In Tough Economy Chrysler Looks to IT to Trim Expenses, Improve Business

At the struggling automaker, private-equity ownership drives IT to slash costs through outsourcing and retool to compete globally.

No one thought it would get this bad.

But this summer, the U.S. auto market officially hit the skids, putting car manufacturers on track to rack up the worst sales year in a decade.

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As gas rose to more than $4 a gallon, commodity prices hit the roof and consumers rejected gas-guzzling SUVs and minivans—or, crippled by the housing crisis and credit crunch, put off new vehicle purchases indefinitely—June's U.S. car sales numbers were a clear sign that things had gone from bad to worse for an industry that was already suffering. General Motor's sales fell 18 percent. Ford's slid 28 percent. Even Toyota, which analysts predict could soon overtake GM as the U.S. auto sales leader, hit a serious speed bump, with its sales dropping 21 percent.

And there, at the bottom of the heap, was Chrysler.

The Auburn Hills, Mich., automaker's June sales fell 36 percent compared with 2007 sales. In North America, where Chrysler does 91 percent of its business, its market share shrank to less than 10 percent for the first time in years. July provided little relief, with U.S. vehicle sales falling to 16-year lows and Chrysler announcing a 29 percent decrease in sales compared to last year. And that was after Chrysler had announced plans to lay off nearly 30 percent of its employees, reduce its product portfolio and shut down its plants for two weeks this summer.

This can't be been what Cerberus Capital Management, the New York-based private-equity firm, which bought a majority stake in Chrysler last August, was hoping the headlines would be, leading up to its one-year anniversary. This year was to be one of painful cuts, to be sure, but one resulting in a return to profitability in 2009, a notion Cerberus and Chrysler executives have since abandoned.

A turnaround was always going to be challenging for Chrysler given today's auto industry focus on global markets, fuel-efficient vehicles and onboard technological innovation. Unlike Ford and GM, which have large foreign operations, Chrysler does little business abroad. It remains dependent on heavy vehicles, like large pickups, sport utilities and minivans. And its vehicles' technical bells and whistles don't match up to the competition, says David Cole, chairman of the nonprofit Center for Automotive Research (CAR). Chrysler has nothing like GM's OnStar system, Toyota's hybrid power-train technology, Ford's Sync communications and entertainment system developed in conjunction with Microsoft, or BMW's onboard computing.

Long-term success for the 83-year-old company means not just sandbagging until 2010, when experts predict the market will turn around, but a fundamental shift in business strategy. Being private could give Chrysler a head start compared to public automakers that have to ensure quarterly improvements to satisfy investors. Chairman and CEO Robert Nardelli touts the company he steers as "newly independent, reinventing ourselves for success" and has taken to calling the company a "$60 billion startup with an owner-operator mentality." It's a reference to Chrysler's revenues of $62 billion in 2006—its last full year as part of a public company—that glosses over that year's $1.5 billion loss. (Fortune magazine listed Chrysler LLC as the fourth-largest privately held company in the country with $49 billion in 2007 revenues, although the company will not confirm that figure.) Still, "Chrysler has the opportunity to change and become an agile company," says Thilo Koslowski, vice president of automotive and vehicle technology for Gartner.

To do so, the automaker must embrace unconventional partnerships with competitors to access emerging markets and introduce new vehicles and features. It must retool manufacturing and business processes to be more agile and efficient. And, to free up the capital to invest in these changes, it must become a drastically smaller company. At the heart of Chrysler's transformation is its information technology organization, which itself must not only shrink in size and get fiscally focused, but support the more agile and global Chrysler of the future.

That means more partnering for cost cutting and access to new ideas—specifically, through two IT services deals: one with Computer Sciences Corporation (CSC) to manage IT infrastructure and another with Tata Consultancy Services (TCS) for applications development and maintenance. It also means restructuring to support the outsourced environment, aligning internal IT staff more closely with the business—and doing it with a staff that's half its original size. "The goal is to move from order taker to innovation partner. It requires a change in thinking, a shift in focus and, in some cases, skills," says Jan Bertsch, senior vice president, treasurer and CIO at Chrysler. "We want to drive—not just react to—business growth."

IT is critical to the turnaround, say onlookers, but success is far from assured. "IT ultimately needs to enable automotive companies to remain agile and better respond to market needs," says Koslowski. "The move to make their own IT departments more efficient and rely more on partners is something we're seeing more and more in the automotive industry, though maybe not on the same scale as Chrysler. We'll have to see how well it works for them. There's potential there, but no guarantee of success."

Back from the Ashes Again

Where is Lee Iacocca when you need him?

The last time Chrysler faced a situation this dire—on the tail end of the 1970s oil crisis—it was Iacocca who made the tough decisions that got the company back on track. He resized the company, secured a significant loan guarantee from the government and introduced the K-Car line of inexpensive, fuel-efficient cars.

Chrysler's new management brought the former CEO in to rally the troops in June. But this time, it seems understood that there will be no government guarantees, no product to save the day, no turnaround by downsizing alone. A more fundamental strategy shift is necessary.

Always the underdog of Detroit's Big Three, Chrysler has slipped to fifth in sales—behind GM, Ford, Toyota and Honda—in its home market. Its performance in the near-decade as part of Daimler (which purchased the company in 1998) was mixed. There wasn't enough in common between the two giant automakers to pay off financially. "They couldn't ever get any economies of scale," explains CAR's Cole.

One of Chrysler's great traits, say industry watchers, has been its willingness to take a chance on a new vehicle. Most notable was its introduction of the minivan in 1982, which paved the way in transportation options for millions of future soccer moms and dads. But in later years, particularly under Daimler rule, the results were less than stellar. The Chrysler Crossfire, a high-design roadster built for Chrysler by Karmann of Germany, wowed car show audiences but stalled in dealer lots when it was rolled out in 2003. The introduction of the full-size Jeep Commander SUV in 2006 was poorly timed. The new products were an expensive hit or miss for Daimler; Chrysler experienced years of yo-yo profit and loss, ending 2006 in the red. And Daimler, which had laid out $36 billion in stock for a profitable Chrysler, decided all bets were off.

Last February, Daimler announced a three-year recovery and transformation plan that would eliminate 13,000 jobs at Chrysler (16 percent of its workforce) and enable a return to profitability by 2008. Chrysler was to focus on cost cutting in the short term and pursue long-term global sales growth along with a product portfolio that included more fuel-efficient, small vehicles. But the German mother company made it clear it was considering all options, including a sale.

At the time, there were some small IT outsourcing deals on the books, but the majority of IT work was done in-house by employees and supplemental contractors. Seventy percent of the IT budget was dedicated to keeping the lights on. Cerberus won the bidding war in May 2007, paying $7.4 billion for an 80 percent stake in the company (of which Daimler got just $1.4 billion, the rest going to fund Chrysler's industrial and finance operations). In August, the renamed Chrysler LLC became the first privately held major U.S. automaker in more than 50 years. And a plan to transform IT moved into high gear.

Cash Is King

Private-equity firms have earned a reputation for cold-bloodedness. Cerberus, named for the hell hound of Greek myth who had a snake for a tail, has little cause to fight the characterization. It invests in distressed companies, creates clear and ambitious financial targets and pursues those targets relentlessly to ready its investment for divestiture at a profit. "Most public companies are not that ruthless," says Alex Cullen, research director with Forrester Research. Private-equity firms "make a lot of money for their partners because they are ruthless." The process usually takes four to five years, according to the Private Equity Council.

Within days of finalizing the Chrysler deal, Cerberus named Nardelli, former CEO of Home Depot and Jack Welch acolyte of GE, Chrysler's chief executive. Nardelli was quick to extol the benefits of private ownership. "It helps us be lean, agile, decisive and fast to act on market opportunities," he reiterated at the International Motor Press Association breakfast in March.

That would be a big shift for any carmaker, say analysts. Chrysler may have introduced some innovative products over the years, but like most auto manufacturers, it takes nearly four years to bring them to market. A few carmakers, notably Honda and Toyota, have invested in digital manufacturing systems that enable them to be more flexible, adjusting product production and volumes to changing market conditions and shaving up to a year off the automobile product lifecycle. (To learn about India's Tata Motors' embrace of digital manufacturing, see "Digital Manufacturing Makes Automakers More Agile," Page 38.) "At Chrysler, that hasn't been the case," says Gartner's Koslowski, but it's important now. "Alignment between supply and demand—and the processes and technologies that will enable that—is something that Chrysler is focusing on quite a bit."

Experts say that a private owner like Cerberus could offer more breathing room to make fundamental changes—a couple of years instead of a single quarter.

Patience is a virtue now. Early this summer, Chrysler implemented its third round of cost cutting since November, raising vehicle prices 2 percent, shutting down a minivan plant and decreasing production of one of its most popular vehicles: the Dodge Ram pickup. All while fighting off rumors of impending bankruptcy.

Nardelli admitted at a Wall Street Journal conference in June that it is "hard to say" whether Cerberus would have shelled out for Chrysler if it had known last year what would happen to gas prices, though he added that the private-equity firm was not second-guessing its investment. Chrysler spokeswoman Mary Beth Halprin confirms that Cerberus's übergoal—the 2009 return to profitability—"has been adjusted," based on current market conditions. "We haven't given a revised time frame, due to the continuing changes in the marketplace," she adds.

Meanwhile, Chrysler's management must be laser-focused on cash flow. They're working to improve working capital, dispose of nonearning assets and, where it makes sense, reinvesting in product development and innovation, Nardelli has said.

For Bertsch and her team, that means IT must lower its fixed costs—and fast. "The feeling of senior management was that IT was spending too large a portion of its budget on maintenance and not enough on strategic new initiatives," explains Bertsch, noting that both applications and maintenance costs have been a drain. Chrysler's IT department is not alone in that criticism. "The auto industry is rationalizing more and more across all departments," says Gartner's Koslowski, "and IT is an area where the company wasn't always sure the investment was bringing the value it needed to."

Private equity brings that critique into sharper relief. Says Forrester's Cullen: "It's not a hostile environment, per se, but nothing's taken for granted. No IT investment will be made unless it's essential to keep business running or helps some aspect of a future sale."

Bertsch, a native Detroiter, may be uniquely suited to the CIO role in this iteration of Chrysler. She spent her 29-year auto industry career in finance at Ford and Daimler-Chrysler before being named the VP and CIO for Chrysler and Mercedes-Benz in 2006. Technology, she says, has always taken a back seat to cars. "Understanding the financial side of the business is critical and it's the basis for all business decisions including IT investments," says Bertsch.

"We're living in times of unprecedented change, and my personality is pretty well-suited to change. I'm always pressing for new things and challenging the status quo," she says. "I knew we had to consider a lot of options as we decided how to react to this challenge and transform our company and the IT organization."

Global Partnering for Cost Cutting and Profit

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