Chrysler Shifts Gears

Pity the poor Chrysler execs at the Frankfurt Motor Show this month. They traveled to Germany to show off their steroidal new 300C Hemi luxury sedan and wagon. But the press wanted to talk only about Chrysler's fall from the Big Three after being overtaken by Toyota in August. With microphones shoved in their faces, the Chrysler brass tried to beat back rumors of layoffs, salary cuts and even speculation about the company's demise. "Nobody ever claimed this would be an easy road," a weary Chrysler CEO Dieter Zetsche told NEWSWEEK during a brief break from the frenzy. At that very moment, back stateside, Toyota execs basked in a two-day lovefest with their dealers at a convention center in Philadelphia. Former president George H.W. Bush was on hand to congratulate them. Ruben and Clay, the "American Idol" duo, serenaded the crowd, too. And for the grand finale, Elton John gave a private concert of his greatest hits. A crowd favorite: "Don't Let the Sun Go Down on Me."

Toyota's relentless rise is leading to a historic changing of the guard in Motown. Analysts say Toyota will inevitably displace Chrysler from the Big Three permanently (though Chrysler is likely to hold on to the No. 3 slot for this year). And it could get worse. Chrysler "might fall to No. 5 or No. 6 or nothing," says veteran industry watcher Maryann Keller. Chrysler's share of the U.S. auto market is in free fall, slipping to 11.7 percent in August, its lowest in 16 years and down from a peak of 18 percent in January 1999. Buyers are paying almost full price for high-quality Toyotas, while Chrysler desperately revs up the discounts. The problem: those big rebates are vaporizing profits. The automaker lost $1.1 billion in the second quarter--a stunning turn of events for a company that had promised a $2 billion profit in 2003. Now Zetsche is backpedaling on a pledge to boost Chrysler's annual sales by 1 million cars by 2010. "That's more of an aspirational target than a target to be accomplished to the last digit," he told NEWSWEEK.

The car company that has made an art of the near-death experience is once again trying to reinvent itself to survive. Zetsche, a former Mercedes exec, believes he can pull Chrysler out of its skid by transforming the pedestrian people-hauler into an upscale car line. He is re-engineering Chrysler by borrowing some Mercedes magic (and Benz bits) from its German parent company, DaimlerChrysler. Many of the 10 new Dodge, Jeep and Chrysler models rolling out by the end of next year will benefit from Mercedes engineering. But it's the Chrysler line that will get the most Benzed. Its racy new $35,000 sports car, the Crossfire, is basically a Mercedes SLK under the skin. (Crossfire ad slogan: "Dreamed in America. Crafted in Germany.") And the 300C Hemi, debuting for as much as $40,000 next spring, will be propelled by a Mercedes rear-wheel-drive transmission. By turning Chrysler into Mercedes-lite, Zetsche hopes he can raise prices and pull out of the corrosive price war, as well as leave behind the sales race with Toyota. "It's the only remedy that exists," he says. "Being the biggest doesn't necessarily mean being the best or the most profitable."

But to some, putting Mercedes parts and prices on Chrysler cars is a one-way street to oblivion. "After decades of training consumers that Chryslers are common-man cars, you can't convince them they are worth premium prices," says auto consultant Jim Bulin. "People will say, 'For that kind of money I can buy more prestige in another brand'." And now some of Chrysler's critics see an uncertain future for the automaker. European analysts are predicting that Daimler will cut Chrysler loose after chairman Jurgen Schrempp, the architect of the acquisition, retires in 2005. A new book entitled "The End of Detroit," by New York Times auto writer Micheline Maynard, also paints a dead-end scenario for Chrysler or Ford. Even the dean of the Yale School of Management, Jeffrey Garten, has weighed in, predicting bankruptcy or a bailout for one of Detroit's Big Three. (But don't expect a Lee Iacocca-style rescue for Chrysler this time: U.S. taxpayers aren't likely to bail out a German company.)

Chrysler hoped to quiet the doomsayers with its new Pacifica sport wagon, which it hyped as the greatest thing since the minivan. Instead, the Pacifica became the "Gigli" of the car business. It sputtered from the start with moody Celine Dion ads, which showed little of the car, but plenty of the singer in an anguished rendition of "Drive All Night." "One person asked, 'Why is that woman so depressed?' " says Chrysler dealer Bob Shuman. Chrysler was so confident in its upmarket strategy that it initially shipped dealers only fully loaded $40,000 Pacificas, with fancy navigation systems and DVD players. Car buyers accustomed to spending no more than $25,000 in a Chrysler showroom headed for the exits. "I was just stunned," says Kirstie Hague, who refused to even sit in one after she saw the sticker at a St. Louis dealer. "I was very attracted by the looks of that car, but it was a short-lived love affair." To critics, the Pacifica debacle proves Chrysler is suffering from delusions of grandeur. "To go where you've never gone before," says Ford exec Steve Lyons, "is not a winning hand." Chrysler is now boosting Pacifica sales with a $1,000 rebate, and it's rushing out a stripped-down model priced below $30,000. Dion also disappeared from the ads (right around the time Chrysler's marketing chief resigned). Still, the Pacifica isn't hitting its sales target. Chrysler marketing exec Tom Marinelli says: "It's very difficult to move the iron and the brand image at the same time."

It's even more difficult for Chrysler to overcome its history of inferior quality. When deep-pocketed Daimler-Benz acquired Chrysler in 1998, the German engineers promised to fix those nagging quality problems. And they are making headway. Chrysler's quality outranked even Mercedes's in the latest J.D. Power survey on long-term dependability. But Chrysler is still miles behind Toyota, which keeps raising the bar. And of course, the premium car buyers Chrysler covets have even more demanding tastes. "Clearly, this is an obstacle we have to overcome," Zetsche admits, pledging that Chrysler will match Toyota's quality by 2007. Car buyers like Bill Barnes won't wait that long. Chrysler lost him when the transmission blew on his Dodge Caravan at 39,000 miles. "I just don't have confidence in Chrysler anymore," says the Florida salesman, who just bought a $29,000 Toyota Sienna minivan. Zetsche may want to repair relations with his minivan owners before he courts the uptown crowd. Otherwise, overcoming history may be the least of Chrysler's problems. It might be history.

Chrysler Shifts Gears | News