The Chrysler Syndrome

BGEN.ANDRUNYK:

Distinguished guests, members and friends of The Empire Club of Canada: Of all the creations of man none so dominates his life as the thing we call "automobile." Once a curiosity, then a luxury, it is now considered to be an absolute necessity by over three-quarters of North Americans. Some people are conceived in it; a few born in it; and, I regret to say, far too many die in it.

Our commitment to the automobile has transformed a handful of tinkerers and entrepreneurs into a massive industrial complex. Watched over by the politicians and alternately loved and hated by the public, the automobile industry produces a considerable percentage of the gross national product of Canada and the United States and it directly employs hundreds of thousands of workers in the two countries. When all the businesses related to the automobile are added to the total, the automobile is said to be the source of one out of every six to eight jobs in North America. So it is an industry that deserves our attention and our concern.

Today The Empire Club of Canada is honoured and privileged to have as its guest speaker one of North America's most prominent and best known personalities in the automotive industry--Mr. Lee A. Iacocca, Chairman of the Board of Chrysler Corporation. I do not propose to give you a biographical rundown of our distinguished visitor because this packed ballroom in itself attests to the knowledge you have of his identity. Suffice it to say that most of us see Mr. Iacocca as an outstanding spokesman and a charismatic leader in automotive marketing. We see him as a star of television and as a highly visible symbol of a fighting corporation that is struggling successfully under the most difficult of business conditions.

But there is another side to our guest speaker. Behind the scenes Mr. Iacocca is hard-driving, shrewd and the most respected man in the automobile business. During the past two years he has done a miraculous job of restructuring one of the world's largest corporations. He has been able to accomplish amazing feats of cost reductions, manpower redistribution and redeployment of assets.

Mr. Iacocca's immeasurable contribution to his profession, to an industry in which he has spent his entire life, and to the quality of American life in general has brought him wide recognition. He holds honorary doctorates from many colleges and universities, but undoubtedly the one that is dearest to his heart is the honorary doctorate from Lehigh University--the first university from which he graduated and of which he is an honorary trustee.

Ladies and gentlemen, please join me in giving Mr. Lee A. Iacocca an especially warm welcome to The Empire Club of Canada.

MR. IACOCCA:

Members of the distinguished Empire Club, special guests, all you members of the Chrysler family, ladies and gentlemen: If some of you are surprised that after two long, hard years we were even able to show up here--alive and well--I can understand that. It has been a long and rocky road. I must admit that our bankers around the world are quite relieved that I'm here. The financial analysts are still trying to explain it. A large number of editorial writers and cartoonists are going through their files to see where they went wrong. But I'm delighted, because I have looked forward to this day, and to the chance to spend a few minutes with the most distinguished group of businessmen in Canada.

I come as a representative of one of Canada's largest employers. We at Chrysler are proud of our corporate citizenship in your country. We are proud of the contribution we make to the Canadian economy and to the well-being of all your people. We have a forward product plan which calls for a greatly expanded presence in your economy, and some substantial new investments in Canada. Two members of our corporate Board of Directors are Canadians. They keep me in line. So I feel quite at home here.

I am also proud of the job that Moe Closs and our people have done here in selling cars and trucks. Our Plymouth Reliant is the number one best-selling compact in Canada, and Dodge Aries is close behind. In September of this year, Chrysler Canada was number two in total sales in this country, which is a remarkable achievement. I often tell our people in the States that Chrysler is the number one car company in Mexico. We're number two in Canada. If we could just put some meat in that sandwich, we'd be on our way. We're working on it.

Chrysler Corporation is not out of the woods yet. The American economy is not out of the woods. But we have come a long way, and we have reached this point in history against all odds. Fighting our way through the longest and deepest automotive recession in fifty years, against record inflation, record high interest rates of twenty-two per cent here in Canada, the slings and arrows of all the editorial writers, and a 180 degree turn in US. economic policy, we have survived. So far. billion cost reduction programs across the board, debt restructuring, and all the rest. The combination of all those factors adds up to well over $3 billion of selfhelp for Chrysler Corporation.

I'm interested to read that some people are now calling these kinds of actions "the Chrysler Syndrome," with a recommendation that our example should be followed by others as we seek to become more competitive in world markets.

We didn't go through all that pain and suffering to set an example. We did it because our backs were to the wall, and because we had no choice. Beyond that, we had a commitment to a lot of people who offered a helping hand. And in the process of completing that restructuring program, we are fulfilling the promises we made to those people.

We promised to modernize our plants and convert them to the latest technology. We are delivering, by closing a number of our older plants and by investing hundreds of millions of dollars in totally new ones--seven to be exact.

We promised to convert our entire fleet of cars to front-wheel-drive technology. We are delivering. Nearly ninety per cent of our current products are now frontwheel-drive, and when we add our all-new front-wheeldrive mini-vans and wagons in Windsor, Ontario, at a total investment of $700 million, we will be a totally front-wheel-drive company.

We promised we would be the leaders in fuel economy. We delivered, with a U. S. fleet average of twentyeight miles per gallon, and a Canadian average of 34.6 miles per gallon. We have an additional advantage in Canada. All of our four-cylinder engines up here use regular gasoline at a savings of up to twenty cents a gallon. And with cars like Omni Miser getting up to fifty-seven miles per Imperial gallon on the highway, we're ready for your gasoline prices when they hit two, three or even four dollars a gallon!

We promised improved quality in our products. We delivered, with independent surveys showing Chrysler with the best overall quality of the Big Three, and closing in on the imports. In fact, our Imperial, built in Windsor, is rated the best domestic car sold in North America. So, say a kind word on behalf of the dedication of our Canadian workers.

We promised to lead the industry in new design technology. We are delivering, with a new and innovative system called CAD/CAM. That stands for Computer Aided Design and Manufacturing. Chrysler Corporation is the industry's leader in the development and use of Computer Aided Design which gives us a tremendous improvement in the productivity of our design engineers.

We promised to restructure our company from top to bottom--and we have delivered. We have a new management team made up of some new people from the outside and a large number of outstanding veterans from the inside such as Moe Closs who heads up our Canadian operation. These men have cut the costs out of this company, reduced our break-even point to nearly half the level of eighteen months ago, and maintained a future product line that will keep us competitive through the 1980s.

We promised to develop a closer working relationship with our labour unions. And we have delivered. Doug Fraser, the President of the UAW, sits on our Board of Directors. Our unionized employees have accepted a wage freeze during this critical period in exchange for an Employee Stock Ownership Plan and a profit-sharing plan, both of which give them a stake in the future of this company. And we are well along in establishing quality circles and productivity circles in many of our plants.

We said we would maintain employment for a half million workers--both direct and indirect--in Canada and the United States. We have delivered. In fact, in the year and a half since the Loan Guarantee Act was passed, Chrysler paid $4.3 billion in wages and benefits in the U.S., and Chrysler and its employees paid taxes of more than $1.2 billion to state, local, and federal governments.

In Canada, during that same eighteen months, Chrysler has provided employment--both direct and indirect--for 40,000 people. We have bought $600 million worth of goods and services from 1,300 Canadian suppliers. Chrysler has paid direct taxes in Canada amounting to $166 million. We have paid $410 million to Canadian employees in wages and benefits. And our Canadian employees have paid $80 million in provincial and federal taxes. I consider that a substantial contribution to free enterprise in Canada.

All down the line, we have kept our commitments to the citizens, and to the governments, of North America. By all standards of business management, and by all that is holy, Chrysler Corporation should be in a good position to take advantage of the increasing need for fuel-efficient cars and trucks.

We are ready to go. Unfortunately, the economy is not. Three things stand in the way of our final triumph. Interest rates. Interest rates. And interest rates.

In a University of Michigan survey of consumer attitudes taken in September of this year, a crosssection of people were asked their reasons for not buying a new car. Thirty-one per cent volunteered that the reason was high interest rates. Just one year earlier, only ten per cent gave that as the reason. And in the years before that almost no one did. Never in the history of our business has there been such a high number of potential buyers who have decided to sit on the sidelines because of high interest rates. And there's one simple reason. Interest rates have never been so high for so long.

Before October 6, 1979, the United States had seen interest rates as high as twelve per cent only once. That was during the Civil War between the states. Never again did the rate hit twelve, until 1979. Then it went to twelve, on up to twenty-one and a half, back down to eleven, up to twenty and a half, now it's stalling at eighteen per cent, and holding. And Canada, in an effort to protect its dollar, was whipsawed up to a record twenty-two per cent interest rate, the highest in your history.

Now, I'm all for controlling inflation through a program of fiscal and monetary controls. But it now appears that the people who control the money supply have decided to break the back of inflation with one single blow. I would like to suggest that it won't work. It's not that simple, and it can't be done that fast.

It took forty years of strenuous effort by a Santa Claus government to create the havoc we have today. We started slowly in the 1930s, and over the years we added layer upon layer of well-intentioned social programs designed to achieve a redistribution of wealth. We created the Cost of Living Index, and we tied salaries and pensions and welfare benefits to it. We created layer upon layer of government agencies to administer these useful benefits. Then we created budget deficits and higher taxes to close the budget gap. We even created a unique system called "bracket creep" in which inflation alone drove people into higher tax brackets, destroying their incentive to work and to save.

We produced stagflation--the unholy alliance of inflation and recession which brought the economy to its knees. It took years of hard work to do that. And it cannot be undone overnight.

One does not depressurize a deep-sea diver in five minutes. One does not reverse forty years of economic policy in forty days. Yet that is precisely what we're trying to do now. In an atmosphere that screams for a policy of economic gradualism, we have some men in a hurry who have sold us a policy of instant solutions to long-range problems. It won't work!

The evidence is all around us. The number of business failures in the United States has climbed to an all-time high. In the last eighteen months, six thousand building contractors have gone broke. More than two thousand automobile dealers have closed their doors. Unemployment in the automobile industry alone totals 180,000 people, with additional hundreds of thousands out of work in supplier industries.

Let's face it. We are in a deep recession, world-wide. The housing industry is on its knees. The farm implement business is closing plants and laying people off. Unemployment in western Europe is over eight per cent. And a small mining town in Idaho is going broke because the demand for silver from their mine has dried up along with new-car sales. That is an example of the ripple effect--and if unchecked, it's going to turn into a disastrous tidal wave!

I don't have to tell the people in this audience the effects of U.S. monetary policy on your businesses or the government of Canada. Yours and other national economies have felt the sting of tight money and an appreciated U.S. dollar. Chancellor Schmidt recently visited the U. S., and before the blades of his helicopter had stopped turning over the White House lawn, he was denouncing high interest rates in the United States. The feeling is universal. In an administration that preaches the gospel of supply-side economics, economic growth, additional investments, more jobs, and more revenue--all of them correct policy--we have a monetary policy that says don't build, don't buy, and don't invest. It won't work. You can't have a supply-side fiscal policy and a demand-side monetary policy at the same time.

To compound the economic tragedy, the fact is that not all money is tight. A lot of it is simply being diverted to the wrong purposes. In the Old West, it was almost traditional that the ranchers at the head of a river diverted most of the water off to take care of their cattle, their land, and their needs. As a result, there was very little left over to trickle down to the poor folks farther downstream in the valley.

In the same manner, there appears to be plenty of money available for Seagrams to make an offer to buy Conoco (and for du Pont to actually buy it). There's plenty of money for Sears to buy Dean Witter. There's plenty of money for the U.S. Treasury to pay the interest on the national debt. There's plenty of money to invest in short-term money markets.

But guess what! Those guys who have diverted all that credit upstream have not created one additional job! They're all making money on money. And those of us who do create jobs, who do make investments in productivity, and who want to expand and pay taxes, end up downstream waiting for a few measly drops of water to get through so we can put a few guys back to work.

Well, you know what happened in the Old West. The ,, guys down below got together and formed a posse. They rode upstream and shot the hell out of the people who were taking all the water. Believe me, I'm not advocating violence. But something has got to give!

And something has to give in both directions-both in fiscal policy and monetary policy.

Allow me to suggest a solution--in two parts.

First--we must reduce the budget deficit through a modification of our tax policy. President Reagan's tax cut program was a sound action, designed to increase savings, investment in new technology, and economic growth. It ought to stand for the long term, because in the long term it will work. But in the short term it is increasing the size of the budget deficit precisely when the deficit must be reduced.

Henry Kaufman is right. If the United States continues to increase the size of its deficits through too large a tax cut, it has no choice but to pay the additional interest on the national debt through increased borrowing in the credit market. In the process, it will crowd out other borrowers, heat up the demand for money, and force short-term interest rates up into the stratosphere again.

The budget has already been cut severely, although it's hard to see why they can't take a few billion more out of defence. You can't cut Social Security, Veterans' Benefits, Aid to Dependent Children, and school lunches any more. So you have one choice. You have to raise revenues.

How do you do that without destroying the incentives of the current tax cuts? How about a one-year user tax on specific commodities? Oil, gasoline, cosmetics, liquor, tobacco, everything except the essentials of food and housing. A ten cent tax on gasoline alone would raise $10 billion. Maybe a surcharge on imported oil? In whatever form, it would increase revenues and also maintain the consumer shift toward more fuel-efficient automobiles which is essential to lessening our dependence on foreign oil. The government of Canada understands the wisdom of energy conservation and increased revenue through higher prices for gasoline. Your new energy policy makes good sense. I suggest that the United States adopt some of the same strategies.

Add to that a short-term tax on other consumer items, and you could quickly raise fifty to sixty billion dollars in tax revenues. That brings you so close to a balanced budget you can taste it. Set it aside as a trust fund for defence, or use it directly to balance the budget. A balanced budget brings interest rates down, makes more money available for the purchase of goods and services, and provides the foundation for economic growth. I don't pretend to have the specific program, that's what politicians are for. And the politicians of my country ought to get on with it.

Second--we must have credit available for the ti purchase of cars and housing. Those of us who provide jobs, pay taxes, invest in new technology, and generate revenue, need to get some of that water downstream. We need to get some action on our own revenue side.

There's plenty of demand for automobiles. We've been running for three years at a level of sales which is well below the trend line. The pent-up demand for new fuel-efficient cars is growing higher every year. The babies born in the boom of the 1950s are now mature and holding a job. There are forty-two million old gas guzzlers getting twelve miles per gallon or less out on the road that need to be replaced by thirtymile-per-gallon cars. People need new cars.

All we have to do now is get out of the way of that demand and allow consenting adults to engage in commerce.

Beginning immediately, the Federal Reserve Board of the United States and the Bank of Canada should establish a policy of informal credit guidance or credit conservation, if you will. They should nudge the banking community into supplying credit at more favourable rates to job-creating industries such as cars and housing. They should "tilt" money away from those whose investments create no jobs, and toward those which do.

For those who rebel at this intrusion into the free market for money, it's too late--at least in our country. We're already guiding money into All Savers Certificates, where it's projected that investors will put $150 to $200 billion by year's end. Our income tax laws tell people to invest with borrowed money instead of savings. The Federal Reserve decrees that if you want to buy stock on margin, you have to put up at least fifty per cent in cash. The fact is that there are already dozens of ways in which the government directs money in our economy. It's time to face facts and put our money where our mouth is--by tilting money toward jobs, investments, and economic growth.

Given an adequate supply of money at a reasonable rate, the businessmen of both our countries can attack the economic problem where it counts--on the revenue side. Consumers will buy cars and housing. People can be brought back to work again. Factories will reopen. Government revenues will rise to equal expenditures. The Canadian dollar will be worth a dollar again. Inflation will decline and our economies will grow.

That is bipartisan economic policy at its best. It does not correct U.S. problems at Canada's expense, at Germany's expense, or at the expense of the deprived people of all nations. It unites all people, north and south, industrial and rural, rich and poor, union and non-union in a common effort to restore the free world's economies to a position of strength again.

There is no other way. We must never again accept double digit inflation as a fact of life. We must never force Canada to run up its prime rate to twenty-two per cent to stop the flow of money to the United States. We must never accept the principle of a "zero sum" society which dictates no more growth, and no more jobs. The economic pie must be enlarged so that all our citizens can share the challenges and the rewards of investment and hard work.

That spirit of dedication to growth is what made your country great, and it is what made my country great. It's time to rededicate ourselves to that goal again, for the sake of generations yet to come.

The thanks of the club were expressed to Mr. Iacocca by Sydney Hermant, a Past President of The Empire Club of Canada.

We have restructured a giant company through one of the most sweeping programs of self-help in business history. And self-help it was. With all of the attention that's been devoted to the so-called "bail-out" of Chrysler, and the erroneous charge that the US. Government somehow handed us $1.2 billion in a brown paper bag, and that Canada is going to do the same with another $200 million, the fact is that in the best traditions of our forefathers, Chrysler has survived by pulling itself up by the bootstraps.

It is true that we have borrowed $1.2 billion at fifteen per cent or so, guaranteed by the U. S. Government. We have to pay that money back, with interest, in the same manner that the other $450 billion of federally guaranteed loans must be repaid.

That $1.2 billion only increased our debt. What really helped was the tremendous contribution made by the members of the Chrysler family--wage freezes accepted by our Canadian and U.S. employees, $2