The Rise, Fall And Rise Of Chrysler
Chrysler, one of the “Big Three” automobile manufacturers in the United States. Founded in 1925 by Walter Chrysler, Chrysler has had their ups and downs. Why did Chrysler file for bankruptcy and how did they manage to get back on track?
In the 1980’s Chrysler was selling over 142,000 vehicles annually. As the years went by, that figure kept climbing, in some cases reaching as high as 650,000 per year. But after 2005, that number started to drop, by 2009 their sales dropped by 47%. So what had happened between 2005–2009 ish?
The biggest factor in the drop was the dizzying increase in fuel prices, oil went from $37.66/ barrel to $50.04, an increase of about 33% within one year, due to concerns of oil supplies, as it was needed heavily in Asia and in North America. This increase did not only affect consumers but also manufacturing plants, as they were paying more to access raw materials. The cost of steel went up, making it more difficult for Chrysler to reduce production costs.
American manufacturers had to pay their unionized employees a higher salary, in 2004, full-time employees who were union members had median weekly earnings of $781, compared to a non-member of $612.
The increase in fuel and in payrolls complicated the financial stability. On top of that, the housing bubble in the US collapsed, leading to the mortgage crisis in 2007, asking financial institutes for aid was not the easiest.
Chrysler made an announcement to lay off 22,000 workers, they started to outsource some of the work that they said was a non-core operation. Many factories closed down for good and many were downsizing.
The CEO at the time, Tom LaSorda said that “the turnaround plan should allow the Chrysler division to reduce losses in 2007 and return to profitability in 2008”. But that could not happen, as the three major U.S. automakers, GM, Ford and Chrysler entered into an economic crisis, in 2009 Chrysler's sales figure dropped down to 47%.
Chrysler was now facing a debt of $6.9 Billion, the Treasury Department demanded Chrysler lenders to reduce the amount of money the troubled automaker owed them. But the lenders that included Oppenheimer Funds, Perella Weinberg Partners and Stairway Capital refused. Chrysler situation became worst, and despite a personal message sent by the President, Barack Obama, to Chrysler’s main suppliers to reassure them that the company’s situation would be solved and that the path to recovery was a fact, the suppliers took the decision to suspend supplies. About 115,000 retired Chrysler workers depended on the company’s continued operation for healthcare benefits.
Chrysler had no option but to prepare itself for Chapter 11 bankruptcy, the process towards bankruptcy was not the easiest. The bankruptcy was to be completed within 30-60 days. The Treasury Department provided Chrysler with $8 billion in loans to get it through bankruptcy. About $3.3 billion from the loan was used to fund operations during bankruptcy, while the remaining $4.7 billion was to be used once the company would exit bankruptcy. In addition, the Canadian government also provided Chrysler with a loan of $2.7 billion to help support Chrysler’s Canadian operations. Using new funds, a deal was made, where Chrysler would combine the company with Fiat to stay in business. Most of the manufacturing operations were temporarily closed until the transaction with Fiat was finalized, many employees were temporarily laid off.
Chrysler also reached agreements with the worker unions to implement a reduction in labor costs, with a strategy where 55% of the company’s ownership would be under UAW (United Auto Workers).
It was decided that once the deal closes, Fiat will examine the cost structure of Chrysler to find additional savings. Fiat also promised to use Chrysler’s existing plants to build small cars. And on April 30, 2009, Chrysler filed for chapter 11 bankruptcy. As a result, UAW owned 55%, Fiat owned 20% with the option to increase it to 35%. The U.S. government was left with 8% and Canada with 2%.
But to truly keep it alive, sales were to get back on track, under the new ownership previous Chrysler Financial team disappeared. The man who brought Chrysler back on track was the CEO of Fiat, Sergio Marchionne. Under his leadership contracts with dealers were renegotiated from scratch, new contracts were signed with workers minimizing labor costs. Within a couple of years, Chrysler became a debt-free and profitable business, and on May 24, 2011, Fiat paid back the loan to the U.S. and Canadian government. On July 21, Fiat bought the Chrysler shares held by the United States Treasury. In 2017 Chrysler sold more than 2 million cars in the United States alone, more than double its 2009 sales. A combined effort from UAW, Fiat, Canadian and American governments provided financial support to keep the automaker alive, and as of today, Chrysler is going strong.