Chrysler’s Private Depression (Fortune, 1958)

January 5, 2014, 6:00 PM UTC

Editor’s note: Every Sunday Fortune publishes a favorite story from its magazine archives. This week, we take a look at a 1958 story about the struggles of Chrysler. Italian car company Fiat gained full control of Chrysler earlier this week, acquiring the remaining 41.5% stake in the company in a $4.35 billion deal with the United Automobile Workers retiree health care trust.

It was logical to assume that Chrysler would be down with the rest of the auto industry. But after its fine showing last year, who would have expected the company to experience the worst quarter in its history?

By William B. Harris

virgil-exner-designchief3 Chrysler’s forward look is the work of Virgil Exner, vice president in charge of design.

It was a fine spring day in 1957, and Francis W. Misch, Chrysler’s vice president in charge of finance, felt very chipper talking to the investment analysts gathered at Chicago’s Midland Hotel. He had a fine story to tell about his corporation- a story that had only a limited number of the hedges that come naturally to financial vice presidents. “Two weeks ago,” he said, “we announced first-quarter earnings of $46,546,000, equivalent to $5.34 a share. In terms of numbers of dollars these were the best earnings achieved in any first quarter in the company’s history, and they are a pretty clear sign that we are headed in the right direction.”

Today, if Misch were asked to discuss Chrysler before an investment group, he would have to disclose that his company in the space of a few months had suddenly found itself heading in a very disagreeable direction. The first quarter of 1958 was the worst quarter in Chrysler’s thirty-three-year history. Losses were $1.74 a share, and the company slashed its dividend from $3 to $1. Only 185,888 Chrysler-make cars and trucks had been sold to dealers, compared to nearly 421,000 in the first quarter last year. (This was a decline of 56 per cent. Ford sales meanwhile had dropped 36 per cent, General Motors 17 per cent, but both reported first-quarter profits.) What was worse, there were few indications that Chrysler would be able to recover much lost ground, if any, by the end of the year.

What happened to Chrysler? One thing that happened, of course, was the 1958 recession, which is making this the worst automobile year since 1946. At the present rate of deliveries, the industry will sell only about four million cars to dealers, about two million fewer units than last year. If the 1959 models, introduced around September, give the industry a shot in the arm, then sales might rise to a little over 4,500,000. That may be the most to be hoped for. Experts on the auto market, looking at the 800,000 cars held in dealer inventory, say that it would take a miracle to sales to five million. But even if that miracle came to pass, Chrysler probably would not show breakeven figures at year’s end—a situation it has not experienced since 1932, the only year the company lost money. For the fact is that Chrysler, in the middle of a national recession, is caught in its own very special and private depression.

Colbert changes the style cycle

Chrysler’s special troubles first came to general notice in 1953, when the industry moved out of the easy sellers’ market of the early postwar years into the fiercely competitive buyers’ market following Korea. Chrysler turned out to be in sorry shape. Its cars had not followed the wider-longer-lower style trends in the industry, and it was the highest cost manufacturer of the Big Three. Low demand and high cost mean trouble in any industry, but worse trouble in the car business, where the costs of styling and of mass-production tools are prodigiously high. Moreover, lost car markets are extremely difficult to regain. It is hard to recover from even so much as a stumble in the car market. The history of Ford, after it lost second place in the industry to Chrysler in 1936, certainly points this up. It was 1950 before the new Ford management was able to regain Ford’s second position, and it was 1957 before Ford was back in full competition with Chevrolet.

In any case, the product itself, the high cost of making it, and an ingrown management organization (inherited from K. T. Keller, who was not able to change the corporation with the changing times) have been at the bottom of Chrysler’s troubles. The most persistent of these weaknesses has been organization, a deep-seated problem that came into view once more with the resignation of James Cope, vice president of corporate market planning, in late March, and became more obvious with the top-level shuffle announced in April. This reshuffle was largely worked out by Chrysler President Lester Lum Colbert and the management firm of McKinsey & Co. of New York.

In the years since 1953, Chrysler, under “Tex” Colbert, has tried earnestly, sometimes with dramatic effect, to be in style, and has even made considerable progress in reducing costs. Modernization of Chrysler’s automobiles was the first job Colbert tackled when he became chief executive officer in 1954. He gave the job of designing the new cars to Vice President Virgil Exner, whom Keller had hired in 1949 from Studebaker. Keller brought in Exner to head an advanced-design group, whose job it was to supply Chrysler engineering, the huge division that handles all of the corporation’s product engineering, styling, and research, with future design ideas. Styling ideas were to be produced on a crash program. A completely new product line was scheduled for production in 1955, and another major change was set for 1957. This was a radical departure from the industry’s normal style cycle: one major change every three years, and two “face liftings” in between. These giant steps were costly—more than $270 million in all for tooling. But Colbert had no other choice, for the public and even Chrysler’s own dealers in 1954 were singularly unenthusiastic about Chrysler cars. Chrysler’s share of the market had skidded from about 20 percent in 1953 to 13 percent. Colbert figured that if Exner could win back the public by 1957, the company could then go back to the industry’s normal three-year cycle, and he planned accordingly.

Exner’s “Forward Look” cars in 1955 made some impact. At least the competition had to revise the faint praise that they had used to damn Chrysler brands with: “Good, but old-fashioned.” Exner’s 1955 cars were lower, wider, and longer than Chrysler’s 1954 models. Banished was the old Chrysler slogan, “Bigger on the inside, smaller on the outside,” which had had little appeal for a public that wanted things bigger inside and out.

Sales up

Chrysler’s CEO L.L. (Tex) Colbert, has spearheaded the company’s attempt to win back its old position.

The Forward Look came to a climax in the 1957 line. The “Suddenly It’s 1960” theme of the corporation’s advertising was not picked out of thin air-these were the cars that Chrysler would have introduced in late 1959 as 1960 models, if it had not pushed its new-car offerings ahead. Exner’s 1957 cars, with sweeping lines and finlike fenders (which Cadillac introduced in 1948), were a bit lower, wider, and longer than any other new cars on the road. Lower, wider, and longer—and bigger all over—has been the trend of car design in Detroit (whatever the aesthetic or practical criticisms), and in this trend Chrysler is now well out in front.

Chrysler posted sales of about 1,300,000 passenger cars on Exner’s 1955 models. This pushed Chrysler’s share of the total market from 13 percent in 1954 up to 16.8 percent. The 1955 performance was confused somewhat by the credit binge the industry went on in that year—literally millions of cars were sold with practically no down payment on thirty-six-month deferred contracts. So it is hard to say whether buyers were more attracted by Exner’s new cars or by the new easy-credit contracts. But the record, made two years later by his 1957 line, left no doubt that his styling had the customers’ approval. Chrysler sold almost as many units last year, when total industry sales were six million, as it did in 1955 when the industry chalked up nearly eight million units. And Chrysler again increased its share of the market—to 19.5 percent.

It has to be new

This was an improvement all right; but the company still had not fully recovered its historical 20-plus percent of the market. And perhaps more significant was the discouraging record the company had made in 1956, the in-between year when Chrysler expected to get by with a not too costly face lifting. Sales in 1956 declined by almost 500,000 units from 1955, a drop of 36 per cent. Now Chrysler is again in an in-between year: the 1968’s are · just face-lifted, or warmed-over, 1957’s. This is certainly part of the explanation of Chrysler’s troubles. Ever since the late 1920’s, when style became such an important ingredient in demand, no face-lifted line has gone over so well as the original except during the late 1940’s when just about any car would sell.

Chrysler is not the only carmaker to feel this. Mercury’s silhouette, for example, is unchanged this year, and its sales in the first quarter were down 52 per cent from 1957. On the other hand, the new Chevy (really new this year) is doing well and is again ahead of Ford (just face-lifted). Detroit, which has always called all annual model changes “new,” has been hoist with its own petard. Buyers are hard to fool and want real newness as advertised-particularly at Detroit’s present prices. Chrysler sales executives claim that the 1959 models will be changed enough to differentiate them from this year’s crop. But as a matter of fact, Chrysler is now back to the three-year style cycle, and in early December company executives said publicly that the basic tooling that produced the 1957 Forward Look would remain about the same for the 1959 models.

For all of Exner’s boldness, Chrysler needed more than new styling to get back into a healthy state. In 1955 sales mounted to $3.5 billion, a record at the time. Profits after taxes mounted to $100 million (the third-highest net in the company’s history), which came to $11.49 per share. But Chrysler’s profit ratio in that good year was a skimpy 2.9 percent, less than half of Ford’s ratio and far under G.M.’s 9.5 percent. In 1956 the face-lifted models produced $2.7 billion in sales, but less than $20 million in profits, or only $2.29 per share. And the profit ratio was less than 1 per cent. Last year’s record $3.6 billion volume again pushed up profits. They rose to almost $120 million, or $13.75 per share. Chrysler’s profit ratio on this record gross was 3.4 per cent; the ratio might have been over 4 per cent if Chrysler’s sales had not deteriorated in the fourth quarter. Though nothing to shout about, this profit ratio was encouraging, for it appeared that Chrysler, against odds, had been making considerable progress against high costs, the second big problem Colbert faced when he took over in 1954. ·

Driving down the costs

The assault on costs was along three fronts. First, a program of building new low-cost plants and renovating old ones with new tools and processes was pushed as hard as possible. New assembly plants were put up in Newark (Delaware) and St. Louis. A large automatic-transmission plant was installed in Kokomo, Indiana. Old facilities in the Detroit plants were thoroughly modernized. Investment in new plant since World War II has been $1.3 billion, $936 million of which has been spent in the past five years.

The high cost of labor was the second point of attack. Basic wage rates, of course, could not be reduced, but Chrysler hoped to cut costs by raising work standards. Here progress has been slower. Poor work standards had been allowed to creep into the plants during the boom, because management at that time decided that it cost less to surrender to local union demands than to lose production through shutdowns. When times got bad for Chrysler in 1953, these concessions to labor proved a heavy burden. Both G.M. and Ford workers produced more work for the same pay.

Colbert went to see the U.A.W.’s Walter Reuther about this competitive disadvantage. Reuther was noncommittal. He said this was a problem to be ironed out with Chrysler’s locals. But getting local· leaders and shop stewards to agree to more work for the same pay has not been easy. The progress made has been at the expense of wildcat strikes, slowdowns, and outright sabotage.

Chief cost cutter at Chrysler is Rinehart Bright, group vice president.

Finally, in its effort to bring costs under control, Chrysler’s management turned its attention to its product engineering. It decided to go all out for interchangeability of parts in the 1957 models. Chrysler, with no one line like G.M.’s Chevrolet or Ford’s Ford-cars turned out by the million-desperately needed the kind of savings G.M. and Ford got from such mass production. Chrysler’s 1,183,000 passenger-car units in 1957 broke down into 110,000 DeSotos, 116,000 Chryslers (plus 37,000 Imperials), 280,000 Dodges, and 640,000 Plymouths. If these cars could be engineered so that a large number of the same parts could be used in all five lines, Chrysler could get itself into a much better cost position.

The program started with the chassis (leaving out the engine), for which the company’s engineers were able to design a remarkably high number of interchangeable parts. And on the chassis for each of the five Chrysler makes, the engineers put what for all practical purposes is the same body shell. This does not mean that body shells are identical. But enough of the basic major panels and parts are the same, from Plymouth through Imperial, for the company to effect major savings. All Chrysler-made station-wagon bodies are identical; trim and exterior sheet-metal styling make the only differences in the appearance of Dodge, DeSoto, Chrysler, and Plymouth station wagons.

Such ‘resourcefulness surprised Detroit, which had not expected anything quite that sharp from Colbert’s boys, and now even G.M. is starting to do the same thing with bodies for all its brands except Cadillac. Chrysler will continue to develop such interchangeability. Last year, in a move toward developing more interchangeability in engines, the company began putting all engine production into a central manufacturing division. Incidentally, in new engine plants in new locations the company can start with new work standards.

Is engineering worth “a bit more”

It is apparent, then, that Colbert was reasonably successful in attacking the tangible problems that had to be solved before the corporation had much chance of changing its direction. Far more important, and a great deal harder to lick, however, were those intangible problems that couldn’t be engineered, styled, or negotiated to solution. The building of a sales organization that can hold its own in any economic climate, and the building of a seasoned top-executive group, are not easy. And it is in these areas that results have been disappointingly slow.

The corporation’s weakness in selling is a physical and psychological one built into Chrysler by -its founder. Walter P. Chrysler was a great personal salesman who sold his company’s engineering innovations. Since the company’s beginning, Chrysler has racked up more important engineering firsts than G.M. or Ford cares to admit. The founder also set the pattern of marketing all Chrysler cars at prices a bit higher than the competition, because, he insisted, Chrysler engineering produced better cars. But in the last decade engineering has become harder and harder to sell. Although some cars ran better than others, all cars worked. Style became the sales keynote. What the great Walter Chrysler, who died in 1940, would have done to meet this shift in sales appeal is not known, but what his successors did was to keep on selling engineering. And they also continued to tell dealers, as the great “Walter P.” had done, that the corporation knew nothing about selling-that was the dealers’ job, and over the years the company felt the job had been well performed. Walter Chrysler did not believe in tight dealer control, and his field force never pressed for orders, never examined dealer operations critically.

Today Chrysler sales strategy certainly emphasizes styling first, but the tradition that Chrysler cars are better engineered, and therefore worth a few dollars more, dies hard. “Model for model, our cars are now completely competitive,” says William C. Newberg, now executive vice president in charge of operations. But half the Plymouth models, at least, are still a bit higher in price than their Chevrolet or Ford counterparts. Edgar C. Row, first vice president and Newberg’s boss, says, “The slightly higher price for Plymouth is due to the fact that we are still ·selling the plus in Plymouth and can command a higher price.” Row knows very well that any Plymouth “plus” actually can be matched by Ford or Chevy. But until he gets his production costs down, he is going on trying to get cash from any “plus” he thinks he can sell.

The Plymouth dilemma

The weakest link in Chrysler’s sales scheme, and even more difficult to change than the engineering sales psychology of the founder, has always been the fact that there was nobody specifically responsible for selling Plymouth, the corporation’s low-priced and largest-selling car. Plymouth

Has the largest dealer group of any car on the market, but the trouble is ‘they aren’t exclusively Plymouth dealers; they are the 8,400 Dodge, DeSoto, Chrysler, and Plymouth dealers. (Chevrolet has 7,500 dealers, Ford has 7,300, nearly all of them exclusive.) Plymouth was given to all the corporation’s dealers in 1930 by founder Chrysler, who reasoned that this low-priced make would help the dealers, and the Chrysler corporation, weather the depression. It may have helped, but the move is now considered to be about the only major mistake the great Walter P. ever made. The corporation, and Plymouth sales, have suffered from it ever since. As one DeSoto dealer puts it, “There are just too damn many dealers around with Plymouths to sell.” When times are good, the dealer tries to sell his franchised Chrysler, Dodge, or DeSoto first simply because there is more profit in such a sale. Only when times are bad and people are reluctant to buy does he push the less expensive Plymouth. But any suggestion that he give up his Plymouth line so that it can be turned over to someone else is met with cries of dismay, for without Plymouth sales and services the dealer fears that he could not meet his costs, let alone make a profit.

This argument has always discouraged the Chrysler management from setting up single-line Plymouth dealers. Management believes that if it did suddenly change its Plymouth distribution, the corporation’s whole dealer organization would be wrecked. Probably the one time in Chrysler’s history when Plymouth could have been separated, without hurting the dealers or the corporation, was from 1946 to 1950, when any car made could be sold. (Ford took its stepchildren, Mercury and Lincoln, away from its Ford dealers at that time and greatly improved the marketing of Mercury.) There probably won’t be another opportunity like that very soon. But the fact remains that Chrysler desperately needs to give Plymouth its own distribution system, regardless of how the dealers would feel.

It looked good on paper

Starting in 1954, Colbert moved to decentralize Chrysler management in order to encourage the kind of ·creativeness that comes from independent profit centers. He also had the problem of Plymouth sales in mind. His plans for a new Plymouth division looked good, on paper, and there were some great advantages to his reorganization. The principal one: division and department heads for the first time really knew to the last penny the extent of their contribution to the company in terms of sales, cost, and profit. But Colbert’s over-all decentralization didn’t work, principally because it didn’t extend to Plymouth at the dealer level. Plymouth was still the stepchild that nobody paid enough attention to. In early 1956 Colbert, discouraged by the progress of his program, called in Everett Smith, of McKinsey & Co., who had be~ studying some smaller management matters for Chrysler. He asked Smith for recommendations that might help solve the Plymouth problem. Among the first things Colbert and Smith decided was that they had better take back a good deal of the responsibility that had been delegated to the divisions in Colbert’s decentralization drive, and concentrate it again in the home office at Highland Park.

As a result of this and of the reorganization in April, Chrysler has become as fully centralized as it ever was in the past-although the management in no way resembles what the company had under “Walter P,” and “K. T .,” when all decisions were made by three or four men at the top. Colbert’s headquarters is now knee-deep in vice presidents heading all manner of group activities, run largely on a committee basis. The concept of the semi-autonomous divisional profit centers has been so watered down that about the only important management· functions still in the hands of division heads are those of purchasing and cost control. Some idea of the completeness of Chrysler’s de-decentralization is apparent from the way the jobs now line up at the top. Colbert, as president and chief executive officer, has removed himself entirely from operations to devote his time to policy. Row, who is first vice president and chairman of the administrative committee, does the planning. As the new executive vice president and third man in the hierarchy, Newberg carries out Row’s plans. All of Chrysler’s other nineteen vice presidents report to Newberg. The nineteen include Rinehart S. Bright, who directs all manufacturing. There are, however, no new faces in the present lineup, just old faces in new jobs.

Indian rope trick

One centralization device adopted on Smith’s recommendation in 1956 seems to be leading to some progress with the Plymouth sales problem, although, like the Indian rope trick, while it seems to be working it may be only an illusion. Smith’s plan took all sales responsibility away from the car divisions and put it in a newly formed sales company called Chrysler Motors Corp.

One reason for forming the sales company was to break down what Row calls “dealer patriotism” for Chrysler’s three franchised brands. New contracts were written between the sales company and all the dealers. Although the vast majority of them appear to be still dedicated to their Chryslers, Dodges, and DeSotos, there seems to be a good chance of breaking down such biases at the company level. The field sales force (from district to division representatives) is now charged with the whole sales job, instead of being assigned to a particular division. Highland Park can direct the full attention of this group to selling Plymouths first. And this is what is being done.

brian-nichols-vpsales3 Byron J. Nichols, made group vice president in charge of all Chrysler sales in April, is confronted with Chrysler’s biggest problem–how to modernize an antiqued distribution system.

But far more important than breaking down brand loyalties is the fact that the new sales company, headed by Byron Nichols, formerly· in charge of Dodge sales, is for the first time in Chrysler’s history moving toward the system of constant supervision of dealers that is used by G. M. and Ford. Also, for the first time in twenty-eight years Chrysler is franchising Plymouth-only dealers. This is not being done at a very fast rate. Only about 200 Plymouth-only dealers have been set up by Nichols’ sales company, largely in territories opened up in new suburban areas. However, these 200 dealers are accounting for nearly 15 per cent of all Plymouth sales. It is significant that in the first dismal quarter of 1958 their sales stayed at that rate. And now, just a little over a year after getting their franchises, these exclusive Plymouth dealers are selling half as many Plymouths as are the 3,400 Dodge dealers.

Nichols has built his new outfit to 2,000 employees. But the sales job facing Nichols, even aside from Plymouth, is immense. It is immense because of the decline in the ratio of all kinds of Chrysler cars on the road today. Cars on the road are a tremendous basic asset. For one thing they provide a market for a car company’s highly profitable parts business. But beyond that they supply a ready-made market for new-car sales. Nearly 70 percent of the drivers of low-priced brands will buy the same brand again. About half the owners of medium-priced makes will remain loyal to their brands. Owner loyalty in the high-priced field is high. Cadillac’s great strength is due to the fact that nearly 95 per cent of the owners come back for another Cadillac. These “loyalty” sales walk in the door. The sales that have to be won away from competitors are the tough ones-the industry calls them “conquest sales.”

There was a time when Chrysler’s percentage of U.S. passenger cars in use was rising every year, reaching a peak of 23.3 per cent in 1947. But since then there has been a steady dwindling in the ratio of Chrysler makes on the road-a full 4 percentage points in the past ten years. With more than 50 million cars now in use, this 4 per cent drop means that since 1947 Chrysler has lost over two million sales to competitors- almost two years’ production at the 1956 level. In the same period G.M. rose from 42.7 to 46.6 per cent. Ford, after dropping to 21.8 per cent of cars in use in 1952, at the end of last year was up to 25 per cent.

To recover what Chrysler has lost, Nichols’ sales company would have to sell for a number of years at an even higher rate than the corporation hit in 1957. But Chrysler’s 1957 sales, third highest in its history, still gave it only 19.5 per cent of the market. So even in this good year it was losing ground to the competition. Its share of the market this April: about 15 per cent.

Dividends slashed

How long will Chrysler’s private depression last? From the action the directors took on dividends at the last quarterly meeting, it would seem that they are not very sanguine about a quick recovery. Since the first quarter of 1939, Chrysler’s directors have authorized regular dividends at a rate of $3 a year, even in 1954 and 1956, when the company did not earn the full amount. They have authorized handsome extras in good years. When they cut quarterly dividends to 25 cents a ~~ weeks ago, one can only assume that the directors saw little improvement during the balance of this year and perhaps not much in 1959. The immediate reaction of the stock market was to knock a couple of more points off Chrysler’s stock, already depressed. Chrysler’s 8,726,000 shares of common were selling below $45 in late April, down from a high earlier last year of $57, a high last year of $82. (The present price is about half of book value.)

The long, long wait

Chrysler’s directors have no doubt moved wisely in an effort to conserve cash, for the company will need every penny it can get to pay for the expensive change-over that will come with the 1960 models. Because the company retained most of last year’s fine earnings-70 percent, equal to some $85 million in cash-and because of the $250- million loan from Prudential negotiated in 1954, its present financial state is good. But Chrysler can’t stand too many quarters like the last one. The loss of $1.74 a share was heavily cushioned by a $16,400,000 tax credit. Actually, loss from operations was about $31,500,000, or about $3.60 a share, before the tax credit. There will, of course, be more tax credits to offset bad operating rates, but tax credits run out after a while. Then the result is a cash drain. To keep this from happening is obviously Chrysler’s most pressing immediate job. If the corporation breaks even in this year’s bad car market, Colbert can pin ribbons on the lapels of all those old hands in new roles at headquarters.

Colbert took a very realistic approach to Chrysler’s situation before the annual meeting on Aprill5. He said, “We have our sights set on the big markets that lie ahead in the 1960’s.” He held out no hope that Chrysler would come to market before then with a sensational new automobile to boost its sagging sales rate-such as cars with gas turbine engines, which it has been developing. He did not indicate that Chrysler would produce a smaller, lower-priced American car. He did say that Chrysler’s “missile business is going to be very big in years to come.” The 184 shareholders at the meeting were not at all critical. They listened attentively, asked few questions. Theirs was a reflective mood. But it appeared from the president’s remarks that they had a rather long wait ahead of them.

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