The Third Strike

First GM and Ford—now Chrysler’s going down the tubes, too.

With all the drama surrounding Ford and General Motors in recent years—criticism from shareholder activists, executive changes, and credit downgrades—the third member of the (less and less) Big Three U.S. automakers has generally cruised along under the radar. Acquired by German automaker Daimler in 1998, Chrysler has generally been regarded as better run and less affected by the labor, competitive, and macroeconomic problems bedeviling Ford and GM.

As Ford and GM struggled with excessive reliance on SUVs and gas guzzlers, Chrysler had a bona fide hit with the Chrysler 300. As Ford and GM engaged in hostile talks with unions about huge job cuts, Daimler this summer added UAW chief Ron Gettelfinger to its supervisory board. As GM and Ford racked up huge losses, Chrysler scored 12 straight profitable quarters. In the first two quarters of this year, Chrysler notched operating profits in North America of more than $200 million. And as GM and Ford lost ground to Toyota and Honda, Chrysler, with its impressive sales figures, actually gained market share in the United States in 2005.

And then suddenly—disaster. In July, the company warned that Chrysler would lose up to $600 million in the third quarter. Last Friday, Daimler was forced to revise that figure sharply downward to a $1.5 billion operating loss. Yesterday, DaimlerChrysler CEO Dieter Zetsche, who headed Chrysler from 2000 through 2005, told analysts Chrysler would slash production sharply in the third and fourth quarters, causing it to lose market share.

Until this news, Chrysler had been viewed as a successful effort to fuse the best practices of German and American carmaking—German engineering and American salesmanship, German cooperative labor relationships and American incentives like profit-sharing, German high-performance sedans and American highway boats. No more. By its own admission, Chrysler is stumbling over the same blocks that have tripped up GM and Ford: “excess inventory, non-competitive legacy costs for employees and retirees, continuing high fuel prices, and a stronger shift in demand toward smaller vehicles.” And so the old narrative—that Chrysler was saved from the sad fate of its rivals by being tethered to the more worldly Daimler—has given way to a new one. Chrysler’s German management and owners have fallen prey to bad American practices in at least three significant ways.

First, perhaps even more than GM and Ford, Chrysler relied too much on big, gas-guzzling cars in an environment of rising gas prices. The Financial Times notes that “pick-ups and SUVs make up about 70 percent of Chrysler’s sales—a heavier exposure than GM and Ford to these segments.” While Chrysler’s parent company is taking steps to introduce the tiny, gas-sipping Smart car in the United States, Chrysler doesn’t have any compelling offerings in the growing market for fuel-efficient vehicles: no hybrids or sub-compacts. Chrysler’s big introduction for this year was another big car, the Jeep Commander, which is languishing on dealer lots along with other Chrysler vehicles.

Second, Chrysler’s German overlords seem to have succumbed to the American disease of excessive optimism. German business leaders are well-known for their dour outlooks; they think things are going poorly even when they’re going well. But Chrysler believed things were going well this summer even when they were going poorly. Why did the company need to engage in the credibility-dashing exercising of slashing earnings estimates twice in six weeks? It was hoping for a big turnaround in the summer. As Zetsche put it today: “There’s no way around it but to say that we were too optimistic.”

Third, Zetsche, who was based in the United States from 2000 to 2005, has gone native by participating gleefully in the only-in-America conflation of the CEO and the brand. This summer, on the heels of a $100 million advertising campaign, Zetsche morphed from a relatively anonymous but highly successful manager into “Dr. Z,” a whimsical, funny, entertaining pitchman par excellence. In television advertisements, Zetsche could be seen chatting with drivers about the merits of DaimlerChrysler’s engineering and the relative fuel efficiency of the company’s cars.

Now, it makes sense for companies to put their CEOs front and center when there’s already a clear identification between the name of the pitchman and the company: Think William Clay Ford Jr. and Ford, or Augustus Busch IV and Budweiser, or Frank Perdue and Perdue Chicken. Or when the CEO is an entrepreneurial founder who really does personify the brands, like Virgin’s Richard Branson or Dave Thomas of Wendy’s. But it’s rare for even the most successful manager to become a star of television advertisements. Even at the height of his popularity, I can’t recall Jack Welch appearing in television ads for General Electric. And the tactic generally isn’t used much in Europe, where CEOs aren’t celebrities the way they are in the United States. Yes, Chrysler once used CEO Lee Iacocca in low-concept advertisements, and to great effect. But no viewer doubted that the earnest Iacocca was the real CEO of Chrysler. Zetsche, with his round spectacles, twirly moustache, and German accent, certainly doesn’t look, sound, or act like the CEO of an American car company. In one ad, he headed a soccer ball! (Jalopnik shows and comments on some of the ads.) As the Wall Street Journal noted: “The ads left some consumers confused and thinking that Dr. Z was a fictitious character.” Remember Chevrolet’s lineup of baseball, hot dogs, apple pie, and Chevrolet? Dr. Z presented soccer, wurst, apfel strudel, and Chrysler.

The ad campaign neatly encapsulates the strange amalgam of German and American influences that now dictates Chrysler’s future. Is it any wonder Chrysler’s business model is kaput?