Chrysler's secret comeback plan

Jodie Wilson / The Detroit News

Exclusive

Chrysler's secret comeback plan

Bill Vlasic and Christine Tierney / The Detroit News

Charles V. Tines / The Detroit News

DaimlerChrysler Chairman Dieter Zetsche, left, and Chrysler CEO Tom LaSorda have been working on a plan to jump-start Chrysler. See full image

The key players

Tom LaSorda
LaSorda has a reputation for cost-cutting and improving factory productivity. After more than 20 years at GM, he moved to Chrysler in 2000 and became top manufacturing exec in 2002 with a mandate to address quality lapses and make factories more efficient and flexible. He was named COO in 2004 and replaced Zetsche as CEO in September 2005. He's taken responsibility for the red ink at Chrysler but could be out of a job if his plan fails.
Dieter Zetsche
Affable and approachable, the German won over employees, dealers, suppliers and the Metro Detroit community when he arrived in November 2000. His success turning around Chrysler won him the top job at DaimlerChrysler, and Chrysler's slide back into red ink is a personal disappointment. He's betting his career on pushing for what once was feared most: deeply integrating Chrysler and Mercedes.
Rainer Schmückle
Schmückle, chief operating officer for Mercedes-Benz, was tapped late last year to help Chrysler craft a plan for restoring profits. He had previously managed restructurings at two other DaimlerChrysler units: Freightliner, which makes commercial trucks, and Adtranz, a rail equipment manufacturer. The 46-year-old is known for his attention to detail and demanding that those plans be executed as outlined and on time.

Coming Tuesday

Chrysler's Jefferson North factory, the last major auto assembly plant in Detroit, will play a vital role in the automaker's comeback.

Related Articles and Links

• Chrysler gets tutor on revival
• Region likely to feel pain and gain
• Audio slideshow: Another restructuring for Chrysler Group
• Audio: DaimlerChrysler CEO Dieter Zetsche on restructuring plan, pressures
• Audio: Tom LaSorda, head of the Chrysler Group, on being in the hot seat
• Audio: Tom LaSorda: 'I've never been more upbeat'
• Audio: Tom LaSorda on the Chrysler teams who are assessing cost-cutting measures
• PDF: Chrysler's factory footprint
• PDF: Bumpy ride for Chrysler stock
• Should DaimlerChrysler AG to hold on to its Chrysler Group and turn it into a smaller, more efficient automaker that has closer ties with its German parent company?

John T. Greilick The Detroit News

A stockpile of Chrysler vehicles is parked at Detroit Metropolitan Airport. The automaker lost a projected $1.2 billion in 2006. See full image

• Printer friendly version
• Comment on this story
• Send this story to a friend
• Get Home Delivery

German shareholders may be clamoring for DaimlerChrysler AG to sell off the Chrysler Group, but they won't get their wish.

Instead, a secret restructuring plan dubbed "Project X" is focused on transforming Chrysler into a smaller, more efficient automaker with closer ties than ever to its German parent company and the Mercedes-Benz luxury division.

The Detroit News has learned that the plan, to be unveiled on Feb. 14, calls for unprecedented sharing of vehicle architectures and parts between Chrysler and Mercedes, including developing small cars and SUVs together.

The plan also outlines deep cost cuts similar to those at General Motors Corp. and Ford Motor Co.: plant closings, a reduction of factory shifts and employee buyouts aimed at slashing more than 10,000 blue-collar jobs. Sources said the likely closures will include an assembly plant in Newark, Del., and an engine plant in Detroit.

Overall, the success of Project X is critical to the future of Chrysler, which lost a projected $1.2 billion in 2006 and saw its U.S. market share slide to 13 percent at year's end.

In Germany, anxious investors are putting pressure on DaimlerChrysler Chairman Dieter Zetsche to sell all or part of Chrysler.

But Zetsche has steadfastly refused to consider a sale, and has now staked his own career on pushing for greater levels of integration between mass-market Chrysler and the upscale Mercedes-Benz brand.

"We need to go deeper and faster, or else what's the point?" Zetsche is said to have told Chrysler officials recently.

Details of the restructuring plan have been closely guarded, and Chrysler executives have declined to comment on its content. But behind the scenes, the pace of discussions has been intense.

Teams from Mercedes and the consulting firm McKinsey & Co. have become fixtures at Chrysler headquarters in Auburn Hills. Company officials say that a 48-seat Airbus corporate jet has been jammed with staffers shuttling to and from DaimlerChrysler's offices in Stuttgart, Germany.

In late January, DaimlerChrysler's global management board reviewed Project X in final preparation for submitting it to the company's supervisory board.

Extensive plans to collaborate

The most stunning piece of the plan, The News has learned, concerns the joint development of vehicle architectures and parts for future Chrysler and Mercedes models.

According to people familiar with the situation, Chrysler and Mercedes will collaborate on their next generation of small cars built in the U.S. and Germany. Also, work is under way on a common SUV architecture for the Mercedes M-Class and Chrysler's Jeep Grand Cherokee and Dodge Durango.

Sharing integral underbody parts - such as the basic chassis and suspension systems - would mark a milestone in the turbulent evolution of DaimlerChrysler, which was formed when Daimler-Benz AG bought Chrysler in 1998.

It's also the key to reducing costs and improving vehicle quality at Chrysler, which is still struggling nine years after its historic combination with Daimler.

"Either there needs to be much more true integration by Chrysler and Mercedes, or they need to separate the business," said John Casesa of the investment firm Casesa Shapiro Group. "Right now, Chrysler is in no man's land."

Besides developing vehicles together, Project X calls for Chrysler and Mercedes to expand purchasing of common parts like steering columns, and to source more components from low-wage nations in Asia.

The revitalization plan is the handiwork of three players: Zetsche, Chrysler Chief Executive Tom LaSorda and Mercedes-Benz Chief Operating Officer Rainer Schmückle.

Together, they have crafted a plan that breaks down internal corporate barriers that have existed since Daimler and Chrysler forged their trans-Atlantic merger.

"It makes sense to do this," said Jürgen Pieper, the chief auto analyst at Metzler Bank in Germany. "If they go forward together, they have to go closer together."

While Chrysler has used Mercedes parts before on models such as the Crossfire roadster and 300C sedan, Project X takes the cooperative approach to another level.

The two sides are working jointly on a small-car platform for products to be built at a Chrysler plant in Belvidere, Ill., and a Mercedes factory in Ratstatt, Germany, said people close to the project.

Sharing courts controversy

Company and industry insiders also say that one platform - code-named W164 - will be used as the underpinning for both the next M-Class and future versions of the Grand Cherokee and Durango.

Sharing engineering and other costs on a new platform should be a win-win situation for Chrysler and Mercedes, said Erich Merkle, an analyst with the market research firm IRN Inc. in Grand Rapids.

"We're anticipating that they will be using one platform and it will be a derivative of the W164 Mercedes platform," he said. "You're using (platforms) for multiple vehicles and that's the whole name of the game."

But bringing Chrysler and Mercedes closer is sure to court some controversy.

Various Mercedes executives have argued over the years that the brand's reputation could be damaged by sharing structural parts with less expensive Chrysler, Jeep and Dodge models.

And after Chrysler's financial results nosedived last year, German shareholders publicly complained the American unit's troubles were jeopardizing the entire company.

Pieper said some German investors continue to harbor a "fantasy" that Zetsche will announce a decision to dump Chrysler on Feb. 14.

"The reaction (to keeping Chrysler) by some investors may be negative because the fantasy has gone too far," he said.

Still, Pieper said the restructuring plan is viewed as a make-or-break proposition for Chrysler.

"This is kind of the last chance," he said. "The shareholders will give them one or two years and if they don't make certain benchmarks, they will sell their" stock.

Surprising plans under way

After suffering through a bruising year in 2006, confidence is building in Chrysler's executive suite that the worst is over.

LaSorda, under fire as CEO after Chrysler's unexpected $1.5 billion third-quarter loss, exemplifies the optimism underlying the restructuring plan.

He shared his enthusiasm with a Wall Street investment adviser at a meeting last fall, when Project X was just beginning to take shape.

"We're going to do a lot more integration, and some of it's going to shock you," LaSorda told the adviser, who asked not to be identified. "You'll be surprised at the things we'll do."

The dramatic changes laid out in Project X had their genesis last summer. At the time, Chrysler appeared to be, by far, the healthiest of Detroit's Big Three automakers.

While GM and Ford grappled with mounting losses, falling market shares and gross overcapacity, Chrysler seemed, by comparison, to be cruising in the fast lane.

But the illusion was shattered when rising gasoline prices drove consumers away from Chrysler's truck-heavy lineup. Stalwart models such as the Grand Cherokee and Ram pickup piled up on dealer lots as Chrysler failed to cut production to match the shrinking demand.

When Chrysler kept forcing unwanted inventory on dealers, they revolted. Tensions ran high, with some dealers making personal appeals to Zetsche to fire Joe Eberhardt, Chrysler's brash sales and marketing chief.

Eberhardt would eventually resign under pressure, but the problems with Chrysler's product portfolio ran deeper than inventory issues.

Besides the runaway success of the stylish 300C sedan, Chrysler had turned out few true hits since Daimler acquired it.

U.S. sales volumes fell from 2.5 million vehicles in 1998 to 2.1 million in 2006, and shifts in the market caught Chrysler unprepared. The nine-year decline was most dramatic in passenger cars, where its sales plunged 32 percent.

Moreover, Chrysler's high-profit truck products had lost their allure. In 1998, Chrysler sold 229,000 Grand Cherokees; last year the total was 139,000. Over the same period, sales of the full-size Durango SUV dropped from 156,000 vehicles annually to 70,000.

"The company had been carried for years by trucks," Casesa said. "They had sporadic hits on the car side, but the car business is owned by the Japanese and the Koreans now."

Full evaluation carried out

The crisis galvanized management in Auburn Hills and Stuttgart. Zetsche, who was Chrysler CEO for five years before becoming DaimlerChrysler's chairman, ordered a top-to-bottom analysis of operations designated internally as Project X.

At Chrysler, a task force was divided into seven "modules" supervised by LaSorda and Chief Operating Officer Eric Ridenour. Mercedes dispatched a team led by Schmückle, a finance expert who had spearheaded restructurings at the luxury-car brand and the Freightliner heavy-truck division.

Consultants from McKinsey & Co. also hunkered down in Auburn Hills. The New York-based firm had already developed the so-called CORE ("Costs down, revenues up") program that slashed 9,300 jobs at Mercedes.

Publicly, Chrysler officials said the planned restructuring would not be as severe as a previous downsizing Zetsche headed that has slashed about 40,000 jobs since 2001. "We're just working on getting through the speed bump we face," said Chrysler spokesman Jason Vines.

But behind closed doors, fundamental issues were on the table.

"Chrysler really has to change the way they do business," Casesa said. "They cannot just tighten their belts and bring out a few new models and try to get through this."

The biggest hurdle to cross was the divide between Chrysler and Mercedes.

When Daimler bought Chrysler, the German side pledged to never violate the sanctity of Mercedes by mingling its basic parts with Chrysler, Jeep and Dodge models.

"That was one of their cardinal rules when they did the deal," said Dennis Pawley, Chrysler's former head of manufacturing. "But can a company really be merged when nothing is shared?"

At some point, the Project X discussions homed in on the delicate issue of sharing vehicle architectures. People close to the situation said it was Zetsche who encouraged the idea, paving the way for the initial collaborative efforts on small cars and SUVs.

The plan to develop the next generation Mercedes A-Class small car and future Chrysler cars was based on the economics of the segment.

"Dieter is basically saying, 'we don't make money on either of these, so let's work together to bring the costs down,' " said one person familiar with the project.

Even with shared architectures, Mercedes and Chrysler models will remain highly differentiated by their engines, styling and interiors. The brand identities of the Grand Cherokee and M-Class, for example, will be kept totally separate.

One analyst said there's little risk in sharing platforms if the overall designs and features remain distinct. "Most consumers don't care if the architecture is similar or the same," said Art Spinella of CNW Marketing Research.

The small cars and SUVs under development won't hit the road until at least 2010, but Project X is expected to pay more immediate dividends.

Suppliers, for example, have already been instructed to cut costs by developing parts that can be used across more platforms. Company insiders also say that an intensive effort has begun to buy more low-cost parts made in Asia.

And while there have been tense moments between Chrysler and Mercedes staffers, a spirit of cooperation seems to be emerging. "There's no pride of ownership," said one Chrysler staffer. "Whatever works, we'll do it."

Analysts caution that the announcement on Feb. 14 needs to include concrete goals and financial benchmarks for Chrysler.

"It's very important that Chrysler gives some milestones it plans to achieve in the next two years," said Pieper of Metzler Bank. "It is important that by 2008 they start earning certain (profit) margins."

The restructuring will also be judged by the extent of the cuts in jobs and production capacity. Sources said Chrysler expects to eliminate at least 10,000 U.S. factory jobs through buyouts and attrition, as well as an unidentified number of salaried jobs.

Project X entered its final stages in late January, when the DaimlerChrysler management board met in Auburn Hills to critique the plan.

After the meeting, LaSorda was to join other executives in Arizona to test-drive future vehicles, including an important new crossover model to replace the Chrysler Pacifica that will be built in Mexico.

But LaSorda canceled at the last minute. "I've got to stay here and finish" the plan, he told an associate.

The stakes could hardly be higher for LaSorda and his boss, Zetsche.

When asked about the restructuring at a media event in Las Vegas on Saturday, LaSorda conceded that Chrysler has had a rough ride in the past year. "There is a feeling that this (plan) is a chance to get it right," he said.

As the architect of Chrysler's previous restructuring, Zetsche rode its successes to the top job at DaimlerChrysler.

But with Chrysler in trouble again, Zetsche must prove the American icon can make a long-term, positive contribution to Germany's largest industrial corporation. In a recent interview, he acknowledged the pressure of fixing Chrysler for good. "Any management which runs a business and the business doesn't perform the way management set goals, of course feels pressure," he said.

The blueprint for Chrysler's comeback will be formally presented to the DaimlerChrysler supervisory board for approval on Feb. 13 in Auburn Hills. The following day, Pro ject X will be made public at the company's annual press conference on financial results - the first time the briefing has ever been held in the U.S.