STRATEGIC MANAGEMENT

Barnali Chakraborty, under the direction of Vivek Gupta

“For too long, Chrysler moved too slowly to adapt to the future, designing and building cars

that were less popular, less reliable and less fuel efficient than foreign competitors.”1

BARACK HUSSAIN OBAMA

PRESIDENT OF THE UNITED STATES, IN APRIL 2009

“More than anything the consumers are very hesitant to do business with a manufacturer in bankruptcy.”2

PETER GRADY

EXECUTIVE AT CHRYSLER, IN MAY 2009

“This partnership (with Fiat SpA) transforms Chrysler into a vibrant new company with a wealth of strategic advantages.

It enables us to better serve our customers and dealers with a broader and more competitive line-up

of environmentally friendly, fuel-efficient high-quality vehicles.”3

BOB NARDELLI

CHAIRMAN AND CEO OF CHRYSLER LLC, IN MAY 2009

Chrysler Files for Bankruptcy

ON APRIL 30, 2009, CHRYSLER MOTORS LLC (CHRYSLER), the third largest automobile

manufacturer in the United States, filed for bankruptcy protection under Section 3634 of

Chapter 115 of the U.S. bankruptcy code in the Manhattan Bankruptcy Court along with its

24 wholly-owned U.S. subsidiaries. As part of its bankruptcy filing, Chrysler announced that

it would establish a global strategic alliance with Fiat SpA (Fiat).6 It would create a new company

in which Fiat would initially have a 20% stake, which would later be increased up to

35%. The Voluntary Employees’ Benefit Association (VEBA)7 would have a 55% stake in it

and the U.S. Treasury Department (U.S. Treasury) an 8% stake. The Canadian and Ontario

governments would have a combined 2% stake, with the Canadian government holding 1.33%

and the Ontario government holding the remaining 0.67% stake.

This case was written by Barnali Chackraborty, under the direction of Vivek Gupta, ICMR Management Research.

It was compiled from published sources, and is intended to be used as a basis for class discussion rather than to

illustrate either effective or ineffective handling of a management situation. © 2009, ICMR Center for Management

Research. This case cannot be reproduced in any form without the written permission of the copyright holders, Vivek

Gupta and ICMR Management Research. Reprint permission is solely granted by the publisher, Prentice Hall, for the

book Strategic Management and Business Policy, 13th Edition (and the international and electronic versions of this

book) by the copyright holders, Vivek Gupta and ICMR Management Research. This case was edited for SMBP, 13th

Edition. The copyright holders are solely responsible for case content. Any other publication of the case (translation,

any form of electronic or other media) or sale (any form of partnership) to another publisher will be in violation of

copyright law, unless Vivek Gupta and ICMR Management Research have granted additional written reprint permission.

Reprinted by permission.

Chrysler was struggling to stay afloat even after receiving financial aid in the form of a federal

loan of US$4 billion in January 2009, out of the requested amount of US$7 billion. However,

with declining sales, it had become increasingly difficult for Chrysler to continue with its operations.

Therefore, in its Restructuring Plan for Long-Term Viability, submitted on February 17,

2009, the company asked for another US$2 billion federal loan over and above the US$7 billion

loan it had requested earlier. For Chrysler to get an additional federal loan, the U.S. government

had made it a condition that the company should establish an alliance with Fiat on or before

April 30, 2009. The company was also required to restructure its debt and negotiate with UAW

(United AutoWorkers)8 and CAW(Canadian AutoWorkers)9 to reduce costs. Although Chrysler

was able to reach an agreement with Fiat and had convinced UAWand CAWto reduce costs, it

failed to get all its creditors to agree to debt restructuring. The company finally had to file for

bankruptcy protection. Commenting on the company’s bankruptcy filing, Bob Nardelli (Nardelli),

Chairman and CEO of Chrysler, said, “Even though total agreement was not possible, I am truly

grateful for all that has been sacrificed, on the part of many of Chrysler’s stakeholders to reach an

agreement in principle with Fiat. My number one priority has been to preserve Chrysler and the

thousands of people who depend on its success. While I am excited about the creation of the

global alliance, I am personally disappointed that today Chrysler has filed for Chapter 11. This

was not my first choice.”10

While some analysts were apprehensive about Chrysler’s viability, others were of the

view that Chrysler would come out of the bankruptcy soon. According to Lee Iacocca

(Iacocca), former Chairman and Chief Executive Officer (CEO) of Chrysler, “It pains me to

see my old company, which has meant so much to America, on the ropes. But Chrysler has

been in trouble before, and we got through it, and I believe they can do it again.”11

About Chrysler

The history of Chrysler can be traced back to the 1920s. In 1921, Walter P. Chrysler (Walter)

joined as Chairman of Maxwell Motor Corporation (Maxwell).12 During that time, Maxwell

had high debts because of its declining sales after World War I.

In 1923, the production of automobiles under the brand name of Maxwell was stopped.

In 1924, a new vehicle named Chrysler Six, which had a light, powerful, high-compression

six-cylinder engine and the first ever four-wheel hydraulic brakes, was launched in the U.S.

automobile market. The vehicle was available for US$1,565.

In 1928, the company acquired the Dodge Brothers firm and became the third largest

automaker in the United States. The company also started the DeSoto and Plymouth divisions.

The company positioned the Plymouth brand as a low priced car, while DeSoto was introduced

in the medium price segment.

In 1934, the company introduced the Chrysler Airflow, one of the first cars to be aerodynamically

designed. However, it was not able to generate much interest among the public.

Nunetheless, the company was able to survive during the Great Depression13 because of the

strong sales generated by the entry-level Dodge and Plymouth brands.

In 1951, Chrysler developed the Firepower, the first hemispherical-head V8 engine,

which later became popular as the HEMI® engine.14 By the end of the 1950s, the company had

become famous for creating power steering, power windows, the alternator, electronic fuel

injection, and many other automotive innovations.

In the 1960s, Chrysler expanded into Europe and formed Chrysler Europe by acquiring

the UK-based Rootes Group,15 Simca,16 and Barreiros.17 In the 1970s, the company had to face

new challenges such as issues related to environmental pollution and rising gas prices. It also

started facing competition from foreign car manufacturers such as Honda Motor Company

(Honda) and Toyota Motor Corporation (Toyota).

The oil crisis of the 1970s18 resulted in a high demand for fuel-efficient cars. American

customers started preferring small, fuel-efficient Japanese cars as compared to the U.S.-made

bigger cars. Moreover, as the performance of the Japanese cars was superior to the cars made

in the United States and their prices were competitive compared to the American cars, there

was an increase in their sales.

In the 1970s, Chrysler’s sales started declining. In 1978, the company hired Iacocca as the

Chief Operating Officer (COO) of Chrysler Corporation. In September 1979, Iacocca was promoted

to Chairman and CEO. Soon after, he carried out a revamping exercise in the company

and set up a new management team.

Iacocca initiated several cost-cutting measures including scaling down nonproductive operations,

closing down plants, stopping some employee benefits, initiating temporary layoffs, and so

on. In the late 1970s, the company had a debt of approximately US$4.75 million and was in deep

financial trouble. It had to ask for financial help from the U.S. government. In 1979, U.S. President

Jimmy Carter signed a bill through which the U.S. government provided a US$1.5 billion federal

loan to Chrysler Corporation. The federal loan helped the company restructure itself.

During the restructuring, Chrysler’s product line was substantially expanded. Iacocca emphasized

manufacturing passenger cars, like the Dodge Caravan and Plymouth Voyager, which

received a good response from consumers. Apart from that, the company also focused on designing

fuel-efficient K Cars.

By the early 1980s, Chrysler had started recovering from the crisis. In 1983, seven years

ahead of schedule, the company repaid the federal loan. In 1984, the company reported a profit

of US$2.4 billion.

Between 1984 and 1988, Chrysler acquired many companies including Gulfstream

Aerospace Corporation, a corporate jet manufacturer; Lamborghini, the Italian luxury car

manufacturer; Finance America; E. F. Hutton Credit Corporation; American Motors Corporation;

and so on. Through the acquisition of American Motors Corporation, the world famous

Jeep® brand came into the company fold. In 1987, the company increased its shareholding in

Mitsubishi Motors Corporation and entered into a strategic alliance with Samsung, a South

Korean electronics company.

In the late 1980s, the financial condition of Chrysler Corporation started deteriorating.

The company began taking cost-cutting measures and introduced fuel-efficient vehicles like

the Dodge Shadow and the Plymouth Sundance. In 1989, it started a US$1 billion cost-cutting

and restructuring program. On December 31, 1992, Iacocca retired as the CEO of the company.

In 1996, the company shifted to its new headquarters in Auburn Hills, Michigan, in the

United States.