering 4X4s, the field is getting crowded.

The problems of weak demand and global overcapacity endemic to the auto industry are real enough, but should not overshadow the transformation of a company that faced two near-death experiences in one decade. When Robert J. Eaton, a career GM man, came to Chrysler in March 1992, many inside the company were skeptical. “Bob Eaton from GM? You’ve got to be kidding,” is the reaction one senior executive recalls hearing at the time. “He was a stranger to us,” adds Chrysler Vice Chairman Tom Denomme. “It was evident he was a much different leader than Lee.” The short, soft-spoken former head of GM Europe had little horsepower in the charisma department, but neither did his ego require frequent tune-ups. Shortly after his arrival, Eaton, now 57, called a meeting of Chryser’s top 60 officers to talk about vision. One attendee recalls: “We sat in a room around a U-shaped table with easels and colored markers. Bob stood at one of the easels like a teacher or a coach helping us form our vision of the future. Can you imagine Iacocca doing this? No way!”

Since he took over as CEO in January 1993, Eaton and his team, including Vice Chairman Bob Lutz, who had hoped to be tapped for the top job, thrust the company into overdrive. Fueled by strong entries in the truck market and its reputation for hot styling, Chrysler pushed its total market share with 2.7 million vehicles last year to 16.5 percent at a time when Ford and GM seemed stuck in neutral. While it has given back a point or two of this market share in recent months, observers expect this trend to reverse itself as the company launches new products over the next 12 months.

“Perhaps more than any other auto-maker, foreign or domestic, Chrysler has refined the product development process into a potent competitive weapon,” asserts Lehman Brothers analyst Joseph Phillippi. For example, the 1993 Intrepid took 39 months, from concept to market. The 1998 Durango SUV took 23 months. With average industry development times for new products approaching 30 months, this advantage will be magnified as the company increases its operational flexibility. Platform teams, concurrent engineering, and CAD predated Eaton, but his emphasis on decentralized initiative translates into faster decision making.

This culmination of strengths has given Chrysler the highest profit per vehicle ($1,868) in 1996, according to the Harbour Report, which tracks auto industry performance. This is 95 percent higher than Ford, the next best. It’s interesting that Chrysler can do this without even coming close to having the best labor productivity. It needed 40.5 labor hours to build a vehicle, 8 percent more than Ford and 43 percent more than Nissan, reports Harbour.

The near- and medium-term outlook poses a number of challenges for Eaton and his crew. For the last three years, domestic industry sales have topped 15 million vehicles. Analysts expect a 3 percent to 5 percent reduction to 14.7 million by 1998. Used car prices, which had risen from 4 percent to 8 percent in recent years, fell 2 percent in the last 12 months. The used car market is now more than twice the size of that for new cars, causing worries that there are simply too many cars and too few people who want them.

Unlike GM or Ford, Chrysler is a domestic producer overly dependent on meager North American market growth at a time when most automakers are globalizing their businesses as quickly as possible.

Eaton has set his sights on doubling Chrysler’s exports, now running about 10 percent of unit sales, by 2000. The challenge is that markets such as India, China, Brazil, and Argentina require maturing before their populations can realistically afford autos.

The industry must also deal with a distribution system in the early stages of revolution. Customers demand better service and a more transparent buying experience. AutoNation, CarMax, and other megadealers are trying to consolidate this end of the industry. No one knows how the Internet and e-commerce will alter marketing and distribution costs. Given that today’s average vehicle age is 8.5 years-up from 6.6. in 1980 due to increased mechanical reliability-automakers are competing with the vehicles in their customers’ garages as much they do with competitors. Hence Eaton’s and Lutz’s obsession with product. (Eaton, who has an engineering background, loves to drive the Plymouth Prowler featured on this issue’s cover, when not tooling around in his blue Viper with white racing stripes.) The more buoyant mood around Auburn Hills, MI, is evident. Survival isn’t the issue anymore; it’s more “who says we have to stay No. 3?”

DRIVING CHANGE

Sales and margins slipped in the first half of 1997. What does that mean going forward?

The strike we had in the second quarter is an obvious factor. Also, this is a year with few new product introductions in the first three quarters. Those things, combined with a tough market, clearly made ’97 not as good as ’96.

We’re now moving into a huge product introduction. We recently conducted a “mega launch,” introducing a new Dodge Intrepid, Chrysler Concord, Dodge Ram, Quad Cap, four-doors, an all-new Durango sport utility vehicle, as well as a major change on our Ram wagon and van. So I view the latter part of this year and all of next year as being every bit as good as ’96.

Do you see demand overall softening?

There’s no question that the market is tougher. Volume is up in ’97 over ’96, but

it is being raised by high incentives. And in the new ’98 model year there was virtually no pricing increase in the industry. The market is tough enough that people felt that they had to eat whatever inflation there was.

Chrysler has market strength in trucks and relative weakness in passenger cars. Will the company’s mix change in the future?

Our biggest opportunity is in passenger cars-and a big portion of what we’re rolling out will be passenger cars. However, we’re strong in trucks by intent. That’s where the market strength has been, and that’s a significant part of our success. Mini-vans and sport utilities are viewed by the public as passenger-car alternatives.

Is that segment overexploited now?

Sport utilities, mini-vans, and so forth will continue to be the largest growth area. It’s the segment with the least amount of excess capacity. Also, the No. 1 thing that determines the kind of vehicle population a country has is disposable income. But the second most important thing is fuel prices and taxation of the vehicle. In the U.S., we have the lowest gasoline prices of any major developed country, and that’s why we have as many large vehicles, mini-vans, and sport utilities as we do.

What affect will the increased competition in the sport utility sector have on Chrysler?

Whenever you come up with something new and it’s extremely popular, people follow you. Who would’ve ever thought that Lincoln, for example, would have a sport utility? Or Mercedes? So we have a lot of imitators out there, but Jeep is the original and will continue to do very well.

I believe its brands are the most important thing any company owns. At the same time, if you’re going to keep moving ahead, you’ve got to move to another new area and make that a success. Then they’re going to come after you there. We’ll continue to use our current brands, but we’re also trying to develop new segments with some new vehicles we’ll he bringing out.

What kind of new vehicles?

I could say, but I won’t.

Is Durango part of it?

Durango is not a new segment; it’s between the compact sport utilities, like the Chevy Blazer, and the Ford Explorer. It has three rows of seats, but is considerably smaller on the outside. Yet it has the same towing capability and a bigger engine. It’s right-sized, smaller than the big ones, bigger than the small ones, with all the features and capability of the biggest.

BRIDGING BORDERS

Chrysler is increasing overseas business through joint ventures and distributing prefabricated car kits. Why not follow GM and Ford by establishing manufacturing facilities overseas. is it for want of cash?

We have the cash. In the last three years we bought back $5 billion of stock that-if we thought we had a good investment opportunity-could have been put overseas. We have on the order of $7 billion in cash today, and a significant portion of that could be put overseas. And we have plenty of debt capacity. It’s a different philosophy.

GM and Ford’s large fixed-cost base overseas goes back to the ’20s. Because of the financial problems Chrysler had in the ’70s, we didn’t have anything outside of North America, with the purchase of AMC in ’87, we had a very small amount.

We’re growing that at 20 percent per year, and growing it profitably, which we believe is the right strategy for us. With the right opportunities, we’ll be happy to go in and put in a large-scale plant over time. We’ll keep looking for opportunities, but if none look attractive, we’ll just continue our methodical growth.

How will you continue to export to markets that may have limited access, quotas, and other barriers about not being made locally?

A lot of nations require local content or local build. South America, where we have two plants operating and two under construction, is a good example. A plant in Argentina is making Grand Cherokees and will start making Cherokees shortly. Another in Venezuela is making Cherokees and Neons. A plant in Brazil will open next June.

What is your view of the risks in entering emerging markets?

The U.S. market is going to grow at best at something like a half a percent per year. The greatest growth is going to be in South America and in Asia. And both of those areas are prone to volatility. We’re willing to subject ourselves to the cycles in those economies. The thing that causes us not to be interested in a country is a National Car Program that favors one company, such as found in Indonesia and Malaysia. We’re willing to go against anybody on a level playing field. But if there’s a favored country or company kind of thing, we’re going to stay away.

Isn’t that unrealistic? The level playing field is an American concept the rest of the world doesn’t believe in.

We’ll never have completely level playing fields. No other country has as open a market as the U.S. Europe and South America are relatively open, as are some of the Asian countries. But some governments favor certain countries. Nobody else is putting investment in Malaysia and Indonesia right now; they’re waiting for the government to recognize that they’re going to have to level the playing field.

What happens when the Koreans, and the Indonesians, and the Malaysians start selling cars made at their labor rates here?

There’s already excess capacity of 20 million in the world, and 1.5 million here in this market going up to probably 2.8 to 3. Yet we’re doing quite well. While it’s going to be a tough market, most brands will survive, but some won’t, plants will close, and there will be less capacity.

Tell me about the composite concept vehicle (CCV).

We wanted to develop a vehicle halfway between a motorcycle and the cheapest passenger car for markets like China and India, where the vast majority of people have bicycles, motorscooters, motorcycles, or a three-wheeled vehicle because they can’t afford passenger cars. If you go back and look at the vehicle that put this country on wheels, it was the Model T back in the ’20s. For Europe it was the Beetle and the Deux Chauveau. To put some of these countries-China and India-on wheels, it will take a vehicle like the CCV.

With efficiencies no longer a key differentiator, what will differentiate Chrysler going forward?

As a differentiation, even cost is secondary to the attractiveness of your product. Being relatively small is a big advantage there. We can make decisions faster than our competitors, nationally or internationally. And we have a team of people with a passion for vehicles. We lead the world in our product-creation process.

There’s a dramatic revolution going on in distribution, with consumers embracing mega-dealers or shopping through the Internet. How will Chrysler dovetail into that?

It is a revolution, and also a huge opportunity. The customer does not like the current buying process. It’s intimidating, and it’s not transparent. You never know if you’re getting a good deal. Things like the Internet are making customers smarter, and that’s ultimately good.

Also the current distribution chain is inefficient, representing $3,000 in cost from the time a vehicle leaves our plant to when the customer pays for it. That cost can be cut in half, for a savings of $1,500.

Will we even have dealers in 20 years?

It’s possible we won’t.

What are you doing to work toward that reality?

All of our dealers own the franchise to sell vehicles in those areas. So it would be a long process to remove them one by one. What we’re trying to do is help make them competitive with any system that’s out there by taking costs out and making it a more friendly and transparent process, but still one that utilizes that network of local entrepreneurs that can sell and service the cars throughout its lifetime.

We’re not sure where the revolution is going. So we’re going in every direction. In our ’98 model-year rollout, customers could connect to us through the Internet, and from us to the dealers via satellite. Ultimately, the whole process will be connected, so you can buy a vehicle from the dealer in your hometown through us; or through the Internet, without ever going to the dealer.

What are the demographics of Chrysler buyers overall?

In the past five or six years, we have had the largest change in demographics of any of the companies that compete in this market, foreign or domestic. From the Dodge Intrepid to its predecessor, the Dynasty, we went down more than 10 years in average age, which is a huge change. Chrysler owners are generally younger than our domestic competitors, but older than many of the foreign competitors.

Is that the purpose of cars like the Viper and the Prowler?

We don’t make money on those vehicles. Yet, overall they’re one of the best financial returns we have, because of their effect on the image of our brands. The vehicles that domestic manufacturers made in the late ’70s and early ’80s were pretty boring. We were not competitive from a cost and quality standpoint. That’s changed. Our vehicles have gotten more youthful and more competitive.

Where does Bob Eaton fit into the pantheon of auto chiefs?

Today, it’s the strongest team that wins. I want to be known for having left the best team of any company in the world that’s focused on doing vehicles that people want to buy, and will enjoy driving and want to buy again.

Chrysler has probably been the most cyclical company in one of the most cyclical industries. We have flirted with bankruptcy many times since the ’50s. I want to be the first chairman of Chrysler who never has to bring this company back from the brink of bankruptcy. I want us to be on the opposite side of that, the most financially stable auto company in the world.