In 1981, Chrysler had $1.2 billion in federally backed loans and an array of new products. Problem solved? Not exactly. In the third installment of our series on the Chrysler bailout, we examine the corporations rocky road back to solvency and how it ended up on the ropes again less than a decade later.

BACK FROM THE BRINK

Even with new products and federally guaranteed loans, Chrysler was in rough shape in 1981. The costs of launching the K-cars and Imperial had further eaten away at the corporations scant available cash. Its new cars were off to a slow start on the showroom floor, requiring generous rebates to spur sales. The economy was still in poor shape, and the public was understandably suspicious of Chryslers prospects.

Worse, the new cars suffered poor assembly quality (a seemingly eternal Chrysler problem), leading Iacocca to revive the old five-year/50,000-mile warranty, which Lynn Townsend had quietly axed back in 1971. The warranty and the rebates helped, but they were expensive.

To receive the third and last of Chryslers federally backed loans, amounting to some $300 million, Iacocca had to obtain a further $600 million in concessions from suppliers and the UAW. In addition, with the help of the Treasury Department, the banks were persuaded to forgive a substantial portion of Chryslers remaining debt more than $1.1 billion in exchange for company stock.

Despite such assistance, Iacoccas relationship with his government overseers the Loan Guarantee Board, which consisted of the chairman of the Federal Reserve, the comptroller general, and the secretaries of Labor, Treasury, and Transportation was uneasy. G. William Miller, the Secretary of the Treasury, ordered Iacocca to report to the board every month, something Iacocca detested. Iacocca was further annoyed when Treasury decided to raise the governments guarantee rate from 0.5% (the statutory minimum) to 1.0% on the grounds that the loans were still at risk. Miller told Iacocca that he wanted to make Iacoccas life so miserable that it would give the Chrysler chairman an added incentive to pay off the loans. Iacocca needed little convincing, particularly since the Board had the authority to remove him from his position if they felt he was not holding up his end of the deal.

The loans were also a public relations nightmare. Each new loan drawdown meant more negative headlines and derisive editorial cartoons, which did nothing for sales.

FROM CHAIRMAN TO SPOKESMAN

To face Chryslers public relations problems, Iacocca took an unusual step: becoming a pitchman for his own company. It was not Iacoccas idea; it was suggested by Chryslers new ad agency, Kenyon & Eckhardt, in 1980. The ad men told Iacocca that the best person to convince America that Chrysler was not about to collapse was him. Iacocca was reluctant, but they eventually talked him into it, leading to a series of memorable TV spots. Rather than try to dance around Chryslers problems, K&E opted to face them directly with a tough-talking, no-nonsense approach for which Iacocca became famous.

Behind the scenes, Iacocca was in the awkward position of negotiating with his old boss, Henry Ford II. Although Ford Motor Company was still far healthier than Chrysler was, Fords 1980 losses were nearly as bad as Chryslers were, around $1.5 billion. With the help of Salomon Brothers and Goldman Sachs, Fords investment bank, Chrysler put together a proposal for a Ford-Chrysler merger. The prospect of Iacocca and Henry Ford II coexisting in such an environment was a stretch, but Iacocca suggested that both he and Ford step aside after one year, leaving the management of the joint company to others.

How seriously Iacocca meant that offer is unclear, but it was a moot point because Ford rejected the proposal almost out of hand. Iacocca felt that his old nemesis, Phil Caldwell, was responsible for Fords refusal, which Iacocca attributed to sour grapes.

PAYBACK

As we mentioned in our previous installment, Chryslers 1982 sales were even worse than those of 1981, dropping under one million units. Cost reductions, however, had lowered the corporations break-even level from 2.3 million units (a figure it hadnt even approached since 1973) to only 1.1 million. Although Chrysler had fallen short of that mark in 82, it was a far more attainable figure. By 1983, the national economy was improving, and sales rose to 1.3 million, enough to earn Chrysler a genuine profit for the first time in several years.

On the strength of that performance, in the spring of 1983 Chrysler issued 26 million new shares of stock, netting $432 million. The motivation for the stock sale was simple Iacocca immediately wrote a check for $400 million to pay off one of the three federal loan draws. He and the Chrysler board subsequently decided that they should immediately repay the balance of the loans, before the end of the year. On August 15, 1983, Iacocca handed the loan trustee a check for the remaining $800 million, plus $13,487,500 in interest. The loans had been repaid in full, seven years ahead of schedule.

There remained a final wrinkle to be sorted out, however: the 14.4 million call warrants Chrysler had issued to the Treasury Department as a deal-sweetener back in 1980. (A call warrant is a transferable certificate that gives the bearer the right to purchase a share of stock at a pre-negotiated price in this case, $13 a share on or before a specific date, which in this case was 1990, the original due date of the federally guaranteed loans.) At the time the warrants were issued, Chrysler stock traded for only $5.50 a share, so the warrants had essentially no value. By the summer of 1983, the stock price was up to nearly $35 a share, which suddenly made the warrants a major potential liability for Chrysler; issuing an additional 14 million shares of stock would have diluted the value of its existing shares by an uncomfortable margin.

In May 1983, Iacocca asked Treasury to simply give the warrants back. Even G. William Miller probably would have balked at that suggestion; Ronald Reagans Treasury Secretary, Don Regan, a former stockbroker, was not about to surrender a valuable asset for nothing. A series of increasingly contentious negotiations ensued, with Regan ultimately opting to hold a public auction. Infuriated, Iacocca attempted unsuccessfully to appeal to President Reagan, who promised to intervene, but never did. Finally, in late September, Chrysler was compelled to bid against its own offer, finally paying $311 million for the warrants. Iacocca was resentful of the whole affair, and his 1984 autobiography is tinged with bitterness toward the Reagan administration.

An improving economy did wonders for Chryslers sales over the next few years, as did the introduction of the groundbreaking T-115 minivans, a concept Iacocca and Hal Sperlich had considered at Ford in the 1970s. The compact, front-wheel-drive vans, based on the K-car platform, got off to a slow start, but, unlike the K-car, their sales improved each succeeding year. They eventually accounted for a large percentage of Chryslers business. The minivans were essentially unique when first introduced (at least in the U.S.; the contemporary Renault Espace was conceptually similar). Chrysler benefited greatly from the fact that it took GM, Ford, Toyota, and Honda more than a decade to develop anything truly comparable. The minivans left Chryslers balance sheet in a far rosier state than it had ever been. The company posted a $2.4 billion profit for 1984 and a still-impressive $1.6 billion for 1985.

THE SALESMAN TRIUMPHANT

Popular opinion gives Iacocca sole credit for saving Chrysler, an idea Iacocca himself promoted heavily in his autobiography and commercials. Many of the difficult decisions, though, were John Riccardos, although it was up to Iacocca to carry them out and to sell them to the company, Congress, and the public. Calling Iacocca the companys savior is perhaps an exaggeration, but it was certainly the greatest selling job of his life. It was also a personally taxing one, particularly since his wife, Mary, was simultaneously struggling with complications of diabetes; she died on May 15, 1983, three months before Iacocca paid off the last of Chryslers loans.

Iacocca was richly rewarded for his efforts. His base salary grew by 30% for 1983, another 20% for 1984, and a further 17% for 1985, plus generous bonuses and stock options. For the rest of the decade, he was the most highly compensated executive in the auto industry. His total compensation for 1983 was $5.4 million, which earned sharp criticism from the UAW including Doug Fraser, who still had a seat on the Chrysler board.

Their objections were understandable because the cost of Chryslers revival had been high. More than 70,000 jobs were permanently eliminated between 1978 and 1983, about half of the corporations pre-bailout payroll. Although Iacoccas claims about how many jobs the bailout saved always included jobs at Chryslers suppliers and dealers, no one has ever estimated how many jobs were lost by the suppliers Chrysler stiffed month after month during its worst period.

The Chrysler K-car survived for many years with minimal changes; this is a 1988 Aries America sedan, which sold for a modest $6,995. It accounted for a respectable 85,613 sales.

Moreover, the companys rank-and-file workers had paid a disproportionately heavy price. The loss of income for UAW workers, who had accepted pay cuts that left them more than $2 an hour behind their counterparts at GM and Ford, was much steeper than that faced by most Chrysler executives under Iacoccas much-ballyhooed Salary Reduction Program. Furthermore, only two years after that program began, seniors executives had their salaries restored to their 1979 levels, including retroactive payments for their lost income during the previous two years; factory workers enjoyed no such recompense. One could argue that Chryslers management deserved a competitive salary simply retaining an effective executive staff in a corporation in such critical condition is challenging but it sent an uneasy message.

THE SCORECARD

Did the bailout save Chrysler from bankruptcy? Not exactly. There were lengthy periods between 1979 and 1981 when Chrysler was technically insolvent had its various suppliers and creditors tried to force immediate payment of monies owed, the company would have been forced into receivership. What spared Chrysler from Chapter 11 were the many concessions made by suppliers, which ranged from a willingness to accept IOUs instead of cash to retroactive price cuts. The federal loans and Chryslers turnaround plan did probably encourage the companys suppliers to cooperate, but their choices were limited in any case.

The most lasting impact of the bailout came not from the federal loan money, but from the extremely generous concessions Chrysler received from its creditors. The banks forgave more than $700 million of Chryslers debts in exchange for preferred stock (traded early in 1983 for common stock), and allowed the company to pay off an additional $740 million of debt at 30 cents on the dollar. In essence, the bailout deal gave Chrysler a number of the advantages of bankruptcy without the stigma of actually declaring Chapter 11.

Defenders of the bailout note that the federal government actually made money on the deal. By Iacoccas reckoning, Chrysler paid out $404 million in interest, $33 million in administrative fees (the Loan Guarantee Board charged Chrysler a $1 million monthly fee for its services), $67 million in legal fees, and $311 million for the return of the call warrants. Still, there are any number of reasons why running Treasury as a for-profit entity is a bad idea. Furthermore, the Reagan administration was wholly resistant to suggestions made by Iacocca and several members of Congress to invest the interest in a fund to retrain or otherwise assist Chryslers laid-off workers, so the money did little to alleviate the pain caused by Chryslers corporate downsizing.

K-CARS AD NAUSEUM

Chryslers cost-reduction program also entailed deep cuts in capital expenditures and R&D, which seriously hurt Chryslers product development later in the decade. Iacocca might have avoid that problem if he had reinvested the companys substantial mid-eight profits in new products, but he opted instead for a series of high-profile acquisitions, most of them in non-automotive businesses. Over the next few years, Chrysler bought Gulfstream, Electrospace Systems, Airborne Systems, Thrifty, Snappy, Dollar Rent a Car, E.F. Hutton, and a variety of other financial services companies.

At the time, diversification seemed like a prudent choice; after the auto industrys roller-coaster ride of the previous decade, all the U.S. automakers were considering it. Still, all of these acquisitions drained capital that might otherwise have been used to improve Chryslers car and truck lines, and many proved to be expensive boondoggles. For example, when Chrysler attempted to sell its new aerospace divisions at the end of the decade, it was only able to find a buyer for Gulfstream; the sale netted $825 million, which, on an inflation-adjusted basis, wasnt a whole lot more than Chrysler paid for it in 1985.

On the automotive side, Chrysler acquired Lamborghini, a 24% stake in Mitsubishi, a small share of Maserati, and the failing American Motors Corporation, which included the Jeep brand.

The decline in Chryslers R&D wasnt immediately obvious, because the company continued to bring out new products, most of them derivatives of the K-car platform. Chryslers engineers became expert at spinning off new variations on existing architecture and engines; Chrysler led the industry in turbocharging. for example, in large part because the money for completely new engines was simply not there.

The problem was that the resultant products, except for the minivans, became progressively less competitive as the decade went on. Even the new AA-body cars the Dodge Spirit and Plymouth Acclaim, introduced for 1990 were yet another rehash of the K-cars, whose engineering and rectilinear styling hadnt been exactly cutting edge in 1981. The Honda Accord had been redesigned three times since then, the Toyota Camry twice, each a notable improvement on its predecessors. Meanwhile, Ford had finally introduced a truly modern front-wheel-drive platform, the Taurus, with cutting-edge, aerodynamic styling. Chrysler became more and more dependent on cut-rate pricing and heavy rebates to maintain its sales volume.

Chrysler was still profitable through 1990, but its margins slipped each year and its 1990 profit was only $68 million, accompanied by a drop in market share from 13.8% to 12.3%. The company lost $795 million the following year, largely because of a sluggish economy and the impact of Iraqs invasion of Kuwait. A decade after the federal bailout, the company was again flirting with bankruptcy.

Had it not been for the arrival of François Castaing from AMC in 1987, who subsequently became VP for Vehicle Engineering, Chrysler might have continued churning out K-car clones well into the 1990s. Castaing and Chrysler president Bob Lutz, however, pushed hard for a radical reinvention of Chryslers product-development approach, with leaner, more cohesive platform teams for each new vehicle. The test case was the Dodge Viper, a sports car that Lutz had pushed into small-scale production in 1989. The Viper project was very successful from the standpoint of production efficiency, and Castaing and Lutz lobbied to institute the same process on a larger scale for Chryslers mainstream vehicles. Iacocca finally agreed, but only with great trepidation.

SUCCESSION CRISIS

By the end of the decade, Iacoccas public image, once overwhelmingly positive, had been soured by years of anti-Japanese rhetoric, which many observers saw as making excuses for the failings of the domestic industry. Iacocca seemed to have grown more conservative over the years, less willing to accept change. He clashed repeatedly with Lutz, whose privileged background was a sharp contrast with Iacoccas, and he tried several times to fire Castaing, although Lutz always blocked him.

Whatever his misgivings, Iacocca did eventually approve a seismic shift in Chryslers engineering strategy, which led directly to the superbly designed Neon, LH cars (Dodge Intrepid, Eagle Vision, and Chrysler Concorde), JA-cars (Dodge Stratus, Chrysler Cirrus, and Plymouth Breeze), and the Jeep Grand Cherokee. In both styling and engineering, they were the most convincing efforts a domestic manufacturer had fielded since the Ford Taurus in 1986. Their development was expensive the LH cars alone cost $1.5 billion but Chrysler was once again an industry leader.

Iacocca stayed several years past normal retirement age, finally stepping aside in late 1992. His succession had been a contentious issue for the past several years and had seen the demise of a variety of likely successors. In the end, he chose an outsider, Robert J. Eaton, head of GMs European operations. Eaton inherited a company far better positioned for the future than before (most notably, work had already begun on the successors to the LH cars), but his relationship with Lutz, Castaing, and design boss Tom Gale appears to have been a tense one. Former Chrysler engineer Bob Sheaves also blames Eaton for a last-minute cost-cutting program that undermined the success of the companys new products, contributing directly to problems like the head-gasket and exhaust donut failures that plagued the Neon, and the LH cars inadequate air conditioning. The cuts produced short-term savings, Sheaves says, but resulted in millions in additional warranty costs and many unhappy customers.

Questionable management decisions have been an endemic problem for the American auto industry since the 1950s. Chrysler, being one of the smallest automakers, has arguably suffered the worst simply because it has less margin for error, but its problems are not unique. They bespeak larger issues that beset the entire industry and to some extent the entire American economy. There but for fortune, as the saying goes, go we all.

NOTES ON SOURCES

Our sources for this article included the Auto Editors of Consumer Guide, Encyclopedia of American Cars: Over 65 Years of Automotive History (Lincolnwood, IL: Publications International, 1996); David Halberstam, The Reckoning (New York: William Morrow and Company, 1986); Lee Iacocca, Iacocca: An Autobiography (New York: Bantam Books, 1984); Charles K. Hyde, Riding the Roller Coaster: A History of the Chrysler Corporation (Great Lakes Books) (Chicago, IL: Wayne State University Press, 2003); Manuel Velasquez, The Chrysler Loan, from Chapter 3 of Business Ethics: Concepts and Cases Fifth Edition (Upper Saddle River, NJ: Prentice-Hall, Inc. 2006); James K. Hickel, The Chrysler Bail-Out Bust, The Heritage Foundation, 13 July 1983, www.heritage. org/ research/regulation/bg276.cfm, accessed 25 November 2008; and Terry Parkhurst, Lynn Townsend, Former Chrysler President, Allpar.com, n.d. www.allpar. com/ corporate/bios/townsend.html, accessed 23 November 2008.

Some information on the final days of Iacoccas reign at Chrysler came from Bill Vlasic and Bradley A. Stertz, Taken for a Ride: How Daimler-Benz Drove Off With Chrysler (New York: William Morrow, 2000) and an online discussion at Allpar.com with former Chrysler engineer Robert W. Sheaves 21-28 April 2008, (www.allpar. com/ forums/index.php?showtopic=103289, accessed 31 July 2008).