SERGIO MARCHIONNE,"New Realities in a New Automotive World",

04.02.2011
J.D. Power and Associates International Automotive Roundtable, San Francisco
Sergio Marchionne
Chief Executive Officer, Chrysler Group LLC
"New Realities in a New Automotive World"
J.D. Power and Associates International Automotive Roundtable
Palace Hotel
San Francisco, Calif.
February 4, 2011
Thank you, Finbarr. And good morning to all of you.
I want to thank J.D. Power and Associates for the opportunity to speak to this group. Over the years,
J.D. Power has had an enormous and lasting influence in forcing our industry to honestly assess itself
by showing us how customers view what we do.
It is a trite statement of fact that facing reality has not always been the automotive industry's strong
suit.
This is one of the factors that made it so difficult for our business to get through the economic "perfect
storm" that is finally, we hope, subsiding. One might even venture to say that this condition was the
cause for the perfect storm.
But regardless of its origins, the recent crisis has swept away many of the old notions about how to
operate in this industry. The inevitable outcome of the deep recession was a seismic shift in market
conditions and, of necessity, the operating models we were accustomed to.
The crisis has forced a shift to something new, different, and in my view, much better.
It is inappropriate to eulogize now a crisis that has caused so much suffering for so many. However, it
is already evident that once the rubble has been cleared away, an enduring part of its legacy will be
the fact that it has forced every part of the system - industrial, economic, financial and even, in part,
political - down a path of reform and renewal.
The crisis has rubbed our noses in the irrefutable reality that no part of the system can afford to
indulge in wasteful practices and that the new era now upon us requires selectivity, rigor and
austerity.
We have entered an era where inertia cannot be tolerated and failure to adapt is punished.
It is no longer possible to waste time by denying problems or passing them down the line.
It is no longer possible to waste energy and resources, being content with inefficiency.
It is no longer possible to waste capabilities and energies in pursuit of objectives that are not in the
common interest.
This reality applies across the board: to every industry sector and every national economy.
In particular, automotive was one of the worst hit sectors precisely because it has been carrying its
structural flaws for decades - problems such as production overcapacity and economic inefficiency -
without ever having demonstrated the courage or ability to tackle them.
We were forced to acknowledge our shortcomings and to take action to remedy them.
I'm reminded of a story about John F. Kennedy.
As a Navy lieutenant in the Second World War, he was credited with saving the lives of his crew after
his boat, PT 109, was struck by an enemy destroyer in the Pacific.
Later, when a reporter asked how he became a war hero, Kennedy said, "It was involuntary. They
sank my boat."
For the auto industry, the decision to construct a new operating model also was involuntary. It was the
sensible response to realizing that the boat was sinking.
The crisis laid bare the necessity to work more closely with others in order to ensure access to
adequate capital, leverage technological know-how and investment, lower costs and ultimately deliver
what customers want.
The alliance between Chrysler and Fiat is one demonstration of how this industry is adapting to new
realities.
Before I discuss where Chrysler is at today, I want to take you back some 25 months. On December
31, 2008, The Financial Times published its predictions of what would happen in 2009.
Under the question, "How many U.S. carmakers will survive?," the Financial Times answered, "Two."
The newspaper wrote, "a great deal of overcapacity will need to be cut and the obvious victim will be
Chrysler."
Much has happened since then, and Chrysler's continued existence has surprised many
prognosticators, not just The Financial Times.
For a while, it was as if there was a competition to write the best obituary before the body had turned
cold.
But no obituary is needed. Chrysler is in fact on a path to a solid recovery.
Just this week Chrysler announced its 2010 total year results.
It showed that we had met or exceeded all of our upgraded forecasts.
Chrysler posted an operating profit of $763 million dollars for the year. We ended 2010 with $7.3
billion dollars in cash, bringing our total available liquidity to more than $9.6 billion dollars. This cash
generation is important as it enables us to continue investing in new products and in brand building.
In the United States, Chrysler's market share came in at 9.2 percent, up from 8.8 percent the previous
year. Canadian market share increased to 13 percent for full-year 2010 compared with 11 percent in
2009.
We also began 2011 with a product portfolio that has been almost completely rejuvenated within a
span of only 19 months since Chrysler Group LLC began operations as a new entity. For the full year
2010, we launched 16 all-new or significantly refreshed vehicles. These included two nameplates that
were new to the market, as well as 75 percent of the nameplates carried over from 2009.
Our ability to deliver on our commitments is helping to change attitudes toward the company.
Earlier this month, in a story filed from the North American International Auto Show in Detroit, Forbes
magazine reported that "Everyone was buzzing about Chrysler's turnaround."
The story was headlined, "Against the Odds, Chrysler Goes From Third World to World Class."
I don't say all this to brag. It is not our style, although this industry has produced some incredibly
cocky people.
I think we should distribute humility pills, so that we all remember to keep our heads down and keep
on working.
My purpose today is to show how much the conversation about Chrysler has changed.
You may well ask, how did this reversal happen in only 19 months since Chrysler Group LLC began
operations?
To start, I would be remiss if I did not acknowledge that we owe a deep debt of gratitude to taxpayers
in the United States, as well as Canada, who enabled a new, restructured company to be formed.
There is no doubt that the determination and courage shown by the U.S. and Canadian governments
are unique.
An initiative whose initial objective was to save hundreds of thousands of jobs turned into an
opportunity to launch a "new green deal" through which a profound impact can be made on
consumers habits, giving support to the auto industry's efforts to reduce emissions levels and fuel
consumption.
We recognize that we have a moral responsibility to be worthy of these investments. And we intend to
show our gratitude by fulfilling our commitments and by repaying every cent that has been loaned to
Chrysler Group LLC.
Another part of the answer to Chrysler's progress is certainly the partnership with Fiat.
Chrysler and Fiat now share a common challenge to merge their respective strengths and capabilities
in order to overcome the lingering effects of the crisis and create a future together as a global leader
in the auto sector.
Everyone knows that Chrysler and Fiat are two very different companies.
They each have their own unique history and represent two worlds, two cultures, two distinct fonts of
experience and know-how.
But it is exactly the differences between two companies that constitute the strength of the partnership,
because the two groups are perfectly complementary in terms of products, architectures, know-how
and geographic presence.
The alliance is leveraging core competencies on both sides, with a clear definition of responsibilities to
enable the two groups to maximize cost efficiencies in development, engineering and manufacturing.
The presence and experience of Fiat in the smaller car segments and of Chrysler Group in the
medium and larger segments translate into a full product offering and the ability to compete across all
market segments.
Both Fiat and Chrysler Group will benefit from each other's core powertrain strengths.
Fiat is recognized for its technological know-how and commitment to sustainable mobility, as well as
its ability to bring fuel-efficient powertrain technologies, including diesel and CNG, to the United
States.
Chrysler Group brings to the partnership its experience in hybrid and electric engine technologies, and
will introduce its first fully electric car, a version of the Fiat 500, in 2012.
We will begin selling a gas-electric hybrid version of our Chrysler 300 sedan next year and later will
bring hybrid technology to our next-generation minivan.
We are also sharing best practices in several areas, such as application of Fiat's World Class
Manufacturing program to all Chrysler plants, a key to improving safety, quality and efficiency in our
facilities.
On the distribution side, the alliance provides Fiat access to the North American market.
The first tangible result is the introduction of the Fiat 500, the Cinquecento, marking the brand's return
to North America after an absence of 27 years. The 500 will soon be rolling into the 130 dealers that
will represent the Fiat brand in the United States.
As for Chrysler, we are now in the process of finalizing agreements to distribute Chrysler products
through the Fiat dealer network in both the European Union and Latin America. All of this is in addition
to the work we are doing to strengthen the domestic network.
I often hear the statement that the fate of our dealers, as large or small as they may be, depends
primarily on the choices made by Chrysler.
The general assumption is that Chrysler drives its partners both in terms of financial results and
strategic direction.
This is true, at least in part, and we will continue to do our best to ensure its success.
But that assumption completely overlooks another aspect, which is just as important.
Unilateral relationships do not exist.
Chrysler is a product of the quality and skills of the people that work in Chrysler, but also, and of equal
importance, of the quality and skills of the people that work with Chrysler.
And so I believe the reverse is equally true.
If our partners are strong and competitive, if they make courageous choices and anticipate the needs
of the market, then Chrysler will also be stronger.
I know that the pride, the sense of partnership, the desire to be a better performer that drive a dealer's
commitment to a customer depend a lot on the knowledge that the partner is solid and resourceful
enough to execute on its commitments.
And since they play a key role in our endeavour, I think it's fundamental that they have a clear idea of
our objectives and how we intend to achieve them.
The new kind of relationship that we want to set up with them is an integral part of the change that the
Group is experiencing.
In regard to the dealer network, we are proceeding with Project Genesis, through which each
dealership will distribute all four Chrysler Group brands.
More than 80 percent of our dealers are now operating profitably, the highest level achieved since
2000.
Dealers are showing confidence in Chrysler Group's future and have invested a total of $304 million
dollars in new buildings or renovation since the formation of the new group 19 months ago.
And Chrysler Group plans to invest more than $500 million dollars in support of the dealer network
over five years, beginning with $140 million dollars already spent in 2010.
Our dealer partners have gone through a great deal of hardship and uncertainty.
This is why, at the international dealer convention we held last September in Orlando, we
acknowledged the importance of each side fulfilling its commitments.
The Leadership Team and I promised to deliver our products to dealers at competitive quality levels
and with adequate marketing support.
In exchange, we asked for our dealers' commitment to deliver our growth objectives, to comply with
our dealer standards, to invest in our brands and to adopt practices that treat our products and our
customers with the dignity they deserve.
A simple, straight, uncomplicated exchange of a promise for a promise.
I have described some of the initiatives undertaken at Chrysler, but we have done much more than
just change strategy.
What I have learned from my experiences as a Chief Executive in a decade and a half is that a
change in culture is something much deeper and longer-lasting than a simple change in strategy, in
industrial or commercial practices.
This is the only secret I know.
It is the only guarantee to build something solid and lasting, that resides in the DNA strands of the
people that make up the organization.
I have often said that, when all is said and done, an organization is simply an expression of the
collective will and aspirations of its people.
All of the new Chrysler's results reflect the change in mentality which is being introduced.
Chrysler needed to embrace the idea of constant change and see the future as a huge opportunity, as
Fiat did some seven years ago.
It needed to live the culture of change as a necessity, of feeling comfortable in the discomfort
associated with uncertainty, of measuring itself each day and of rooting itself in the values of
competition and the market.
Chrysler's recovery is being led by a group of motivated and tenacious leaders who believe in
themselves and in their collaborators: individuals who do not flinch in the face of responsibility and
have an extraordinary capacity to craft creative collaborations inside their teams.
This group of leaders is our best hope for the future.
They are passionate about rebuilding the fabric of a new Chrysler, a vibrant and competitive American
auto maker.
They understand competition, embrace it openly, and know how important it is to continually rethink
their approach.
Among our company-wide values is the integration of the Chrysler and Fiat cultures.
The alliance between our two groups is about more than just products and business opportunities.
It is about something much more profound.
Fiat and Chrysler are undertaking a cultural integration based on mutual respect and humility, where
there is no room for nationalism or the arrogance of those who think they know better.
It is an integration based on equality and the willingness of each partner to learn from the other.
Today we have an extraordinary group of people working alongside each other, listening, exchanging
ideas, expanding their horizons.
Two cultures are merging.
It is not a casual encounter between passing strangers or curious tourists.
We are working and growing together as fellow citizens and friends.
This is the true strength of our partnership and I believe the most precious part, whose value lies in
the incredible human wealth created for our people and companies.
Recently, a couple of trade publications raised the issue of a succession plan for Chrysler and Fiat.
As one journal delicately put it - what happens if I step off a curb and get hit by a bus?
This is an example of the tendency to mythologize chief executives.
The myth is based on the mistaken image of one great man who resolves all of an organization's
problems by himself.
I believe the true value of a chief executive should be measured in terms of the human impact that he
has on an organization and, specifically, on his ability to choose the right leaders and put them in the
right positions.
By the "right leaders", I mean individuals who have the courage to challenge the obvious, to travel
uncharted paths, to break away from convention and the old way of doing things, and to go beyond
the tried and tested.
The right leaders are those men and women who have the capacity to create new points of reference,
who have courage and clarity of thought, the strength not to be victims to change but rather to search
and often initiate it.
Men and women who understand the concepts of service, community, respect for others.
Individuals who act swiftly but have the ability to listen.
Individuals who are dependable in the sense that they always keep their promises and don't make
promises if they are not able to keep them.
Above all, individuals that view the broader social context of their actions.
The role of true leaders is to support people, bringing out their qualities and helping them to make the
best of who they are and who they have the potential to become.
This is my constant reminder to those who work with me at Fiat and Chrysler.
They are the true architects of the future of those two businesses.
Supporting and guiding them as they do that work is my job.
And what makes me proudest is to see their success and the impact that success has on them, their
self-confidence and their vision for the future.
This is why I have ultimate confidence in the future for both Chrysler and Fiat.
I would like to offer a few thoughts about the year ahead.
There is no doubt that an air of optimism is returning to the auto industry.
After the economic meltdown that caused so much turmoil, all of us welcome the indicators that a
rebound appears to be building momentum.
One encouraging sign this week was the January auto sales report that showed the U.S. market was
up 17 percent compared to a year ago.
Consumer expectations are improving, credit is becoming easier to obtain, and joblessness claims
have declined. The average vehicle on U.S. roads is now 10.2 years old compared with a decade
ago, when the average was 8.8 years.
Taken together, these factors suggest a slow but steady healing of the automotive market.
While most forecasters see the U.S. vehicle market surpassing 13 million units this year, Chrysler is a
bit more conservative. Our five-year plan, which we introduced in November 2009, is based on a 12.7
million SAAR in 2011.
We are not banking on large volumes coming through and rescuing us. I think it is much better to
make a cautious assumption, and then be able to react quickly to an upswing when it happens.
Predicting the market is an inexact science that can be affected by events that none of us can foresee
or control.
We need to jump into the future without even asking what the rules of the game are because we will
almost never know in advance.
Therefore, flexibility is essential.
We need to ensure that change is not imposed but that it becomes natural.
We have put in place a lean, flat organization that gives leaders broad spans of control and empowers
them to move fast to react to changes in the market.
The only thing that we can establish is our objectives.
This we have done clearly and rigorously, independent of the market or the global economy.
Even with our conservative SAAR forecast, we have set some aggressive targets that we believe are
achievable in 2011 based on our significantly improved product lineup.
Chrysler's goal is to sell more than two million vehicles worldwide this year, compared with about 1.6
million units last year.
In our 2011 guidance, our target for operating profit is in excess of $2.0 billion dollars.
We are projecting net income for the year between $200 million dollars and $500 million dollars, and a
positive free cash flow of above $1 billion dollars.
These numbers reveal something about our goals going forward.
But to paint you a more vivid picture of our aspirations, I want to close by referring to something I was
told when I first came to Chrysler.
At the time, I was interviewing many people as we were establishing our leadership team.
In one interview, I asked a man to tell me his previous experience in the automotive industry.
He told me this: "First I worked for the worst car company in the world. Then I worked for the best car
company in the world. And then I worked again for the worst."
You may have guessed that the point is, he had never changed jobs. He had been at Chrysler his
entire career.
I want to leave you with the knowledge that our commitment is to put down a solid foundation for the
new Chrysler, a foundation rooted in values on which a better, more reliable and certain future can be
built.
Thank you for your attention.
I look forward to taking your questions.
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