IACOCCA'S LAST STAND AT CHRYSLER His anointed successor must launch new models, shore up a shaky balance sheet, and find the controls of the company fast. But is Chairman Lee ready to give them up?
By Alex Taylor III REPORTER ASSOCIATE Wilton Woods

(FORTUNE Magazine) – CONFRONTED with a crisis, Lee Iacocca has always responded by stirring things up: Hire a new executive, change titles, rearrange reporting responsibilities. Now facing his biggest challenge -- disengaging from 13 years on Chrysler's throne -- Iacocca, 67, has done it again. But by bringing in an outsider, General Motors executive Robert J. Eaton, to succeed him as CEO, he has set up a combustible situation. Any number of events could cause ignition, and the resulting firestorm -- a massive exodus of top executives, say -- could easily harm the company. For the past three years Chrysler has been running on empty. With car and truck sales tumbling, it has been hoarding scarce cash to fund the new models that it desperately needs. Now, with those new models on the cusp of introduction, Eaton, 52, moves in as vice chairman and chief operating officer. He's confident. ''I have a strong background in product and manufacturing, and at least enough marketing and finance to run a successful business,'' he says. But even though Chrysler -- No. 11 in the FORTUNE 500 -- is only a quarter the size of No. 1 GM, he'll need months, perhaps a couple of years, to find all the levers. While Eaton is going through on-the-job training, he has to prove himself to his volatile boss. Forget what Iacocca says about retirement and golf. After years of living like the reigning monarch of autodom (planes, hotel suites, even the two houses the company bought from him), he's unlikely to turn up in a ticket line at Detroit Metro airport anytime soon. Iacocca is the biggest threat to Eaton's success because he still doesn't want to quit. Associates call him a man who can't let go. Their publicly announced agreement has Eaton taking over as CEO on December 31, with Iacocca moving to chairman of the executive committee. Eaton says he understands Iacocca will step down from that post at the end of 1993. But in a FORTUNE interview, Iacocca talked as if he plans to stay on until he turns 70, in October 1994. He has already picked out a role as Chrysler's spokesman to the world. Says he: ''The first couple of years, he ((Eaton)) wants to get his hands on the product and the dealer organization. Mr. Outside ((Iacocca)) will do what's right for the company and right for Eaton. Remember, the board didn't ask me to step aside. I'm still virile and strong, and I want to see this company do more than just get by. It's his show to run, but I know the press better, the bankers better, the Washington people. I've got to use that because it's good for the company.'' In Detroit parlance, Eaton is a ''car guy,'' not a ''bean counter'' -- but for Chrysler to prosper, its perilous finances are going to require a lot of his attention. After losing $795 million last year, the company saw its cash on hand shrink to $3 billion at the end of 1991. (The till has since been bolstered by $836 million from a private placement.) Analysts figure Chrysler will lose about another $150 million in this year's first quarter. Chrysler Financial Corp. has lines of credit worth $6.8 billion expiring in 1993 that must be renegotiated with 160 different banks. Chrysler has to have the money to lend out to new car buyers. People close to the situation expect the loans to be renewed but worry about the price the banks will demand. After seven years of declining profits, Chrysler's always shaky asset base has turned to matchsticks. Because the company stopped making cash payments to its pension fund last year in order to save money, its unfunded liability now stands at $4.4 billion. Under new accounting rules, by next year Chrysler must also set aside $5 billion to $7 billion for future retiree medical costs. Chrysler seems likely to follow the lead of other companies that have said they would take a one-time hit rather than spread the charge over many years. A one-time hit would cost Chrysler $3 billion to $4 billion after taxes and take a substantial bite out of the shareholders' equity, which stood at $6.1 billion at the end of 1991.

Longer term, other equally daunting shortcomings are apparent. Because it has the oldest work force in the business (average age: around 44), Chrysler will never be the low-cost producer. Older workers get sick more often, so Chrysler pays $600 more per worker annually in medical costs than Japanese manufacturers in the U.S. Since Chrysler thus earns less per car, it has less to invest in future new models and so risks slipping behind richer competitors. FOR THE IMMEDIATE future, all eyes will be focused on the fifth floor of the K.T. Keller Building at Chrysler's headquarters complex in Highland Park, Michigan. The odds on Eaton's survival may be no better than Chrysler's as an independent automaker. Iacocca treats heirs apparent the way Henry VIII treated his wives. Says one well-placed former Chrysler executive: ''The longer Lee lives with this guy, the longer he has to find fault with him.'' Since 1986 four potential successors have left Chrysler prematurely, at least in part because of Iacocca: President Harold Sperlich and three vice chairmen, Bennett E. Bidwell, Gerald Greenwald, and -- just last month -- Robert S. ''Steve'' Miller. Says a longtime industry observer: ''Eaton is small fry. What's he going to do when he gets the treatment that Bidwell, Greenwald, and Miller got?'' To complicate Eaton's settling in still further, a fifth potential successor remains very much on the scene. Friends say President (and until recently COO) Robert Lutz, 60, was shocked at being passed over for Eaton, though he has made the best of it by declaring publicly that he's a team player and privately that he's ''going to make this work.'' That doesn't mean he wouldn't leave if the right job opened up -- but neither does it prevent Iacocca from using Lutz as a foil to Eaton. Says one former Chrysler executive with close ties to the board who watched the succession process carefully: ''I can just see Lee around November 15 coming to the board and saying, 'You're going to have to prevail upon me to stay because these two guys ((Eaton and Lutz)) are at each other's throats, and you need me to save the company.' '' High-stakes office politics aren't what's required at Chrysler. The new troika at the top must start pulling quickly and strongly in the same direction. This year the company introduces its first all-new cars and trucks in more than a decade. Among them: the fire-breathing 400-hp Viper ($50,000), a new Grand Cherokee Jeep ($18,900 to $27,400) to counter Ford's hugely successful Explorer, and midsize sedans code-named LH (probably $15,000 to $25,000) that were the hit of the Detroit Auto Show in January. Launching a product that costs a billion dollars or so to develop is a tricky business that requires careful coordination among manufacturing, parts, advertising, and distribution. Flub any part of it and millions can be wasted, dealers and customers angered, momentum lost. Just ask GM, which has seen the debut of the much admired 1992 Cadillac Seville slowed by problems in the paint shop. If Chrysler can get past the hiccups that accompany a launch, its immediate future looks shinier than it has since the mid-1980s, when the revolutionary minivan and the original Jeep Cherokee had the market all to themselves. Over the past two years the company has completely reorganized its vehicle operations along Honda-style lines. Designers, product engineers, and manufacturing specialists have been assigned to ''platform teams'' for each type of vehicle. Instead of passing new car projects over the transom from design to engineering to manufacturing, Chrysler now assembles 700 to 800 engineers and others from each of those areas and tells them to work together. That gets better results faster and cheaper. Several of the teams have been installed just north of Detroit in Chrysler's new, billion-dollar Technology Center, the largest of its kind in the world, which was custom-designed for platform-team product development. So far, so good. Chrysler developed the new Grand Cherokee and built a plant to assemble it for $1.1 billion -- a bargain price. GM spent $1 billion on each of a series of assembly plants it erected in the early 1980s, some of which it may soon close. Production of the new Jeep started in January. Analyst John Casesa of Wertheim Schroder estimates that Chrysler will earn a healthy $5,500 per unit once the factory is running at capacity of 175,000 annually. In June, production of the long-awaited LH cars starts at a plant in Canada. They will be marketed in different forms as Dodges, Eagles, and Chryslers. If Chrysler can avoid embarrassing miscues like those that accompanied the introduction of its flawed four-speed electronic transmission in 1990, Casesa estimates it can build up to 300,000 of the cars annually and expect a profit of $4,100 on each one. WITH MUCH of the company running so smoothly, why did Iacocca and the board bring in an outsider? From interviews with Iacocca and Eaton, other current and former Chrysler executives, and sources close to the board of directors, it seems clear that Eaton was selected because he was the only candidate acceptable to Iacocca -- besides Iacocca himself. Neither Lutz nor Greenwald, the other finalists, appeared willing to give Iacocca as much rope as he wanted to stay on at Chrysler indefinitely as CEO or in a strong, decision- making board position. Iacocca tells a different story. He contends that Eaton had an edge over Lutz in age and experience. Says he: ''Bob Lutz is a great product planner, but he's not the manufacturer or engineer that Eaton is, no more than I am.'' As for Greenwald, he wasn't a car guy but a bean counter. Besides, Iacocca says he promised Greenwald that he could succeed him as CEO at the end of 1990 -- and Greenwald left anyway to lead an unsuccessful union attempt to buy out United Airlines. Last fall, as Iacocca increasingly procrastinated about picking a successor or setting a retirement date, the board began prospecting on its own. But the directors went about it in a peculiar way. Even though a three-member board nominating committee deals with executive assignments, all ten non-Chrysler board members decided to participate in the decision process. It would give them an opportunity, they believed, to work together as a unit for the first time since Iacocca trimmed the board last year from 18 to a more wieldy 13. The outside Chrysler board members included a core of hardheaded CEOs: Kent Kresa, head of Northrop; Joseph Antonini, chairman of Kmart; and Peter A. Magowan, who runs Safeway. But it also had the usual World War II bomber crew assortment, including Michigan ex-governor William G. Milliken, Lilyan H. Affinito, vice chairman of Maxxam Group, a forest products firm, and former Carter Administration Cabinet member Joseph A. Califano Jr. Their diverging concerns led to a series of leaks about who was being considered and, in the end, meant indecision and compromise. One consistent theme ran through the board's deliberations. Clearly Iacocca didn't want Lutz, his logical successor once Greenwald was gone, to follow him. Both Iacocca and Lutz are strong-willed executives reluctant to share the limelight; they seemed destined to reach this final impasse. So the board began turning up candidates from outside Chrysler, though not in any systematic way. No headhunter was retained to make the process more professional -- or more discreet. Among the most noteworthy candidates: Greenwald; Roger Penske, the race car driver turned industrialist; and Ross Perot, the computer company founder and gadfly former GM director. Penske has enhanced his reputation by resuscitating engine maker Detroit Diesel. But according to one source, Iacocca wanted to sign Penske as No. 2 without a firm guarantee of when Penske would succeed him. That was unacceptable to Penske. A further obstacle: the need to unravel Penske's other considerable business interests, which include an Indianapolis 500 car racing team, Hertz Penske rental trucks, and Longo Toyota in El Monte, California, the nation's highest-volume showroom. The board got in touch early on with Greenwald, who had worked at Chrysler since 1978 and was Iacocca's No. 2 from 1986 until he left. Though he was pursuing a second career as a New York investment banker at Dillon Read, Greenwald often said that he missed the excitement of the auto business. But departing Chrysler was one strike against him. Strike two was the board's belief that picking Greenwald meant losing Lutz. Though not exactly blood enemies, they had been natural rivals because of their proximity near the top of the Chrysler totem pole. A showdown between Iacocca and Lutz had been inevitable since Lutz arrived in Highland Park in 1986 after leaving Ford in the wake of a management dust- up. Lutz is the only auto executive in Detroit who can outshine Iacocca. Tall, silver-haired, and photogenic, Lutz is articulate and cosmopolitan. He speaks four languages and after a stint at BMW ran Ford's big international operation in the early 1980s. When Iacocca lights one of his Havana cigars, he looks like a plutocrat; when Lutz puts a match to one, he resembles nothing so much as a dashing RAF pilot back from a risky mission. (Lutz flew jet fighters in the Marines.) ''One hot dog can't like another hot dog,'' says a former Chrysler boss and Iacocca chum about the conflict. Lutz's strengths were also his weaknesses. His concentrated focus on product development left him unschooled in the niceties of finance or labor relations. His single-mindedness often appeared as stubbornness. ''Lee is adaptable,'' says one Chrysler executive. ''Lutz is not.'' In opposition to Iacocca, Lutz wanted Chrysler to remain independent and to develop a new subcompact car on its own, without an overseas partner. Lutz won both battles but lost the war.

Then there were personal matters. The multilingual Lutz occasionally conversed with chief engineer Francois Castaing in French, a habit said to have infuriated Iacocca. Though Iacocca is no stranger to failed marriages, Lutz is in the middle of his second divorce and has complained publicly that it will cost him $20,000 a month. While Iacocca is more comfortable in the back seat of a limo, Lutz loves to drive fast -- really fast -- and packs a police radar detector in his briefcase. Three years ago, at 57, Lutz learned how to fly a helicopter; two years later he crashed one and has found less time to fly since then. Eaton entered the competition late in the game, only weeks before the final selection. His 29-year career at GM was marked by swift promotions with no detours; he is a hunting companion and protege of former CEO Roger Smith. An accomplished engineer, he developed GM's first front-wheel-drive compact cars, introduced in 1979, and ran GM's huge Technical Center before his posting to GM Europe as president in 1988. He inherited a strong product line and, with the German economy roaring, reaped record profits for several years. He has never held a day-to-day operating job. GM Europe is based in Zurich, far from any car factories, and is run like a holding company with a scant 200-person staff. BY FEBRUARY, owing in part to public pressure from major stockholders, the board's deliberations took on greater urgency. Names of potential candidates were leaking to the press. Vice chairman Miller's abrupt departure stripped Lutz of some insurance because a number of directors had mentally paired Miller, a finance specialist, with Lutz as a team. Miller insisted that he left Chrysler to do something new -- investment banking, with the James Wolfensohn firm in New York City -- but associates speculated that frustration over Iacocca's intransigence helped him make up his mind to go. When the outside directors convened for their crucial meeting at Manhattan's Waldorf-Astoria on a cold Saturday night in mid-March, their choices were limited. They had not faced the Iacocca issue squarely. They wanted a succession plan in place -- all boards do -- but they were unwilling to push Iacocca out despite their misgivings about his intentions. Their irresolution eliminated Greenwald, who made his candidacy contingent on quick installation as CEO and an exit plan for Iacocca. Lutz was less explicit about his terms but was clearly unsympathetic to having Iacocca stay on indefinitely. Eaton could afford to be more accommodating. His chance for big future promotions at GM was almost nil, since he faced a logjam of other qualified executives and GM has a poor record for reassimilating personnel from overseas. Once subjected to the Iacocca charm, and mindful that even Chairman Lee cannot roll back the calendar, Eaton undoubtedly felt the risk was manageable. Of course Iacocca can change his mind about Eaton, as long as the board concurs, and while Iacocca has indicated that he might leave the board at the end of 1993, he now hints that it could be a year after that. Chrysler, arguably the most improved member of the Big Three, will now be run by a former executive of GM, which lost a record $4.5 billion last year even though GM Europe made money. Some sorting out will be in order. Because Eaton and Lutz are both product specialists, they will have to find a way to divide their duties. Following the departures of Greenwald, Miller, and treasurer Fred Zuckerman in the past two years, Chrysler has a shortage of bean counters -- something it may need more urgently than car guys now that it is beginning to roll out its impressive line of new models. The well-liked incumbent CFO, Jerome B. York, 53, an engineer by training, has had the job less than two years. Eaton will find that Chrysler's management style takes getting used to. GM is committee-managed, bureaucratic, staid; Chrysler is lean, fast, loose. If Eaton asks for a study group, he'll get a management trainee; if he wants a report, he'll get only a page or two. Chrysler executives, especially those on the fifth floor at Highland Park, engage in a fair amount of men's-club jostling, most of it friendly, and sometimes express their opinions loudly. Says one Chrysler manager: ''We're a little different. You can't get near the fifth floor without hearing voices being raised.'' Eaton's arrival has already dented the morale of other Chrysler executives who now see their way to the top blocked by a relatively young boss. While it would be only natural for Eaton to recruit former colleagues to come to Chrysler, creating a further squeeze on the supply of attractive jobs, he says that's not his style. Also, the boss has asked him not to. ''When you bring six or eight guys in from outside, that's when you have trouble,'' says Iacocca. ''We did that in 1978 and 1979, but we're not in that bad shape anymore.'' One area where Eaton is bound to make an impact is in forging foreign alliances. He negotiated GM's purchase of 50% of Saab's car-making unit in 1990 and has put together several manufacturing ventures in Eastern Europe. Iacocca has talked for years about forming a ''Global Motors.'' He has had manufacturing and distribution alliances with Renault and Mitsubishi, and has discussed mergers with Volkswagen and Fiat. Ford has studied combining with Chrysler. Iacocca's Japan bashing has alienated Mitsubishi over the years, and Renault and Fiat are too weak to help Chrysler now. But Volkswagen and Ford remain genuine possibilities. Both companies could benefit from Chrysler's skill at product development, now the deftest in the West. Volkswagen needs Chrysler to boost its sales in the U.S., which it cannot do alone. Chrysler's minivans and Jeeps are popular in Europe, and would fill gaps in VW's product line. Ford needs Chrysler to fill gaps in its line, notably with minivans and the LH sedans. Once Iacocca is out of the picture, integrating the managements of the two companies would be easier. What does Chrysler need? It is replenishing its product line with new small and compact cars, a new light truck (the first in 22 years), a new roadster, and a revamped minivan in 1995. But what happens after that? The company hocked the store to develop these new models. It needs money and resources to engineer their successors and salt some cash away for the next economic downturn. Staying competitive in engineering, marketing, and distribution gets ever more costly. Government regulations require hugely expensive investments in cleaner engines, lighter and more economical vehicles, and electric propulsion systems. Chrysler cannot spend enough to keep up with more prosperous rivals both in the U.S. and abroad. Since Iacocca masterminded the $1.5 billion government loan guarantee that kept Chrysler afloat in the early 1980s, he has turned in a mixed performance. Between 1986 and 1991, Chrysler fell from No. 6 to No. 10 among the world's automakers (see table). If Eaton finally gets the opportunity, his job will be to arrest that slide and ensure Chrysler's survival -- as a small independent automaker or as part of a new Global Motors. Either way, it won't be easy.

CHART: NOT AVAILABLE CREDIT: FORTUNE CHART CAPTION: DOWN TO NO. 10 Since 1986 automakers in Europe and Japan have grown, while all of the U.S. ) Big Three have seen sales skid. Only Chrysler lost position, however, sinking from No. 6 to the bottom of the top ten.

CHART: NOT AVAILABLE CREDIT: FORTUNE CHART/SOURCE: STANDARD & POORS CAPTION: A FINANCIAL RISE AND FALL Since Chrysler's credit rating has once more slipped below BBB-, its debt is again considered ''junk.''