Iacocca Still on the Offensive With AMC Buy
Why is Chrysler buying American Motors? Because Chrysler Chairman Lee A. Iacocca knows that the best defense is a good offense.
The man who saved Chrysler six years ago has been saying recently that he’s not satisfied with the company’s 11% to 12% share of the U.S. car market, that he would like to lift it to 15% over the next five years by expanding production and adding some luxury models, such as the Maserati convertible that joins the Chrysler line this year.
Well, on Monday morning, Iacocca added production of several hundred thousand vehicles--perhaps 3% of the U.S. market--to Chrysler’s total when he agreed to buy AMC, the chronically ailing Kenosha, Wis.-based car maker that is 46% owned by Renault of France. The acquisition has been rumored since last fall, when Iacocca worked out a deal for AMC factories to produce some cars for Chrysler, which needed the extra capacity because he was intent on building and selling as many cars as possible.
Bucking the Trend
Such bold strokes buck the trend of U.S. car makers. With the U.S. market overflowing with automobiles from manufacturers the world over, both Ford and General Motors are trimming production to fit reduced expectations. For giant GM the cutbacks represent a retreat from its strategy of trying to hold onto 42% of the market by offering low-interest loans to move its surplus cars. Now GM’s beleaguered management says it will be happy if it can sell fewer cars but make more profit on each sale.
That’s not good enough for Iacocca, who has become the nation’s best-known, and probably most admired, businessman for the job he did--with the help of government financing that Chrysler has now repaid--in rescuing the car maker. “You either go forward or you go backward,” he has been saying recently.
Is Iacocca right, or merely overconfident? He’s right, of course, especially in buying AMC. Chrysler puts the price it is paying at $760 million, but the total could go over $1 billion depending on future profits of AMC. Either way it’s a bargain, although American Motors’ published statistics wouldn’t tell you that. The company lost $91 million last year and $125 million the year before. It has lost money in six of the last seven years, in fact.
But behind that veil of red ink there’s the AMC subsidiary that produces Jeep vehicles--named for the old military runabouts, but now dressed up as sporty four-wheel-drive ranch wagons for the suburban set. There were 207,514 Jeeps sold last year, at prices ranging from roughly $12,000 to $20,000. The Jeep subsidiary, on a reasonably conservative estimate, could be making a $250-million-a-year profit. Indeed, given the extra push the brand name gives its sales and its profit margins, if Jeep isn’t earning at least that much, it should be.
Story of Recovery
And if anybody can make sure it earns a profit it’s Iacocca. The story of Chrysler’s recovery--the combination of cutbacks and sacrifices that cost tens of thousands of jobs but saved 100,000--is now familiar. All but bankrupt at $12 billion in sales in 1979, the company has come all the way back to more than $1.3 billion net income on sales of $22 billion in 1986.
But what is sometimes overlooked is the simplicity of what was done: Iacocca and the many managers he hired away from his old employer, Ford, and the company’s unionized work force sweated costs out of Chrysler’s car production so that today the No. 3 U.S. auto maker can make a car at least $500 cheaper than Ford or GM--even though both those companies have poured billions into robots and computers and automated manufacturing.
How has Chrysler done that? Toughness, shrewdness, flexibility--Chrysler buys 70% of its parts from outside suppliers, the way Japanese car makers do, and that allows it economies that Ford, 50% outside suppliers, and GM, 30%, do not have.
But now, if Chrysler is to stay efficient as it gets larger, it must spend money on automated plants and equipment. So it’s probably no coincidence that Iacocca was attracted to AMC, which has had the benefit since 1978 of huge factory investments from Renault, which is owned by the French government. Chrysler is buying out France’s investment at a handsome discount.
So it looks as though Iacocca has made a smart move once again. The 62-year-old Lehigh and Princeton engineer with the salesman’s flair is no shrinking violet--as his autobiography makes clear. And he’s no St. Francis of Assisi either--as Chrysler employees will tell the world. Yet it tells you something else about him that in 1981, to try to help his company, he swallowed his pride and offered Chrysler in a merger to his old employer and nemesis, Ford Motor--which snubbed and attempted to embarrass him by making the offer public.
There’s more than ego behind the man’s past victories, in other words, for all that the public may by now have tired of non-stop Iacocca lectures. And more than ego, too, behind the reaching out for AMC.
