Introduction
Chrysler Group LLC is one of the largest automobile manufacturing companies in the world. Along with General Motors and Ford Motor Company, these three companies are known as the “big three” in the US market. Chrysler is headquartered in Auburn Hills, Michigan. Currently, Chrysler is a wholly owned subsidiary of the Italian Automaker, Fiat S.P.A. The flagship brands of Chrysler are Chrysler 200 and 300, Dodge, Ram and Jeep. The journey of Chrysler was not always smooth. Upon its establishment in 1925, it soon became one of the most popular car brands in USA. From 1930s till late 1950s, it did very well. However, its prosperity dipped in later years to an extent that the company thought of filing bankruptcy in 1970s, but it managed to return to profitability under the leadership of Lee Lacocca (Ebhardt, 2014). In 1998, Chrysler merged with Daimler Benz AG., but this German American merger did not work well for both the parties. Finally, Daimler sold Chrysler to a group called Cerberus Capital Management in 2007 (Ebhardt, 2014). The recession of 2008 in USA affected Chrysler as much as other automobile manufacturers. It could not sustain the loss and filed for bankruptcy in 2009. This essay will highlight the background of the Chrysler bankruptcy process, its filing for bankruptcy, agreements with labor unions, government interventions, creation of a “New Chrysler” entity as a result of the bankruptcy related proceedings and Chrysler’s successful re-emergence from bankruptcy.
Company Background
Founded by Walter Chrysler in 1925, Chrysler was created from the remains of the Maxwell Motor Company. Chrysler started expanding its operation from 1928 by acquiring Fargo trucks and Dodge Brothers Company. In 1928, it started its Plymouth and Desoto brand (Ebhardt, 2014). In 1987, Chrysler bought the American Motor Corporation from Renault. The main purpose of the deal was to acquire the Jeep brand and the new manufacturing plant at Ontario, Canada. The deal provided a boost in sales for the Chrysler brands. In 1998, Daimler and Chrysler entered into a deal to create a combined entity. Daimler valued Chrysler at $57 billion in 1998 (Ebhardt, 2014). The new entity was named DaimlerChrysler AG. During the short merger between the companies Daimler and Chrysler, brands like Plymouth, Eagle and Desoto were dropped from the company brand portfolio. In fact, the sales figures started plummeting after the merger. When the merger took place in 1998, Chrysler sold around 2.6 million vehicles worldwide. However, since then the sales figures have reduced almost continuously till 2009. Finally, Daimler AG sold its 80.1% stake to Cerberus Capital Management group for $7 billion (Ebhardt, 2014). Daimler retained its 19.9% stake in the company. However, during 2008, the sales figures of Chrysler plummeted by 30% to 1.4 million worldwide. This was the worst sales figures since early 1990s. The company reached a position when it started contemplating to file bankruptcy in 2009.
Management Indecision in Chryslers Bankruptcy
The bankruptcy filing for Chrysler in 2009 was the result of bad management decisions. It was the outcome of poor management vision for over 10-15 years. Bob Eaton took over as the CEO of Chrysler in the early 1990s. Bob Eaton was not a visionary. During the 1990s, when the Japanese automakers were eating away the market share from the US manufacturers, General Motors and Ford revamped their product lines to compete with Japanese products like Camry and Accord. Chrysler did not try to bring any change. It just went ahead with its existing brands with minimum changes in features and styling. It slowly started losing the market share. Between 1990 and 1998, it started losing serious ground in the US market. In 1998, Bob Eaton was totally unsure about what to do with Chrysler and negotiated a merger deal with Daimler AG and left the company. This seemed a great merger of that time. From 1998 to 2007, the Daimler management took control of the Chrysler management. The interests of Daimler were in contradiction with that of Chrysler. Daimler had a product line in Europe that was similar to Chrysler in terms of price and product segments. The primary goal of DaimlerChrysler AG was to enter into the US market with its Mercedes brand of products, but the sole focus on that by the management created a lot of other problems. Firstly, the Mercedes lines of products were not embraced easily by the US market, and hence, the sales of Mercedes products were minimal. Secondly, the management never focused on the existing Chrysler product line, so it saw a freefall in sales. Between 1998 and 2007, the sales of Chrysler products witnessed almost a 100% decline. Finally, the global sales of Chrysler declined sharply due to the inability of the DaimlerChrysler management to launch the Chrysler products successfully in the global market.. By 2007, the Daimler Chrysler management was facing a slew of problems like the poor sales of Mercedes products in USA, the dropping sales of Chrysler products in the US market and no sales increase in the global market. All of these combined problems forced the Chrysler management to sell the company at a throwaway price to Cerberus Capital Management Group. The company due to its poor management decisions between 1990 and 2007 went into a spot where it had no choice but to file for bankruptcy. The recession of 2008 in the US market only accelerated the process.
Pre-Bankruptcy Negotiations
In the early 2008, the management of Chrysler was facing a highly sensitive economic decision. On one hand, the sales of the company were constantly declining. On the other hand, it has a huge responsibility towards its stakeholders to save the company from collapsing. If we apply the economic game theory approach, which was used by the Chrysler management in 2008, we will find three options. Firstly, Chrysler management could have liquidated the company and shut down its doors. It would have been a loss-loss decision for the management as well as stakeholders. Secondly, it could have continued to run the company at a loss. This would have created a win-win situation for the employees and loss-loss situation for the management in the short term but loss-loss for both in the long term. Finally, it could have traced a partner that would help the company grow with the help of organizational strength. This would have created a win-win situation for all. Based on the analysis, the management went for a calculated approach as discussed below.
One of the first reactions of the management was to form a global alliance with an automobile major so that Chrysler was able to receive more global exposure, which, in turn, was expected to boost the sales numbers. Fiat had a small presence in the US market and wished to penetrate that market. Both the companies started discussing a possible merger and global alliance from the late 2008. Finally, on 20th January, 2009, Fiat S.p.A. and Chrysler LLC announced a non-binding term sheet to form a global collaboration of their sales and operation (Lebeau, 2013). The deal contract stated that upon the completion of the deal, Fiat would get a 35% stake in the Chrysler business and would earn an access to the Chrysler dealership network in USA for selling Fiat cars. On the other hand, Chrysler would get a technology from Fiat to build a small, fuel efficient and economic car that would be sold in USA (Touryalai, 2014). Furthermore, Chrysler would be able to use the global dealership network of Fiat for selling Chrysler vehicles. However, the agreement encountered huge opposition from the United Autoworkers Association and Canadian Autoworkers (Isidore, 2009).
The main points of discussion between UAW and Chrysler were regarding the salary of the employees, securing the pension fund and continuing the existing operation. Chrysler wanted to have an access to the pension fund for continuing its manufacturing operation and also continuing to pay salary to its employees. UAW and Chrysler were able to chalk out a framework to deal with the situation (Isidore, 2009). Small lenders were requested by the treasury department to reduce the amount of money Chrysler owed to them which they refused. As a result, the talks failed, and Chrysler was forced to file bankruptcy. The economic approach employed by the Chrysler management was appropriate to achieve a win-win situation, but due to the problem from one stakeholder (small creditors), the management could not achieve the final results.
Bankruptcy Filing
As the second best option available to the management, they went for a structured bankruptcy filing. Economically, going for the liquidation process would have been a disaster for the whole management, the US government and also for the company. A structured bankruptcy was a better deal that allowed Chrysler to protect its asset from the creditors. If we do a microeconomic analysis, we see that if Chrysler would have gone ahead with the liquidation process, then about 39,000 people would have lost their jobs. The US government would have lost a lot of tax income from both the employees and the company. Some of the creditors would have lost their investment. From microeconomic perspective, saving the company would have proved fruitful for the US economy. Chrysler and its huge number of auto ancillaries would have helped even more number of people earn their livelihood. The US government was interested in the tax income from Chrysler. Fiat was interested in setting a foothold in the US economy. It was thus important for all the parties to strike a deal to save Chrysler. Chrysler finally filed for bankruptcy on 30th April, 2009 (Touryalai, 2014). The bankruptcy filing was more of technical nature to protect its assets and the interests of the employees. From the president’s office, it was announced that a new company would be formed, and that would own the plants, brands, land, equipment and contracts with the unions, dealers and suppliers. However, the liabilities of the company towards the 3300 dealerships would be left untouched in the bankruptcy process (Touryalai, 2014).
Bankruptcy Process
Macro economically, it was important for the US government to save Chrysler. Economically, USA was already reeling under the pressure of sub-prime disaster. The collapse of one more giant company like Chrysler would have been disastrous for the overall US economy. Furthermore, it was equally important for the US government to create a framework that not only would have saved Chrysler from immediate liquidation but also would have helped the company recover. As a first step, president Obama supported the reorganization of assets and liabilities. This reorganization process allowed the unsecured creditors to get priority over the Chrysler’s first-lien lenders. This appeared to be a breach of the US constitution, and the small lenders of Chrysler appealed to the Supreme Court against the decision of the New York Court. However, Supreme Court also decided in favor of the reorganization citing greater good of the society, the employees and stakeholders of Chrysler (Touryalai, 2014). As part of the bankruptcy process, the treasury department stated that it would provide a $3.3 billion loan to the company, over and above its 2008 loan of $4 billion in 2008, for continuing operation and giving salary to the employees. The treasury department also stated that it was committed to provide assistance, if needed, for the next several years (Touryalai, 2014). It was also decided that the loan would be provided at an interest rate of 21%. The loan would have a repayment period of 7 years.
Bankruptcy Process: Affected Parties
Different stakeholders of the company were affected differently as part of the bankruptcy process. At that time, Chrysler had 39,000 employees working in its automobile plants and auto parts manufacturing plants. As part of the process, it was decided that none of them would be laid off by the company. The plants would shut down for two months, and upon the completion of the Fiat deal, it would resume operation. During the months of May and June, 2009, employees would be entitled to receive 80% of their normal pay as salary in accordance with the union contract and supplemental pay clauses (Touryalai, 2014).
Chrysler Financial was the financial wing of the company that had 3,400 people working at that time. That division had the responsibility of handling the loans to Chrysler customers and dealers. After the bankruptcy process, that division was dissolved. As Chrysler was unable to attract funding on its own that it used for lending in the past, the division was shut down. As a side effect of that step, most of the 3,400 employees lost their jobs (Touryalai, 2014).
Chrysler dealerships were the worst affected by the bankruptcy. There were no protection provided as part of the bankruptcy deal to the dealerships and its employees. Some of the dealerships were taken over by other automobile players like Honda, Hyundai and Kia. Some of the dealerships, not being able to sustain the low level of sales of Chrysler products, went out of business after the bankruptcy filing.
The Chrysler CEO, Nardelli, left the company after the bankruptcy process was completed. Once Fiat management took over the Chrysler board, Sergio Marchionne became the CEO and Chairman of both the companies (Touryalai, 2014).
Suppliers were not directly affected by the bankruptcy process in most of the cases. However, after Chrysler filed bankruptcy, many suppliers stopped supplying parts to Chrysler fearing that the company would be dissolved after the bankruptcy and they would not be able to retrieve any money for the supply of the automobile parts.
Post-Bankruptcy: Company Restructuring
As part of the bankruptcy process, it was decided that UAW would own 55% of Chrysler. Chrysler’s ‘Voluntary Employee Beneficiary Association’ (VEBA), a trust run by UAW to provide benefits to the Chryslers’ retirees, actually controlled that 55% stake in the company. Fiat owned 20% of the stake in Chrysler but as part of the deal Fiat was responsible for taking decision about the management and day to day running of the company. Later, the parties agreed that Fiat could increase its stake in the company up to 35% (Ebhardt, 2014). The US government and the Canadian government remained minority stakeholders in the company holding 8% and 2% stakes.
Chrysler was renamed as Chrysler Group LLC after the bankruptcy. In subsequent years, Fiat S.p.A. paid $5 billion to VEBA to own the majority stake in the company (Ebhardt, 2014). Currently, Chrysler is a wholly owned subsidiary of Fiat.
Post-Bankruptcy: Company Future
The bankruptcy of Chrysler was dealt with in a very professional manner. With the help received from UAW and the Obama administration, Chrysler was able to turn around in quick time. The Fiat management has a big role to play in this whole turnaround story. When Chrysler filed for bankruptcy in 2009, most people thought that the 85 year old company had come to its demise, but the Fiat CEO, Sergio Marchionne, had other thoughts. Fiat was still struggling in Europe, and Chrysler was struggling in USA. He envisioned new possibilities for improvement by merging these two struggling companies and then using the combined strength of each other. Getting the majority stake in Chrysler was the first step towards that possibility (Maynard, 2013).
In other initiatives, Marchionne revamped the whole Chrysler brands. First, it revamped the Jeep brand and re-launched it in 2010. Since then the Jeep brand has won several best SUV awards across the globe in the last three years. The sales of Jeep have increased by almost 20% YOY in the last three years (Maynard, 2013). Also, Dodge Viper, which was redesigned and re-launched in 2011, is a big hit in the market. The sales figures for Chrysler were 931,402 in 2009. In 2013, the company sold almost 1.8 million vehicles, a 100% jump in sales just within three years (Maynard, 2013). Fiat management understands the value of the Chrysler brand in America and even it understands the brand value of Jeep worldwide. Fiat management is trying to utilize that brand value in the global markets.
Conclusion
Chrysler is one of the three giants of American automobile business. It has a rich past as a company, and its brands like Desoto, Jeep, Ram, Plymouth and Dodge are deeply ingrained in the lives of many Americans. However, Chrysler’s journey has not been without bumps. The worst possible time in the history of the company was the year 2009 when the company was forced to file bankruptcy. In 2009, due to the sluggishness in business and the recession in the US market, Chrysler faced a huge cash crunch and was unable to pay its creditors. After it filed bankruptcy in a New York court, the Obama administration laid out a plan for the revival of the company. First, Fiat was given a 20% stake in the company and a right to manage the company operations. UAW initially owned the majority stake. The US treasury loaned almost $8 billion to Chrysler to continue its operations and pay salary to the employees. Fiat was able to turn around the Chrysler operations. Sales have increased by almost 100% in the last three years. If the Fiat and Chrysler products blend well and the management is able to manage the two portfolios efficiently, then the future looks bright for Chrysler, which was a distant dream in 2009.
References
Maynard, M. (2013). Chrysler: From Bankrupt To A $6 Billion Company. Forbes. Retrieved on 18th April 2014 from <http://www.forbes.com/sites/michelinemaynard/2013/03/28/chrysler-from-bankrupt-to-a-6-billion-company/>
Isidore, C. (2009). Chrysler files for bankruptcy. CNN Money. Retrieved on 18th April 2014 from <http://money.cnn.com/2009/04/30/news/companies/chrysler_bankruptcy/>
Ebhardt, T. and Clothier, M. (2014). Chrysler Pays UAW Trust $5 Billion to End Bankruptcy Chapter. Bloomberg. Retrieved on 18th April 2014 from <http://www.bloomberg.com/news/2014-02-10/chrysler-pays-uaw-trust-5-billion-to-close-bankruptcy-chapter.html>
Lebeau, P. (2013). Four years after bankruptcy, Chrysler files for IPO. Bloomberg. Retrieved on 18th April 2014 from < http://www.nbcnews.com/business/autos/four-years-after-bankruptcy-chrysler-files-ipo-f4B11241667>
Touryalai, H. (2014). The Story Behind Chrysler And Fiat, And Why The Stock Is So Cheap. Retrieved on 18th April 2014 from <http://www.forbes.com/sites/halahtouryalai/2014/01/07/the-story-behind-chrysler-and-fiat-and-why-the-stock-is-so-cheap/>
