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The Iacocca Mystique

Would you buy a new car from this man?

Something about Lee Iacocca inspires exaggeration. Twenty years ago, as general manager of Ford, he made the cover of both Time and Newsweek with his hot new car, the Mustang. Time began its story this way, Iacocca in the driver’s seat:

The trim white car rolled restlessly through the winding roads of Bloomtield Hills, like a high-strung pony dancing to get started on its morning run … The driver of a Volkswagen raised his fingers in a V-for-victory sign. As the car picked up speed and headed southward toward Detroit, a flickering trace of satisfaction crossed its driver’s hawklike face. He carefully knocked the ash from his Ignacio Haya Gold Label cigar into the shiny new dashboard tray. At each traffic light, his dark eyes surveyed the car’s interior and his fingers roamed over every piece of metal and fabric within reach. At one light, the driver of a Chevrolet Impala pulled alongside and mouthed through his closed window: “Is that it?” He was left behind in the exhaust. As the white car approached a school bus and slowed again, the windows flew up and the children Inside chanted: “Mustang! Mustang! Mustang!”

Now, twenty years later, the man sitting next to me on the plane to New Orleans leans over to look at the book I’m reading. Going for Broke, by Michael Moritz and Barrett Seaman. On the cover is Iacocca, chairman of the board Chrysler Corporation, wearing a light blue shirt white cuffs and collar. Iacocca is pointing manfully at the reader as, behind him, in a tableau of Socialist Realism, three autoworkers in caps peer off the page and into the future. They are ready to follow Lee Iacocca anywhere. So is the man sitting next to me on the plane—a C.P.A. from Houston. “Iacocca,” he says. “That’s a great man. He’d make a great President.”

As long ago as 1982, long before he’d paid off Chrysler’s government-guaranteed loans, Iacocca was being touted in Horace Busby’s political newsletter as a terrific Presidential candidate for the Democratic Party. Since then, Iacocca has done little to discourage the idea, dropping such hints as: “I think there’s a vacuum out there. If I were inclined, it would be a good time.”

It is now safe to say that Iacocca will not be running for President on the Democratic ticket in November. In fact, it’s not even certain that he’s a Democrat. In 1971 he called himself a “fairly independent Republican.” And last year, asked about his party affiliation, he answered: “Probably independent, but leaning toward Democrat. I used to be a Democrat when we were poor in the 1930s. Then we got rich and I became Republican. Now, I’m dealing with too many poor people, I guess, and I have swung back to being a Democrat,” Still, Great Mentioners like Robert Novak are talking about him as Walter Mondale’s running mate. Does Mondale want him? No. “Iacocca is exactly what Mondale doesn’t need,” says a close observer of the campaign. “He’s a hero, but he’s also a loose cannon. He’d be totally beyond Mondale’s control, there would be of and gaffes galore.” Part Iacocca’s charm is that you never know what he’ll say next. But, in politics, spontaneity is a liability.

So, bereft of the Presidency and Vice Presidency, what’s left for Lee Iacocca? Are we squandering a precious national resource? Not exactly. He’s still a rich lode for miners of hyperbole. Here is Sean Fitzpatrick of Campbell-Ewald, the advertising agency of a competitor, Chevrolet: “In a period of time when there are heroes. Lee Iacocca emerged as the champion of the most celebrated underdog of all time. Capturing the spirit of Faulkner’s Nobel Prize address, he showed us that man—and Chrysler—will not merely endure, he will prevail.”

The lionization of Lee Iacocca should not be surprising. In an industry filled with gray managers, he is funny, refreshing, and successful. He saved a company that had been left for dead—and saved it in the halls of Congress and on TV, where everybody could see him. Iacocca may not be as good as most people think he is, but he is very good at two things: selling (both ideas and cars) and manipulating the federal government, getting it to do what he wants it to do. This latter skill, until recently, was rarely required of a top corporate manager. Now it’s almost a necessity—certainly more important, in Iacocca’s case than being able to build good cars, Iacocca was a natural government influencer, partly because he was a natural salesman, with a flair for a good slogan.

His first success came in 1956 when, as assistant sales manager of Ford’s District Marketing Office in Chester, Pennsylvania, he dreamed up “56 for 56,” connoting that you could buy a ‘56 Ford for S56 a month. The Chester office went from thirty-second to first in sales that year, and Robert McNamara, then vice president of the Ford division, adopted the slogan nationwide. It boosted Iacocca’s career, but it didn’t prevent Ford’s sales from falling 27 percent. Experts in the industry blamed the decline on McNamara’s penchant for trying to get the public to buy Fords by emphasizing their safety features (deep-dish steering wheels, strong door locks, and rearview mirrors that moved when you banged your head into them), The saying in Detroit in 1956 was: “McNamara’s selling safety” and Chevy’s selling cars.”

Iacocca learned his ’56 lesson well, and his twenty-one-year career as a top Ford manager featured more flash than substance. He brought out jazzy new cars like the Maverick, Mark 111, and Mustang. And many of them were cars that didn’t work very well. In 1967 Ford recalled one-third of all the cars it built. And the Pinto had a gas tank with a propensity to explode, linking it to two dozen deaths, 60 multimillion-doUar civil suits, and 1.4 million recalls.

But in 1978 Iacocca was exactly what Chrysler needed, a salesman who could plead a desperate case to Washington and the public. Henry Ford II fired Iacocca as president on July 13 (“Let’s just say 1 don’t like you,” Ford told Iacocca), and in November John Riccardo hired him as president of Chrysler with a promise that he would become chairman and chief executive officer the next year.

Chrysler is the smallest and least integrated of the Big Three American automakers. It doesn’t have the purchasing clout of Ford and General Motors (GM owns many of its suppliers), and, since its cars are concentrated in the low-to-medium-priced end of the scale, Chrysler doesn’t make large profits. In the auto business, the most profitable cars are the big ones, and, even though Chrysler came under attack in Congress for building gas-guzzling behemoths, its problem was just the opposite: It was strong at the bottom of the line, and thus more vulnerable to Japanese subcompacts and compacts than GM with its Oldsmobiles and Cadillacs and Ford with its LTDs and Cougars. Chrysler’s size (it accounted for one-tenth of annual U.S. auto sales) presented another problem. The company was barely able to withstand the ups and downs of the business. Selling automobiles is cyclical; there are bad years and good, and the trick is to have enough financial resources to weather the bad ones. Chrysler was having a tough time because, during the good years, it wasn’t making enough money to provide a cushion.

Chrysler also was suffering the same malaise as the rest of the auto industry. Beginning in 1965, with the publication of Ralph Nader’s polemic on the Corvair, Unsafe at Any Speed, automakers were being attacked for killing people on the highways, for making the air unfit to breathe, and for squandering scarce natural resources. The fun started going out of cars. Leon Mandel, in his book American Cars, wrote: “Sometime in the late sixties, the searchlights disappeared. Suddenly, almost without our knowing it, new-car introduction day was just another Monday or Thursday. There were no more soapy windows, no more hoopla.” Where were the fins of yesteryear?

Then, when the Arab oil embargo hit in 1973, Detroit suffered a collective nervous breakdown. Automakers began turning out timid, self-conscious cars, ashamed to be on the road drinking precious fuel. These were cars that Detroit didn’t want to build and America didn’t want to buy. They were absurdly overpriced and poorly constructed. Americans turned to Japanese cars not merely because the Japanese were building smaller autos that saved on gas (actually the United States had been the pioneer in small cars, with Kaiser’s Henry J in 1951) but also because the Japanese built good small cars. They were priced well; they were built well, with smooth surfaces and gleaming paint; and they worked.

And so, in the recession year of 1974, Chrysler lost $56 million; in 1975, $260 million. The next two years were profitable, but not profitable enough, and Riccardo realized that the future looked disastrous. To produce the cars it needed in the early 1980s, Chrysler had to invest huge sums in new plant and equipment, and the money wasn’t there. Chrysler was already the most leveraged of the auto companies, and by 1977 it was becoming clear that it was approaching the limit of its debt load.

By the time Iacocca arrived, Riccardo had launched his own rescue operation. The plan was to lobby the Secretary of the Treasury, Michael Blumenthal, for tax breaks that would provide Chrysler with $1 billion in cash to be paid back in future profitable years. Riccardo argued that the federal government owed Chrysler a bailout, that the company had gotten into trouble because of onerous regulations, like CAFE (Corporate Average Fuel Economy), which required companies to increase the average miles per gallon of their fleets from 18 in 1978 to 27.5 by 1985 or face stiff penalties. CAFE meant that Chrysler would have to build a new generation of cars, and, unlike Ford and GM, it didn’t have the money. Blumenthal was unmoved. Then Iacocca stepped in. He shifted the bailout effort to Congress, enlisted the support of Dougias Fraser of the United Autoworkers Union, and softened the argument: to bail out Chrysler would be to boost the economy, to save hundreds of thousands of jobs. If Chrysler failed, said Iacocca, the following plagues would descend on the land: the G.N.P. would fall 0.5 percent, the national unemployment rate would rise between 0.5 and 1.09 percent, the balance of trade would suffer a $1.5 billion shift on the deficit side. Welfare payments would amount to Si.5 billion, and the Pension Benefit Guarantee Corporation might have to shoulders800 million in unfunded liabilities, Iacocca also argued—and still argues—that the loan guarantees he sought from the federal government were minuscule. He said recently: “We weren’t the first; there were S409 billion in loans, guaranteed, before I even got to Washington to ask for my lousy billion-five guarantee.” Those other loan guarantees, by the way, are made mostly by the Small Business Administration, the Farmers Home Loan Administration, and the Export-Import Bank.

“Here I was,” said Iacocca, “a free enterpriser, coming hat in hand and asking for government involvement when I was against government involvement and regulation and so forth.” He campaigned against safety regulations and against CAFE. But, like other modern followers of Adam Smith, he did not let ideology stand in his way. With help from Patton Boggs & Blow, Debevoise Plimpton, Booz-Allen & Hamilton, and Salomon Brothers, Iacocca finally got the money and saved the company. In 1982 Chrysler made profit of $170 million—on the strength of selling its tank division to General Dynamics for $349 million. And last year, with sales up 30 percent, net income was $701 million. The company repaid its guaranteed loans seven years early and resumed dividends.

The immediate reason for Chrysler’s survival the government loan guarantees. The company simply would have run out of money if Congress had not approved the package in June of 1980. But even with the loans, Chrysler would not have survived without: (1.) the upturn in the economy in 1982, with the prime rate falling nearly by half to 11 percent from its 1980 peak, and (2.) measures to control expenses. Iacocca cut Chrysler factory employment in half. He closed one-third of the plants. He simplified production, reducing the number of parts and making new cars out of components of old cars. And he cut the break-even point from 2.3 million cars per year to 1.1 million.

In 1978 Lee Iacocca took over a company that was poorly managed and set it, at least temporarily, on a profitable course. But there’s a parallel here: Philip Caldwell in 1979 took over a company that was poorly managed and set it on a profitable course. The company that Caldwell took over. Ford, was poorly managed mostly by Lee Iacocca himself. “Whatever their accomplishments before or since, Henry Ford and Lee A. Iacocca, who was Ford’s president from 1970 to 1978, presided over major strategic snafus, bad safety decisions and a serious decline in the quality of Ford cars while sketching an illegible blueprint for the 1980s,” wrote Donald Woutat of the Los Angeles Times. “By the time Henry had fired Iacocca as president in 1978 and retired as chairman in 1979, the quality was so bad, a middle-level executive says, ‘It was embarrassing togo to cocktail parties and tell people where you worked.’”

From 1979 to 1983 Caldwell did many of the same things that Iacocca did, but in most cases, he did them better. He cut the break-even point for domestic production from 3.6 million cars per year to 2.3 million, reduced white-collar employment by 30 percent, and closed six factories. The losses of Ford’s North American division between 1980 and 1982 totaled S4.2 billion—far worse than Chrysler’s. But in 1983, Ford made back nearly half of its losses, and its cash flow ($4.2 billion) was more than four times Chrysler’s.

Ford had entered the dismal years flush with cash, and Caldwell didn’t have to spend his time hustling Congress. While Iacocca was in Washington shaking hands and making his case, Caldwell was in Dearborn cutting costs and, just as important, preparing for the future. Ford is roughly three times the size of Chrysler, but between 1979 and 1982 Ford’s capital investment totaled $ll.4 billion, compared with Chrysler’s S2.4 billion. And the investment is paying off in better cars. While Chrysler has been recycling its much-ballyhooed but technically mediocre K-cars, Ford has brought out new lines of aerodynamic beauties—the Thunderbird, Tempo, and Mark VII. The 1983 J.D. Power & Associates Customer Satisfaction Index ranked eight car divisions above average: six were Japanese, the other two were Lincoln-Mercury and Ford.

“If you can find a better car, buy it,” was Iacocca’s slogan during the glorious days of the turnaround. But that slogan was an act of bravado. Better cars were easy to find—and they still are. Most of them are Japanese. Iacocca’s sales appeal was that Chrysler was the scrappy underdog; the chauvinistic bit worked, but it probably won’t work forever. Chrysler has to start building good cars. Not just showy cars, like the LeBaron convertible or the new Plymouth and Dodge mini-vans (which will meet their match next year when both Ford and Chevrolet introduce sleeker versions) or the zippy Daytona and Laser sports cars, but solid compacts and subcompacts. Here, Iacocca has a serious problem. Half of his subcompacts—the Golt and Ghamp made for Chrysler in Japan by Mitsubishi since 1970—are superb. The other half—the Horizon and Omni, made in the U.S.A.—are not. And the K-cars are meeting stiff Japanese competition from the Mazda 626, the Toyota Gamry, and the Honda Accord.

Just how poorly made are Chryslers? A reputable source is Consumer Reports, which in April listed ninety-two recommended used cars by price. None was an Americanmade Chrysler. Of the 1982 and 1983 American-made Chryslers rated by Consumer Reports for incidence of repair, four scored “average,” nine “worse than average,” and five “much worse than average.” None was better than average. Compare those scores with Toyota: sixteen of seventeen models were “much better than average,” the other “better than average.” Ford had nineteen models scoring “average,” one “much worse,” and four “better than average.”

But instead of putting time and effort into improving Chrysler products, Iacocca keeps returning to the scene of his success: politics. He is still the industrialist-as-Washington-insider, and he is now convinced that what Chrysler needs is quotas on Japanese cars, or continuation of the Voluntary Restraint Agreement (which was relaxed this year to allow about 1.8 million Japanese cars to be imported to the United States), or, best of all: “Let’s slap a tax on every Japanese car sold in America equal to the tax loss we suffer on every car they now sell here.” Iacocca claims that the reason Japanese cars sell so well in the U.S. is that they enjoy a $1,600 per car advantage—due to the yen being “undervalued by at least 15 percent”—and that the Japanese “rebate” a S700 domestic tax on cars that are exported. But the Japanese were building better and cheaper cars than Detroit long before the yen declined. And in the first quarter of this year alone Chrysler received tax breaks totaling S317 million. That’s a “subsidy” of more than S600 for every car and truck Chrysler sold in those three months. A better explanation for the Japanese advantage of $1,500 to $2,000 per car can be found in the Commerce Department’s report. The U.S. Automobile Industry, 1982. The edge, says the report, is “primarily due to management factors and lower wage rates.” To compete, American automakers have to redesign their plants to build better cars “with less labor and less waste.”

Iacocca also has been crusading against the joint venture between Toyota and General Motors, by which the Japanese Sprinter subcompact will be assembled in California. It’s an odd complaint coming from the head of a company that sells 140,000 Japanese-built subcompacts and trucks a year, that uses Japanese and German parts and engines in many of its other cars, and that owns 15 percent of Mitsubishi Motors.

Chrysler still has a long way to go before it can survive another deep recession. The company lost $3.5 billion between 1978 and 1982 and has recovered only $1.6 billion through the first quarter of this year. The lesson that Lee Iacocca seems to have learned over the past five years is that industrial battles are won in Washington. Sadly, he’s at least half right—and he’ll be more right if some sort of “industrial policy” is instituted in the next few years. Then top corporate managers will be spending nearly all their time walking the halls of Congress instead of making their companies work better.

John T. Hompe contributed to the research for this article. It originally ran in the July 16, 1984 issue of the magazine.