The automobile industry had been a trademark of the United States’ economy in the 20th century. From Ford’s Model T that revolutionized the assembly line in 1908 until the turn of the century, the automotive industry saw prosperity in domestic and international markets. Although Detroit, the heart of the United States’ automotive industry, had begun to see declines in bottom line and market share from 1998 well into the 21st century. This trend culminated in September of 2008, when the “Big Three” automobile manufacturers, Ford, Chrysler, and General Motors, asked for a $50 billion dollar bailout from the US government to avoid having to file for Chapter 11 bankruptcy, their second bailout request in thirty years.
Among the Big Three auto manufacturers was the Chrysler Corporation, a company founded in 1925 that had a rough history, but nearly a century of operations nonetheless. A series of questionable business decisions left Chrysler in the same boat as its Detroit competitors in 2008; in need of emergency financing from the US government or else the company would likely fold in 2009. Despite efforts by Chrysler’s President and Vice Chairman, Thomas LaSorda, to find a means of economy recovery, Chrysler had found no relief by means of the government or external investors. So Chrysler and LaSorda sat at a crossroads in late-2008, needing to either find a means of recovery or let the company fold into oblivion.
The Chrysler Corporation was founded in 1925 after it absorbed and restructured the assets of the now defunct Maxwell Motor Company. Founded by Walter Chrysler, the company almost immediately began to find success. Chrysler was fueled by a series of innovations, including a lightweight and high-power six-cylinder engine, as opposed to four-cylinder engines that were the standard of the time, and a four-wheel hydraulic braking system that came standard on every car. Included in this system were a number of firsts, such as a carburetor air filter, oil filter, and full pressure lubrication that were not standard for the time. The company continued to innovate and began to see more prosperity in 1951 with the development of a hemispheric-head V8 engine, otherwise known as a Hemi or Hemi V-8.
Brands and Price Point Strategy
Much of Chrysler’s business model was focused on producing cars with different functionalities for different price points. Starting in 1928, Chrysler began to develop the Plymouth, which was a low-priced model that came with just the standard features and a four-cylinder engine. Chrysler then introduced the DeSoto brand shortly after the Plymouth in order to compete on the mid-range price point. As opposed to the Plymouth, the DeSoto contained supplemental features, such as pop-up headlights, increased passenger space and luxurious glove boxes. Chrysler soon after bought the Dodge Brothers automobile company and began to produce trucks in the mid-price range as well. In 1955, Chrysler introduced the Imperial, a top of the line model that included more legroom, luxury add-ons, and their signature Hemi V-8 engine.
The most important inclusion in the brand strategy may have been the development of the muscle car trend. In 1955, Chrysler also developed the C-300. While this was also considered a top-line model, it differed in the fact that the C-300 focused mostly on its horsepower, becoming one of the most powerful car models of its time. From 1955-1957, the C-300 was considered the fastest car in America by winning the Daytona Beach flying mile. The model was also one of the most popular cars as seen on the NASCAR racing series. Cars like the C-300 started a trend from the 50s to the 70s of “muscle car mania” that saw consumers moving towards high-power, but gas-guzzling vehicles.
A Turn for the Worse
Although Chrysler had seen success in its first four decades, mostly due to how innovative the company had become, Chrysler began to come upon hardships in the 1970s. Chrysler had recently been profitably riding a muscle car fad in their production, but market conditions began to take a turn. First, anti-trust laws prohibited companies like Chrysler to merge with international companies as a cost saving method. Secondly, the 1973 oil crisis hurt demand for high-power and less fuel-efficient cars, such as the C-300 and Plymouth Valiant, another Chrysler luxury car. John Riccardo, Chrysler’s president at the time, went public with the current hardships that the company was currently facing. He revealed that Chrysler was currently $4 billion dollars in debt. He asked the government for tax holiday of $1 billion dollars and federal assistance. As time moved on, federal assistance looked bleak, and Riccardo was ultimately let go after Chrysler had $460 million in losses the next quarter and $1.2 billion for the year.
The Lee Iacocca Era
After letting go of Riccardo, Chrysler looked to Lee Iacocca as Chrysler’s new CEO. Iacocca, a recently fired Ford executive, immediately asked for government assistance. During his tenure, he was well known for cutting down a number of Chrysler’s plants in order to cut costs, including its plant in Hamtramck, Michigan, which was regarded as its main plant and the heart of the company. Although Iacocca gained no popularity points for these decisions, he ultimately won assistance from the federal government, and the “Chrysler Corporation Loan Guarantee Act of 1979” was signed by President Jimmy Carter. The act stated that the government would loan Chrysler $1.5 billion dollars if it secured $1.43 billion in private financing as well. Chrysler began to start seeing profits again in 1981 and paid off its loans in 1983, seven years before the deadline. Although they had been on the brink of disaster, Chrysler and Iacocca seemed to keep the company running.
DaimlerChrysler and Bailout Number Two
Riding their newfound second wind, Chrysler went into a “merger of equals” or a 50-50 partnership with Daimler AG and became DaimlerChrysler Motors Company LCC or Chrysler Group. The merger was made to create synergy between the two companies, and, although the partnership began as a 50-50 split, Daimler began taking control of a majority of business decisions.
One major effect of the merger is that the Chrysler Group began to change their production strategy. Daimler AG had become intensely focused on cost saving strategies. Cost cutting and a move towards the “SUV craze” led the newly founded Chrysler group to make bigger cars that did not fit Chrysler’s previous quality benchmarks. As a result of their new strategies and the accompanying recession and rising gas prices, DaimlerChrysler and the other Big Three manufacturers began to see a decline in sales as their big, gas guzzling SUVs were no longer attractive to customers. In 2008, Chrysler sales fell 34.9% in 12 months. President Bush allowed for a $17.4 billion bailout to be distributed between the Big Three manufacturers. However, because of poor business decisions, Chrysler found themselves on the brink of bankruptcy and asking the government for an additional bailout at the risk of not surviving past 2009. In April 2009, Daimler sold 80% equity shares to a private investment firm called Cerberus Capital Management. The result of the DaimlerChrysler merger left Chrysler on the verge of bankruptcy and asking the government for a bailout once again. In 2009, Chrysler eventually filed for Chapter 11 bankruptcy.
Although Chrysler had filed for bankruptcy, the company began reorganization with government aid. In March 2009, the White House announced it would give Chrysler an additional $6 billion dollars on the terms that they complete an alliance with Fiat Motors before the end of April. In June 2009, a newly formed Chrysler Group LLC was formed with Fiat holding a 20% minority share, the US government holding 8%, and Canadian government holding 2%. Fiat’s share has since increased to 58.5 and Chrysler Group LLC has paid back $7.6 billion in loans. Although they have cost taxpayers billions of dollars and workers thousands of jobs, Chrysler has survived again, for the time being. With the new structure and better business practices, Chrysler hopes to avoid bankruptcy in the future. But, given Chrysler’s past history, how good should we feel about that hope? If the automobile industry should fail again, should they be bailed out, given the costs of the previous bailouts?
Additional Ethical Perspectives
The Chrysler case is an intriguing one because it calls into the question the cost of reviving “Too Big to Fail” companies and industries, such as Chrysler and the automotive industry. Namely, it encourages the reader to ask if such forms of government aid are worthwhile, given their cost to American taxpayers and, in the automobile industry’s case, the volatile history of the industry. Can we expect to shoulder the burden of billions of dollars of aid for big business for the good of the economy, even though the US was already nine and a half trillion dollars in debt at the time of the second bailout. Perspectives from modern ethical theorists may help to shed light on these questions.
One useful way to look at the Chrysler case is to see how the parties involved would become affected by the use of bailout money. For instance, a utilitarian perspective might see the usefulness in the recovery money. In the case, the greatest amount of good for the greatest amount a people may be to keep the Big Three afloat rather than see them fail. The reason for this stance would be because, even though society or the American public might take a hit at the time, it would be better off to look out for the well-being of the economy as a whole; to preserve jobs and stability in the US economy. A consequentialist perspective on this matter could change depending on the progress of the Big Three after the bailout. Immediately, consequentialists would see the ends as a justification to the means. The fact that the US economy survived to get a chance to rebound from the Great Recession could justify the money taken out of taxpayers pockets. However, if the auto manufactures were to default again, a scenario that is feasible given their history, then the consequentialist perspective would vastly change. Taxpayer money and government spending during the 2008 bailout would only be seen as an increase to the national debt, and one that comes at a bad time, with the US already owing large amounts of debt to foreign entities.
Another interesting variable in this case is the amount of transparency within the company during Riccardo’s reign as CEO. Although the company had been tanking, one thing that Riccardo seemed to ethically do correctly is to remain transparent with shareholders and to let them know the exact situation with the company. Unlike companies such as AIG that had similar dire circumstances, Chrysler went the honest route and informed those parties that were involved. Although this was an honest move, the results were drastic, losing $460 million in the quarter after informing the public. Theorists such as Freeman would see a problem with this move. According to Freeman, responsibility to shareholders is, first and foremost, to increase profits. By releasing to the public that Chrysler was in poor conditions, hopes for withholding investors and keeping the company afloat went out the window. Although companies like AIG had been looked down upon for withholding financial information, cases like Chrysler show just exactly what could happen should a company divulge such information.
- Maxwell Motor Company, 1904-1925
- Chrysler Corporation 1925-1998
- DaimlerChrysler AG, 1998-2007
- Chrysler LLC, 2007-2009
- Chrysler Group LLC, 2009-present
Early Chrysler Models
Exhibit 2 (cont.)
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