It’s been nearly thirty years since Chrysler received its last government bailout in 1979 and Lee Iacocca engineered a comeback for the third-player in Detroit’s “Big Three”, but it appears we’re back at the point where investors and citizens have to decide whether to fish or cut bait once again. Hammered by high oil prices, hurt by the credit crunch and crippled by marginal quality, Chrysler is well on it’s way to the junkyard, not only if the federal government fails to act, but also if the company’s leadership fails to make fundamental changes to the way Chrysler does business. Never afraid to jump into the foray, here are the key changes I recommend that Chrysler make to survive and even thrive.
1. Stop building engines. It’s paragraph two, but I think I’ve already caused some heart attacks, so I’ll repeat – in all but specialized products, Chrysler should stop building engines and outsource their design and manufacture to competent suppliers. Give the vendors the product requirements (minimum horsepower, minimum fuel economy, quality/reliability, and needed interface points, such as the transmission coupling), give them a deadline and let them build. A few engines, such as the Viper V10, may need to be kept in-house, but otherwise, engine development should be outsourced and the engine-manufacturer portion of the business spun-off.
There are a few reasons why: (1) Chrysler isn’t known for building great engines, so it’s not like brand value is being lost by making the move. Sure, they’re engines are good, but I don’t think I’ve ever heard anyone say, “Boy, that Chrysler/Dodge/Plymouth engine ran forever…” (2) The cost of building and designing engines is very high and capital intensive, so both design and manufacturing costs can be lowered by moving this over to another business that already does this well. (3) There’s a great deal of uncertainty about which power plants will move autos in the next few decades, whether it be hybrid or electric or fuel cell, and this transfers the “bet” on technologies to companies that can better manage the risk, and (4) There will be more choices for consumers, who can choose the smaller, lighter Mitsubishi engine with their Chrysler or the higher-revving, more powerful Saab. Sure, not all auto manufacturers will build engines for Chrysler, but enough will jump in to make for better engines at lower cost.
2. Share platforms. Like chassis, platforms are the foundation for cars used to build the overall vehicle. Platforms are extremely expensive to design and develop, so auto manufacturers often develop a platform for use in multiple car models over multiple years, up to a decade. For example, both the Chrysler Sebring and Dodge Avenger are built on the Chrysler JS platform, so are similar, but not identical cars.
Similar to the move away from building engines, Chrysler should share the design & development of some platforms with competing carmakers (like GM) in those areas where competition is more about styling, such as the basic sedan. Just like engine manufacturing, platform design and development is extremely costly, so sharing these costs across multiple businesses makes sense. This also neutralizes a competitive disadvantage caused by Chrysler’s lower production volumes – the need to produce cars on a dying platform for more years than competitors, making their products less innovative and less appealing. It also enables Chrysler to shift its focus to the areas where it really belongs – quality, brand and the distribution chain.
3. Emphasize quality, not quantity. I make these statements without any inside information, so try not to read too much into this: Quality and the perception of quality have not taken hold at Chrysler as it has at other automakers during the past three decades, indicating that the processes necessary to prevent defects before they occur, the mechanisms to reward quality over quantity during production, and the emphasis on automation wherever are possible are not in place at Chrysler to the degree necessary. One need only look at JD Power & Associates Brand Rankings for initial quality at http://www.jdpower.com/autos/ratings/quality-ratings-by-brand/sortcolumn-1/ascending/page-#page-anchor, which show all three Chrysler brands in the lower third of the auto industry. If Chrysler as a business is going to survive into the third decade of this century, this must improve.
4. Focus on the brand(s). Currently, the Chrysler group has three brands – Chrysler, Dodge and Jeep – having eliminated the Plymouth brand earlier in the decade. Though this is subjective, the Jeep brand has the strongest identity and highest brand equity; Chrysler is second, while Dodge is struggling to shed the “Detroit rust-belt automaker” image it garnered in the 1970’s and 80’s. As Madison Avenue knows, selling products is more about image and perception than about fact, so Chrysler needs to changes it’s brands by:
(a) Re-establishing a brand ladder like the one it had in the past. A new brand is needed for the entry-level buyer to replace the old Plymouth nameplate. Modeled after Toyota’s Scion, this brand should build smaller, lower-cost cars that continually update styling based on recent trends.
(b) Ditch Dodge. Though a well-known brand, Dodge needs to be replaced with a more positive brand name in the middle-market, or at least overhauled. Currently, the brand is far too muddled by the presence of sports cars, minivans, mid-market sedans and burly trucks all side-by-side in the same dealership with the same nameplate. Dodge could transitioned into a boutique sports car brand, retaining the Viper and Charger, then adding a convertible and a coupe to the brand to cement the “fast and furious” image. Dodge trucks should be moved under the Jeep brand, where durability and reliability are already well established, while the Caravan and sedans should be moved to the new brand.
(c) Chrysler can remain at the top-end of the market, but some significant effort and marketing dollars will need to be spent to re-establish Chrysler as a luxury brand. Right now, the top end of the market is very crowded and very competitive, given the presence of Lexus, Infiniti, Acura, BMW and Mercedes to join domestics Lincoln and Cadillac. The best move may be to shutter the brand until a concerted effort can be made to re-enter the luxury market.
(d) Letting style drive design. Product development should start in places like Madison Avenue, the Wilshire District, and ?????? not just end there. And, while, Chrysler has had some innovative product designs in the past two decades, few people put individual Chrysler products at or near the top of their categories for styling. Plus, with most engine and some platform design moved out-of-house, certain constraints on the product design will push style to the forefront.
5. Dump the dealerships, not the dealers. There’s something about a dealership that is enormously wasteful. It’s the size, the space, the number of employees and the sheer number of cars sitting idle for months waiting to be purchased. Sure, in the good times, inventory turnover is sufficient to justify having 30 different vehicles of the same model at once sitting on a lot, but in the bad times, it’s downright debilitating.
Chrysler still needs dealers to sell its cars and it still needs repair centers to repair them, but it certainly doesn’t need the enormous dealer network it has to effectively sell automobiles. The first step is to pare the number of dealers by 1/3 and convert another 1/3 into authorized repair centers that retain the profit-rich repair business while dumping the profit-poor sales side of the house. The remaining third become repair, distribution and sales centers for those buyers who can’t adjust to the new distribution model I’ll describe next.
6. Build to spec. It’s not a new concept in the car business, but the last time it was attempted, it was successful. Some of us remember how successful Saturn was with this model, which dramatically reduced inventory costs while personalizing each vehicle. A customer drives one of a few demo models, goes back to the showroom, then chooses the features on their car from the ground up – heated seats, fog lights, faux chrome. If they need a car right there and then, they drive off with a dealer loaner that’s standard-equipped, but they return in three-four weeks to pick up the car that fits them perfectly. One can only wonder why GM insisted upon “absorbing” Saturn into it’s primary business, killing all of the wonderful innovations Saturn brought to the market, but I suppose that’s an entirely different subject for a blog.
7. Sell cars at shopping malls. This may be my most radical idea since the recommendation that Chrysler stop building engines, but let’s see if I can convince you, nonetheless, that the mall can be a better place to sell cars. Every weekend, our nation’s largest shopping malls represent one of the highest areas of foot traffic in their local area, and those with auto sales experience know that foot traffic matters. Certainly, these people did not come to the mall to buy a car, but have you ever stopped in the center of a mall to look at one of the three or four cars parked there by a local dealership? If a new car model showed up at the mall and you had a chance to drive it while you were there, wouldn’t you give it a try? Months later, when you actually needed a car, would you insist upon going to a dealership, or would a stop by a small retail center at the mall suffice? This is just a hunch, but you’re probably more open to buying a car at the shopping mall than you think.
Let’s describe the “shopping mall” model, then. Chrysler signs contracts with regional mall operators, such as Westfield’s, which allow them to display three to four vehicles in the center of the mall. Chrysler then assigns a dealer from its current pool to run their mall center, and the dealer places a sales person at each of the four cars. The sales person invites people to sit in the car, shows them the latest features, and if appropriate, takes them on a test drive of a similar car parked out in the mall’s parking lot. If the person likes the car and is ready to buy, they work with the sales person at a kiosk to build their car from the ground up (see build to spec), answering a few financial and credit-related questions and making a down-payment electronically. At that point, the buyer can leave with one of three or four standard-issue models in the shopping mall lot to drive until their new car arrives at their home, paying a week-to-week lease in the process. Or, the buyer can wait for their custom car to arrive before starting payments. Trade-ins are either accepted at the mall or handled by a third party wholesaler who works in conjunction with the dealer. Either way, a shopping mall dealer should only need fifteen or twenty cars at the mall, instead of the hundred-plus needed at a typical dealership. Supply is replenished on a weekly basis by the regional service, repair and distribution centers.
8. Strengthen the core. Well-structured, modern U.S. businesses have learned that the best way to maintain business stability, accommodate rapid growth and hedge against potential downturn is a core-contractor staffing model. In most of these businesses, the core represents 1/3 to 1/2 of all workers – those who have specialized skills, difficult-to-find expertise, and long-term organizational knowledge to grow the business across decades. The remaining 1/2 to 2/3 of workers, though certainly important, work in jobs that are either redundant or do not require specialized knowledge. These can be outsourced, contracted or trimmed if economic conditions require it, allowing the company to remain agile in a competitive market. Chrysler needs to adopt the same approach with it’s staffing, making a strong commitment to 1/3 of its union staff, investing in their success with continued training and opportunities at advancement in to leadership and management. In exchange for commitment to the first third, the union agrees that the second 1/3 of staff are union temps who pay union dues, can be laid off quickly and can also move in to the first third if turnover allows. The final third is 100% contractor – either on-site or off-site – and is officially employed by another company free to adopt its own staffing model.
Though to some, the core-contractor staffing model seems like a major concession on the part of unions, this change is necessary if Chrysler and its union worker system are to survive into the next decade. It will also strengthen the bond between union and management, as the ability to honor the commitment and work together long term increases.
9. Make the workers own. This concept is far less radical than some of my previous ones, but it’s equally important. Every member of Chrysler’s core work force – union and management – needs to benefit from the success of the business via slowly-vested stock ownership. It’s important that union members, as well as management, consider the question, “If we don’t make this change, what will my stock be worth?” while building it’s value through hard work and innovation. The ownership percentage needs to be sizable – not ten or twenty shares per worker amounting to a couple hundred dollars, but thousands of shares worth tens-of-thousands of dollars for the most-tenured rank-and-file. In my humble opinion, this is the best way to encourage the rank-and-file to think holistically about the success of Chrysler from decade-to-decade and not solely about their compensation from month-to-month. We’ll address management, next.
10. Make the leaders work. In my limited experience in the manufacturing industry, I was surprised to find out how little the desk-jockeys in many manufacturing businesses actually know about the work being done on the plant floor. Many have never even visited the assembly line, much less spent time working on the line before moving in to a support role or management. This lack of experience fosters a lack of understanding about the work and a lack of empathy about the people who make the products.
To ensure that this does not happen at Chrysler, the company’s leadership and support staff should be required to visit the assembly facility at least once per month and actually perform work on the line wherever possible, observing in many cases and helping in others. One area where leaders could work and be relatively innocuous is quality assurance. Certainly, leadership should not to replace the current QA staff, but instead would add a second set of eyes who review the QA checklists, see actual product quality with their own eyes, and learn about what people look for when they determine the quality of a product. There are also other areas where the leaders can work productively and safely, but I’ll leave that to tacticians to determine.
After reading this far, you’ve probably come to the conclusion that the ten steps I’ve outlined are not over-night cures of the organization, They are long term strategic moves to build a successful business; hey will take years to implement, so there are quick fixes ahead. But, this is the fundamental way that Chrysler’s leadership and investors should think about the company. Forget about whether this quarters profits are 2% higher than last quarters or 5% higher than estimates; concentrate on whether Chrysler has a business model that can thrive in 2010, 2020, 2030 and beyond, because this will yield the biggest gains to share-holders and to society.