Iacocca: "Daimler Screwed Chrysler"

The ex-Chrysler chief talks about his reaction to the buyout and explains how Cerberus could rise to the occasion

by Lee Iacocca

My phone started ringing off the hook the day Daimler's (DCX) deal to sell Chrysler to Cerberus was announced. The reactions were mixed. Some people thought it was a hell of a deal. Others thought it was a deal from hell. More than one person mentioned that Cerberus was named after the three-headed monster in Greek mythology that guards the gates of Hades. Mostly, though, the people I talked to wanted it to work because they cared about Chrysler and about the future of the American auto industry.

There's one thing everyone agrees on: Daimler screwed Chrysler royally. To understand how the desperation sale to Cerberus Capital Management could possibly happen to one of America's iconic car companies, you have to look at the history. Chrysler's merger with Daimler-Benz nine years ago was a disaster from the start. At the time, Chrysler was making a lot of money—something like $1 billion every quarter. The minivan was a cash cow. The Jeep Grand Cherokee and Dodge Ram pickup were selling like crazy. There were 4,000 profitable dealers, a brand-new $1.5 billion research center, and $12 billion in cash. Chrysler was the lowest-cost producer and the most profitable car company in the world, with sales of 2.5 million cars and light trucks. But it took Daimler less than a decade to drive Chrysler off a cliff.

Now the question is: Has the sale to Cerberus rescued Chrysler or doomed it to the junkyard? The answer won't be known for some time. But Chrysler's fate will ultimately depend on the kind of hands-on leadership Cerberus brings to the table. Let's look at the pros and cons.

The biggest fear that people have about private equity firms like Cerberus is that their basic goal is to "strip and flip." That is, buy ailing companies on the cheap; "restructure" them by slashing costs, jobs, and benefits; then resell them for a big profit. Cerberus' track record, however, is pretty good in this respect. It would be naive to think that cost-cutting and even downsizing are not necessary when a company is struggling. I had to do that myself when we turned Chrysler around in the early Eighties. But let's be real. The problem that is crippling our big manufacturing companies like Chrysler is not inefficiency. It's legacy costs. Chrysler's health-care and pension burden amounts to about $1,500 per car.

A lot of people were surprised when United Auto Workers President Ron Gettelfinger endorsed the deal. With new contract negotiations set to begin this summer, many workers fear they'll be forced to make huge concessions. But that fear existed before the sale. If Cerberus is serious about reviving Chrysler, it will have to take care of the employees who build the cars and the dealers who sell and service them.

In the end, it will all come down to leadership. This is the first time in history that a company outside the auto industry will own a major automaker. But in my opinion, the best leadership is still on the inside at Chrysler. Cerberus should give CEO Tom LaSorda the independence and flexibility he needs to show his stuff. He didn't have that with Daimler, so the new arrangement offers an opportunity for him. LaSorda is a smart guy, and the workers respect him. As a former factory boss and the son and grandson of labor leaders, LaSorda understands the nuts and bolts of the car business. His strengths combined with Cerberus' capital could be the formula for success.

In my new book, Where Have All the Leaders Gone? (Scribner), I talk about the shared sacrifice and commitment we had when we revived Chrysler in the early Eighties. That's got to happen now.

But turning Chrysler and the rest of the auto industry around requires more than one company getting it right. Leadership in the car industry means knowing where corporate policy ends and public policy begins. You see, companies are not separate entities from government. Everyone has a part to play in the recovery of our manufacturing sector. Leaders in business, labor, and government must make a joint commitment to resurrect our great industries. Wouldn't it be something if we could say that the best days of the U.S. auto industry were still ahead of us ?

There's one thing everyone agrees on: Daimler screwed Chrysler royally. To understand how the desperation sale to Cerberus Capital Management could possibly happen to one of America's iconic car companies, you have to look at the history. Chrysler's merger with Daimler-Benz nine years ago was a disaster from the start. At the time, Chrysler was making a lot of money—something like $1 billion every quarter. The minivan was a cash cow. The Jeep Grand Cherokee and Dodge Ram pickup were selling like crazy. There were 4,000 profitable dealers, a brand-new $1.5 billion research center, and $12 billion in cash. Chrysler was the lowest-cost producer and the most profitable car company in the world, with sales of 2.5 million cars and light trucks. But it took Daimler less than a decade to drive Chrysler off a cliff.