Chrysler Quality Under Scrutiny in Takeover Bid : Autos: Workmanship is a nagging problem at No. 3 U.S. car maker. But is it as bad as Iacocca makes it out to be?
While billionaire Kirk Kerkorian’s proposal to buy Chrysler Corp. is focused on high finance and global strategies, it is also putting the spotlight on a nagging problem for the nation’s No. 3 auto maker: quality.
In recent years, Chrysler has won praise for its impressive turnaround. Once a financial basket case, the company now sets the industry’s standards for efficiency and profitability.
But the record has been marred by continuing concerns about product quality. Chrysler trails General Motors Corp. and Ford Motor Co., as well as most Japanese producers, in key quality measures. Recent launches of some key new vehicles have been marred by recalls.
The concern over quality is one reason former Chrysler Chairman Lee Iacocca says he teamed up last week with 77-year-old Kerkorian in making a takeover proposal for Chrysler, a deal valued at $22.8 billion. Chrysler rejected the tentative proposal but said it would evaluate it if Kerkorian came up with financing.
Iacocca, 70, could not be reached for comment Monday, but last week he said that Chrysler is in danger of falling further behind its competitors in quality, which could hurt its sales and image.
It is ironic that Iacocca is taking his successor, Robert Eaton, to task on quality. The poor workmanship of Chrysler’s vehicles during the mid-1980s, when Iacocca was at the helm, contributed to the company’s financial woes.
“Iacocca is not exactly known as a quality guru,” said a top Chrysler executive.
Industry experts say quality has been an issue at Chrysler but that Eaton has made it a top management priority and that the vehicles being produced today are showing clear improvement.
“I can’t believe that Iacocca or Wall Street is making an issue of this,” said John McElroy, editor of Automotive Industries magazine. “It’s just a red herring.”
This is not the first time Iacocca has spoken out about quality since he retired from Chrysler in 1992. Last May, when he was still on the payroll as a consultant, several members of Chrysler’s board sought his counsel on the issue.
That same month Eaton fielded questions on quality from shareholders at the company’s annual meeting in Toledo, Ohio. He said more needed to be done but that internal audits showed quality of cars to be up 25%, trucks 41% and minivans 52% compared to the previous year.
“But we aren’t happy with that progress,” he said.
The company increased its focus on quality after J.D. Power & Associates, an Agoura Hills market research firm, released a survey of initial quality that showed all of Chrysler’s brands ranked below the industry average. The survey measures the number of defects that buyers identify in the first 90 days of ownership.
Chrysler challenged the results, saying the survey focuses on the small things that go wrong with vehicles rather than emphasizing the overall ownership experience. “Owners rate our vehicles very high,” said company spokesman Steve Harris, adding that the firm expects its rating to improve substantially in this year’s J.D. Power study.
But turning around public perception may be difficult when quality problems keep popping up.
In the past two years, the company has recalled its popular Jeep Grand Cherokee four times, the Dodge Ram pickup twice and the Neon subcompact three times. It also delayed the introduction of its highly touted Cirrus and Stratus sedans because of quality glitches.
Last month, the company settled a safety investigation by federal regulators by agreeing to fix rear-door latches on its popular 1983-93 minivans. Regulators investigated whether the latches were defective because they gave way during crashes in which 29 people died.
Another blow came recently when Consumer Reports magazine removed Chrysler LH mid-size sedans from its “recommended buy” list because of customer complaints about the 1994 models.
Iacocca, with the apparent backing of some worried institutional investors, has seized on those problems to partially explain why Chrysler stock has languished in recent months.
After peaking at $63.50 in early 1994, it stood at $39.25 before Kerkorian launched his $55-a-share offer. The stock closed Monday at $48, up 12 1/2 cents in heavy trading on the New York Stock Exchange.
But some Wall Street investors and analysts believe the quality issue is a minor concern. They say Chrysler’s stock has not been performing well because of weakening auto sales, its slowness to expand internationally and its cash reserve of $7.3 billion that has not been invested productively enough.
“Quality has hurt them image-wise,” said Seth Glinkenhaus, a New York investment manager whose company holds 5.3 million Chrysler shares. “But in reality, it’s not much of a problem and they are doing everything they can to remedy it.”
