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Chrysler's Neon


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CHRYSLER'S NEON

In the afternoon of July 31, 1990, in a test-track garage in Highland Park, Mich., Lee A. Iacocca huddled with a dozen Chrysler Corp. engineers to make a decision that would help determine the future of their company--and, quite possibly, of the U. S. auto industry. To husband cash at his troubled carmaker, Iacocca was considering a joint deal with Italy's Fiat to build a new subcompact, Chrysler's first since the Omni and Horizon twins in 1978. On this steamy day, the engineers had one last chance to persuade their strong-willed chairman to let them do it themselves.

The lights were dimmed, and Robert P. Marcell, the 53-year-old head of Chrysler's small-car team, made the most of his opportunity. He began showing slides of his hometown, Iron River, a decaying mining community in Michigan's Upper Peninsula. Up flashed the now-shuttered Homer-Wauseca mine, where Marcell had worked summers during college. Then the abandoned yard, where 1,000 railcars a day were once loaded with ore. And the hospital where, because of the flight of the young from Iron River, five people die for every one that is born. The town is crumbling, he said, his voice shaking, "because we couldn't compete."

Detroit, Marcell argued, was slowly heading toward the same fate, and abandoning small cars would speed its demise. But if Chrysler could become the first U. S. company in decades to make a profitable subcompact, it could help reverse the trend. It could prove that American carmakers, in toe-to-toe combat, can outmuscle the Japanese. Marcell uttered what became his team's rallying cry: "If we dare to be different, we could be the reason the U. S. auto industry survives. We could be the reason our kids and grandkids don't end up in fast-food service." As he ended his pitch, he thought he saw a tear in Iacocca's eye.

Thus began one of the most remarkable development efforts in Detroit's history. Marcell and a core group of 150 compatriots at the No. 3 carmaker mobilized 600 engineers, 289 suppliers, and even blue-collar workers in the campaign to deliver the new model in a speedy 42 months, for a fraction of what any recent small car has cost. Starting with an uncharacteristic willingness to borrow from competitors, they overcame the hidebound Motown habits and self-doubt that for decades squelched U. S. auto innovation. Now, as the frenzied effort builds toward a close, it seems that the Neon, as the car is named, will meet most of Marcell's goals.

RESURGE AND DEVELOPMENT. Despite such disruptions as a midcourse change to snazzier headlights, production should start in November, three months ahead of schedule. Thanks to unprecedented penny-pinching, Chrysler engineers think each car will cost $500 less to build than any competing subcompact. When it hits showrooms on Jan. 1 with a price of about $8,600, the Neon could thus beat the Japanese at their game of selling inexpensive, good small cars at a profit. By that measure, "this will be the most successful American small car ever," says James P. Womack, co-author of the seminal 1990 auto study, The Machine That Changed the World. If he's right, Neon will help finish a fast turnaround at Chrysler. Just 16 months ago, its losses were alarming, its stock was at 10. But a redone Jeep Grand Cherokee plus its new LH midsize cars produced a record $880 million first-quarter operating profit, before an accounting charge. Now, the stock is at 40.

By completing the triple play, the Neon would be the most dramatic proof yet of the edge Chrylser gets from its improved development formula. The car should come in on budget at $1.3 billion. By contrast, Ford Motor Co.'s newest Escort, developed with help from Mazda Motor Corp., took five years and $2 billion to bring out. Ford's new European Mondeo compact, soon to replace the Tempo in the U. S., cost $6 billion. General Motors Corp.'s hugely popular Saturn took seven years and $5 billion. The rest of Detroit is getting the message. Ford is hustling to create its own versions of Chrysler's teams and reverse its greatest weakness--its glacially paced product development. And GM, at long last, seems poised to shake inefficiency so it, too, can finally compete.

There are reasons galore for taking this road. For a decade, analysts figure, the Big Three have priced small cars so low--to sell enough to average against their large cars in meeting the government's gas-mileage standards--that economy-car losses wiped out big-car profits. Detroit's earnings have come mostly from pickups and minivans, segments where foreign competition has been weak or hurt by tariffs. But these havens won't stay safe forever. Heavyweights such as Honda, Toyota, and Mercedes-Benz will crowd into them in a few years, driving margins down.

At the same time, environmental pressures will likely force more Americans to buy small cars. Already, California is considering a higher sales tax on gas hogs. And new federal energy taxes could push gasoline up 75 a gallon by the end of the decade, predicts Christopher W. Cedergren, an analyst at AutoPacific Group Inc. in Thousand Oaks, Calif. On top of that, the federal mileage standard is likely to rise from the current 27.5 miles per gallon, forcing carmakers to sell more gas-stingy cars. Companies that can't make money on those may end up on the junk heap.

Skill in making small cars may also be crucial for exploiting new opportunities. Subcompacts predominate in emerging markets such as Asia and Latin America, where auto sales are expected to zoom 50% in the next decade. Meantime, markets such as Western Europe and North America will stagnate. It will thus be crucial to apply the Neon's lessons to big cars, as well--either to fatten profits or hold prices in check to build market share.

YEN AND YANG. Indeed, Detroit is getting the hang of all this just as the Japanese are stumbling. The latest versions of models such as Honda Motor Co.'s Civic and Toyota Motor Corp.'s Corolla have become so big and sumptuous that they're giving shoppers sticker shock. The stronger yen, up 21% vs. the dollar in just two years, has forced prices even higher: Japanese subcompacts, on average, cost 13% more than in 1991. As a result, the Japanese share of U. S. sales in that segment has fallen from 52% to 49%. "Customers are willing to pay less than we expected," says Takayasu Honda, Toyota's chief engineer on the Corolla.

It's way too early, of course, for Chrysler to crow. The yen's value can always change back in Japan's favor. For the Neon to turn a profit, moreover, 300,000 must be sold each year--a figure that Saturn is just approaching. Beyond that, the 2,300-pound car will have some heavy baggage to haul. Chrysler has the worst quality record of the Big Three--not to mention the Japanese. "I'm not that worried," says Toyota's Honda. "Even if you have a good car, it's hard to get people to buy it immediately. You need a reputation for reliability." Still, the Neon has the best chance in years to disprove Henry Ford II's 1972 dictum: "Minicars, miniprofits."

At least in Detroit, that logic is still largely undisputed. Designing a first-rate, inexpensive small car "is probably the ultimate engineering challenge," says Kenneth K. Kohrs, Ford's vice-president for car product development in North America. Until the Neon, big and small cars took nearly the same time and money to design--yet small ones sold for far less. At Chrysler, top officers such as Iacocca and Chief Financial Officer Jerome B. York knew this all too well, and by 1990 they were sizing up potential partners. Even so, four months before the garage meeting, Marcell began planning the Neon with backing from President Robert A. Lutz and engineering chief Francois J. Castaing.

From the start, Marcell figured the Neon demanded an unusual approach for Chrysler. He and 12 engineers first assigned to the project latched on to a newly popular concept called concurrent engineering. This meant getting engineers, marketers, purchasing people, and finance types to work together from the start to avoid later delays from disagreements or misunderstandings. Teams designing the new Jeep and the LH cars were already trying such an approach. But the intensity peaked at Neon: If costs weren't rock-bottom, the project would die. The team borrowed Japanese techniques with names such as quality function deployment, a way to prioritize customer desires, and poka-yoke, making assembly procedures more foolproof. And blue-collar workers got more responsibility than in any program except Saturn's.

While the Neon was still only a sketch, the team began sizing up the competition. The engineers drove models such as a Honda Civic and a Ford Escort, measuring in detail how they handled. They also tore them apart, weighing each component and figuring what it cost to make so they'd know what they had to beat. Then team members talked to consumers, such as subcompact owners in import-happy San Diego. They didn't want much: a small car that felt like a big one and was reliable, fun to drive, and safe. In expeditions to shopping malls, Marcell's deputy, engineer Alan C. Carlson, found that young families use small cars as utility vehicles, hauling kids and gear to work and play.

All the preparation armed Marcell for his test-track pitch. When the meeting broke at 6 p.m., Iacocca was noncommittal. But Marcell's speech had moved the cigar-chomping chairman. A few weeks later, the team began getting requests from top managers for more details. "That was the turning point," says Joseph N. Caddell, Chrysler's general product manager for small cars.

TWICE SHY. Marcell knew the car risked missing its stringent targets unless components makers got on board early. After all, they would furnish 70% of the value of the car. So in October, 1990, the team invited 25 makers of key parts such as seats, tires, and suspension components to send engineers to Chrysler's Chelsea (Mich.) proving ground. There, they drove the crude first prototype, cobbled together on a Dodge Omni body. Team members laid out their tough cost challenge. At first, the suppliers were skeptical of the partnership Marcell envisioned, which called for sharing sensitive financial data and ideas in a mutual effort to slice costs. They had all been burned before by customers professing brotherly love. But Marcell's earnestness won them over.

Soon, suppliers were nearly living with Neon team members. Take the case of Johnson Controls Inc., which Marcell chose to supply seats. Johnson met its cost target. But it fell far short on safety, weight, and comfort. So on Jan. 2, 1991, 10 Chrysler engineers arrived at a glass-and-brick Johnson building west of Detroit. After five 10 1/2-hour days, they and 10 JCI counterparts, led by sales director Rudy Paluch Jr., agreed on weight, cost, and performance targets that haven't budged since. That's a stark contrast to the typical U. S. new-car program, where countless small changes inflate the price. "The dimes all of a sudden add up to dollars, and you've lost your cost control," says Paluch.

In another break with convention, the Neon team accepted higher component costs if it meant a less costly car overall. For instance, Johnson designed the rear seats for some Neon models so they would fold down to expand trunk space. But Chrysler's manufacturing engineers wanted all versions of the seat to install the same way, which meant making the fold-down seat more complex. That cost more, but Chrysler will save up to $1.1 million in simplified final assembly.

ESCORT REDUX? As the Neon took shape, the magnitude of Chrysler's challenge was dramatized by its rivals' troubles. In April, 1990, with much fanfare, Ford unveiled its all-new Escort. But sales slumped because of lackluster styling and a rough-running engine. Ford soon began selling Escorts with popular options for $9,995--at a loss, analysts figure, of $500 each. In fact, although more than 4 million Escorts have been sold since their debut in 1981, "the car has lost a lot of money," says a former Ford executive. To keep the original car selling, for instance, the company spent nearly $4 billion on cash rebates and other incentives during its 10-year life.

By the spring of 1991, the cost-containment work of Marcell's 12 core people was easing Iacocca's fears of Escort redux. For one thing, production was to start in January, 1994. Such a quick turnaround alone would shave about 40% off Chrysler's usual engineering bill, which accounts for about one-fifth of development costs. So in April, 1991, the Chrysler board approved the Neon's budget. That would cover a new body and chassis, plus a brand-new 130-horsepower, 2-liter overhead-cam engine and five-speed manual transmission. It would also pay for retooling assembly plants in Belvidere, Ill., and Toluca, Mexico, and for building new engine and transmission lines. It was an ambitious plan with a tight bankroll. "With the exception of having faith that we would find a way, we really didn't know how we were going to get there," Marcell concedes now.One thing he did know was that the Neon wouldn't sell if it scrimped on features or performance. So the team focused on cutting costs where customers wouldn't notice, or wouldn't care. For instance, small-car owners told researchers power windows weren't important, so the team chose the crank variety. Market research also showed that buyers saw nothing special in the four-speed automatic transmission most competitors offer. So engineers adapted an existing Chrysler three-speed, saving more than $300 million. The team also decided to sell identical cars at Chrysler and Dodge dealerships instead of offering two slightly different versions, as Ford did with its Escort and Tracer. That saved about $10 million in engineering and tooling. Stylists did away with all but one exterior molding, chopping parts costs $50 per car.

At the same time, the team spent money it knew would count. Small-car owners worry a lot about safety. So team members swallowed hard and made Neon the first subcompact with standard dual air bags. Marcell figured the bags would be a whopping 10% of the car's total parts bill. But supplier TRW Inc. lowered that substantially by designing a single, cheaper impact sensor to replace the usual three. In addition, Neon will have reinforced doors that will meet the tough 1997 federal side-impact standards three years early.

By September, 1991, the program was humming along when top management threw a wrench in the works. At a review session in Chrysler's styling studios, Lutz and Iacocca said they wanted a new front end. They preferred the distinctive oval headlights and more daring character of the Neon concept car making the auto-show circuit to the rectangular lights the team had chosen. The problem was, top brass had promised--for once--not to meddle. "I had some pretty upset people," concedes Marcell. "The reaction was, 'It's going to cost $20 million in added investment!' "

CIVIC MINDED. Lutz, worried about morale, offered to explain the decision to the team. But Marcell cajoled his charges into evaluating the difficulty and the cost of a change. They quickly decided that the jauntier appearance was a plus. In the end, the redesign cost only about $7 million. And the new headlights cost less, so the net effect was a wash. More important, the program didn't skip a beat. Team members scrambled, and the Neon prototypes built just four months later incorporated the new look.

Team morale got a lift that October when Honda began selling its all-new Civic. For two decades, Civics had set the standard for subcompact excellence. So Neon team members pored over the new version, and what they found was startling. On the plus side, the car was roomier, with more contemporary styling. And Honda had shaved about $700 in costs with fewer, simpler parts. But the basic price was up 8%, to $8,100. And behind the wheel, visibility was worse and handling was annoyingly sluggish, in part because the car weighed more. The team decided the old version was still its benchmark for driving fun.

By then, Marcell was focusing on readying Belvidere for high-quality output. As early as November, 1990, he had asked union members there to help engineers make the car easy to build and to streamline production methods. The result, in theory, will be fewer defects. "Engineers are great, but they've never built a car," says Bob Dunlavy, a United Auto Workers quality coordinator.

In January and February, 1992, Marcell enlisted the UAW full-time. Chrysler bused about 90 Belvidere workers to suburban Detroit to help assemble the first production prototypes and suggest how to do the job better. Among the many ideas they came up with: a height-adjustable assembly line, so assemblers can fasten on components without fatiguing body contortions that lead to mistakes. Two workers, Ron Swain and Gary Smoot, suggested changes to Neon's door-installation equipment so window glass would fit perfectly. That's crucial, since there's no upper door frame to guide the glass, and the slightest gap can cause wind or water leaks. So far, workers have proposed more than 4,000 changes in the car and production process, and many have been implemented. "We're proud of what's going on," says Dunlavy.

In the spring of 1992, the Neon team got a new target to aim for. After its lengthy gestation and a snail-like production launch, GM's plastic-bodied Saturn began to show big sales gains. Researcher J. D. Power & Associates Inc. tagged it as the highest-quality U. S. model and said its customer satisfaction trailed only Japan's luxury brands, Lexus and Infiniti. For the year, sales would hit 196,000, matching Toyota's Corolla and proving that a U. S.-designed and U. S.-built small car could compete hubcap-to-hubcap.

There was just one hitch: Saturn Corp. may never make money. The company lost about $700 million in 1992. President Richard G. "Skip" LeFauve promises Saturn will break even this year, but that's only because of creative accounting. LeFauve concedes the company will be paying only ongoing expenses, such as materials and wages, plus the amortized $1.9 billion cost of Saturn's factory. An additional $3 billion in Saturn's startup costs go on GM's books. "Saturn started about 20 miles in the hole, and there's just no way they can get out," says author Womack.

Costs aside, however, Saturn sent an urgent message to Neon: Top quality is crucial to sales. Defect rates on Chrysler products have declined dramatically over the past decade, but they're still higher than almost everyone else's. In 1992, Chrysler's current small cars, the Dodge Shadow and Plymouth Sundance, had 162 problems and 137 problems, respectively, per 100 cars, according to J. D. Power. That's worse than the small-car average of 111 problems and well behind leader Toyota Corolla's 76. Consumer Reports, meanwhile, rates the two cars' reliability next to last among small models, ahead of only the Hyundai Excel. Marcell vows that Neon will match the Corolla.

HARD MILES. To make good on that promise, test drivers are logging unprecedented hours. By the time sales kick off, Neon prototypes will have been driven 4.7 million miles--40% farther than Chrysler's LH sedans. In another break with tradition, Belvidere workers will rack up 1.5 million miles to get hands-on experience with the products they'll build. Some early prototypes have already gone 250,000 miles, helping engineers identify weak spots, such as a front-suspension component that has been reinforced.

By last February, Chrysler felt confident enough about the Neon prototypes to let outsiders behind the wheel. Automotive journalists and industry analysts traveled to Chrysler's Arizona proving grounds for a day of briefings and driving. Most came away impressed by the power of Neon's peppy engine and by its agility on corners. "They really are superb," says analyst Cedergren. "You feel like you're driving a bigger car."

In an unusual twist for a U. S. company, Chrysler plans the Neon's public debut at September's auto show in Frankfurt, Germany. Team members want to drive home the point that it can run with the best small cars in the world. They also hope to attract a few buyers. The Neon will go on sale in Europe in April, 1994, just four months after it arrives in U. S. showrooms. Marcell hopes that European demand will help keep Belvidere humming at its 300,000-a-year capacity. That's key to making full use of Chrysler's investment and making the Neon profitable. If demand falls short, he's ready to start building right-hand-drive versions for export to markets such as Britain and Japan.

Marcell and his team can't get too cocky. Saturn is a formidable rival. And Japanese carmakers are fighting back, methodically cutting costs (page 124). They absorbed the effects of a strengthening yen in the mid-1980s without breaking stride, and they'll recover this time. Still, the Neon has as much chance to succeed as any U. S. subcompact ever has. And to prove, in the bargain, that Detroit can once again run at the front of the pack.SUBPAR SUBCOMPACTS

DODGE OMNI, 1978-1990

It and Plymouth Horizon got five safety recalls in first six months. Consumer

Reports blasted its

high-speed handling.

AMC GREMLIN, 1970-1978

Launched by American Motors Corp., which Chrysler bought in 1987. Stalled

intermittently during right turns.

CHEVY VEGA, 1971-1977

Faulty rear brakes. Wheels tended to fall off. Aluminum engine burned oil after

about 10,000 miles.

CHEVY CHEVETTE, 1976-1986

Transmission, mounted in rear, ate up seating and cargo space. Underpowered.

Weak brakes. GM lost about $300 apiece.

FORD PINTO, 1971-1980

Front end impossible to keep aligned. Rough-riding.

Heavy-steering. Risk of gas-tank fire if rear-ended.

FORD ESCORT, 1981-1993

Good fuel economy, but underpowered. Best-selling American car for a while.

Hasn't yet made money.

David Woodruff in Detroit, with Karen Lowry Miller in Tokyo


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