Iacocca broke - Lee Iacocca, Chrysler Corp

National Review, Dec 3, 1990 by Tucker Goodrich

Goodrich, a former editorial assistant at NR, works for Lehman Brothers in New York.

AFTER Lee Iacocca became president and then chairman of Chrysler, he began advocating a specific set of national initiatives. He became so closely associated with protectionism, participating in conferences as well as lobbying the government, that he was often mentioned as a Democratic presidential candidate in 1984.

His rise to celebrity status began in the late Seventies, when Chrysler was in dire trouble. Years of neglecting product lines had resulted in a plummeting market share, dwindling profits, and the inevitability of bankruptcy. Iacocca, ex-president of Ford, was brought in to shore things up. Unable to get private banks to finance a turnaround, he went to President Carter and Congress in search of $1.2 billion in federal loan guarantees to keep the company alive. Congress agreed, and passed the Chrysler Loan Guarantee Act.

The bailout let Chrysler market the K car, which Iacocca touted as the ultimate American success story. The K car, and the numerous models derived from it (including the minivan) put Chrysler back into the black.

But the company still didn't have an edge on the competition. Chrysler cars weren't as well built as Japanese cars: less fuel efficient, less reliable, and more expensive both to buy and run.

Iacocca seemed to think Chrysler's problem was the absence of a national industrial policy. After all, Japan was kicking his tail (to use Iacocca's lingo), and it had such a policy. So, quitting his Republican free-market heritage, he became an ardent advocate of Democratic industrial planning and protectionism. Lobbying for relief, Iacocca and other American automakers got the Reagan Administration to convince the Japanese to adopt voluntary restraints" on imports-that is, do it voluntarily, or we'll force you. The quota system, the theory went, would let the American car companies get back on their feet." But Iacocca and his new colleages-Lane Kirkland, Robert Kuttner, Ted Kennedy, Robert Reich, and Lester Thurow-wanted more. They lobbied for energy policy that would raise the price of gas to encourage production of more energy-efficient cars, as in Japan, and restrictions limiting Japanese manufacturers to only 15 per cent of the American car market. Some of his cohorts wanted government subsidies and direct investment-pointing to NASA as an example. As a visible, popular, and seemingly successful industrialist, Iacocca became the poster child for protectionism.

As industrial planning goes, the Chrysler bailout was a success-in the short term. Chrysler began making huge profits and repaid its loan well before it was due. Of course, with a limited supply of Japanese cars during the Eighties boom, it should surprise no one that consumers returned to American brands, thereby boosting the domestic market. It was effectively a multi-billion-dollar subsidy.

Meanwhile, the Japanese, led by Honda, took a two-front approach to increasing profits while obeying the quota restrictions. First, they built plants in the United States to beat the import restrictions. Then they moved up-market: selling more expensive models allowed them to increase per-car profits. The quotas temporarily altered Japanese penetration of the market. Now, however, they freely renew the restraints; Tadashi Kume, president of Honda, notes in the New York Times: "As a practical matter [the quotas] make no difference, none at all." The market has returned to full competition.

Back to the Drawing Board?

PARTLY AS a result, Chrysler is stumbling. In fact, the picture resembles the late Seventies. Chrysler has $4.5 billion in cash, but profits, falling since 1982, were the worst ever in the last quarter of 1989, and marginal for the subsequent quarter (even with the $825-million sale of Gulfstream Aerospace). Chrysler expects an $800-million loss for 1990, and has $4 billion of debt due in 1991. One strains to imagine how it will afford its $15.3-billion capital plans. Worse still, most of the sales losses in a shrinking car market are being borne by the American and European marques, as most of the Japanese car companies have posted increases and jointly achieved a record 28 per cent of the market (from 12.8 per cent in 1978). Chrysler's position is weak: after growing slowly through the decade, its market share peaked at about 12.3 per cent of the market in 1989, but is 9 per cent, and falling, today; that's vs. 11.4 per cent in 1979.

Moreover, the standard by which one judges the future well-being of an automaker-models under development-doesn't indicate health. For the short term, the tactic Iacocca once used successfully for the Ford Mustang will continue: rebody old chassises and engines, call them new models, and hope no one notices. Problem is, Chrysler has been doing that, and the customers have noticed. It has dropped 22 models with no replacements-all existing models are based on the ten-year-old K car. Honda, on the other hand, usually offers completely new models, and rarely relies on cost-saving platforms. Honda is the best in the industry in this regard, offering completely new cars every three or four years, with the other Japanese manufacturers right behind. Chrysler's new platform, the L/H, isn't due until at least 1992. That's thirteen years after the introduction of the K car, which is now seriously outdated.