Power Steering

Ask any of the 11,000 people bustling around the Auburn Hills, Mich., headquarters of Chrysler Group why the automaker the U.S. government thought couldn’t possibly survive now can’t possibly fail, and the answer is “Because we have Sergio.”

Cross the Atlantic to Torino, Italy, and ask a similar question about the future of Fiat, Chrysler’s majority owner, and you get this: “Because we have Marchionne.”

The difference is purely cultural–Americans use first names to refer to colleagues; Italians prefer last names. But they are talking about the same guy: Sergio Marchionne, the Man Who Saved the Car Business.

The boss of Chrysler, Fiat and Fiat Industrial is one very unusual management mosaic: a cigarette-puffing, music-loving, gadget-obsessed, speed-demon Italo-Canadian lawyer and accountant who has revived iconic but dysfunctional automobile companies on both sides of the Atlantic. Not only has Marchionne restored Chrysler, a bankrupt wreck three years ago, but he’s also preserved and created thousands of precious manufacturing jobs in the U.S.

Fiat’s small-car prowess, engine technology and superior manufacturing capability was a perfect complement to Chrysler’s remaining minivan, SUV and big-engine-pickup-truck strengths. “There were things that Fiat had, that I had, that if applied here could have pulled this out,” Marchionne explains. “I knew I could help technically. And I had a guy who was willing to fund it.”

A guy named Obama. Sales at Chrysler Group–which includes Chrysler, Dodge, Ram and Jeep–are up 23% through the third quarter of 2011 and are expected to hit $55 billion for the year. Chrysler was losing $1 billion a month in 2009; now its operating profit could reach $5 billion. Sales increased 45% in November over the prior year, driven by hot models such as the Jeep Grand Cherokee, Ram pickups and the Chrysler 200. In May Chrysler transferred $5.9 billion to the U.S. Treasury, paying off the bailout loans six years ahead of schedule and silencing many of the critics of President Obama’s auto-industry-bailout plan. “I don’t think that people really understand what the implications would have been of a lack of decisiveness at that point in time,” says Marchionne. “It would have been a mess.”

That it isn’t speaks not only to the bailout’s benefits, particularly in the industrial Midwest and with unemployment still near 9%, but also to the lasting importance of manufacturing to the U.S. economy. The web of employment tied to autos–from raw-steel and aluminum production to engineering–is not easily duplicated with two-person start-ups.

Chrysler’s success isn’t the only good news in the auto industry. Ford and GM have also proved that, stripped of legacy pension and health care costs and with the United Auto Workers (UAW) willing to craft a competitive labor agreement, they can compete with Japanese and European rivals. Surging carmakers have outstripped the lumbering recovery in the rest of the economy; unit car and truck sales are up 14% through November. GM, which will sell more cars in China than in the U.S. in 2011, grew about 7% and Ford 13% in the last quarter, and both will be solidly profitable this year. The Center for Automotive Research, in Ann Arbor, Mich., believes the auto industry (including foreign brands) will add 47,000 direct manufacturing jobs and 120,000 indirect jobs at parts suppliers in the next four years, bolstering places like Youngstown, Ohio. Mercedes is adding a shift in Vance, Ala. Volkswagen is building a plant in Chattanooga, Tenn. Chrysler is selling so many Jeeps that it is investing $500 million in Toledo, Ohio, to add a second line.

Fiat now owns 53.5% of Chrysler, a stake that will likely grow to 58% next year. (The UAW holds 46.5%.) But it has all the opportunity to grow the business–60% by 2014, according to Marchionne’s plan. The Fiat brand had been absent from North America since 1983. (Fiat also owns Alfa Romeo, Lancia, Ferrari and Maserati.) It is now returning with the kind of small cars that Chrysler could never produce: the stylish Fiat 500 Cinquecento and its sportier cousin, the Abarth. A line of Fiat vans could follow.

Clad in his signature black sweater because it simplifies decisionmaking (he drives a black-on-black Challenger and Maserati too), Marchionne brings an analytical ability that allows him to drill down to the smallest detail of manufacturing or even advertising. At the same time, he is blind to rank and open to new ideas, no matter where they come from. “We flattened the organization out. We reached out and brought people on the management team who had been buried underneath the classical hierarchy of corporate America,” says Marchionne. “They were given an opportunity to play. These are people who had been two or three layers down from the senior leadership.”

It’s sometimes known as loose-tight management, meaning that Marchionne is also unforgiving in holding people accountable for executing their ideas. “It’s pretty intense, because he questions–and again, rightfully so–and there are times when you think you’re so prepared and ready and he’ll bring something completely that you weren’t thinking of,” says Laura Soave, a bright young marketing executive who was in charge of the Fiat 500’s American introduction until Marchionne moved her out for not moving fast enough to establish a new Fiat-dealer network.

That’s Marchionne’s MO: give people all the rope they need and then yank it if he has to. Or maybe even if he doesn’t. It can produce brilliance, as in the company’s “Imported from Detroit” Super Bowl commercial featuring Eminem. That was concocted by his chief marketing officer, a poet and genially offbeat Frenchman named Olivier Franois, and 44-year-old Lebanese-American Saad Chehab, whom he plucked from below and put in charge of the Lancia and Chrysler brands. “What I look for in people is the ability to use that space intelligently, not to abuse the freedom,” he says. “It’s to remain absolutely focused on the objective but not to define the method of execution.”

After Marchionne saw a nearly complete version of the commercial–and after listening to lots of Eminem–he pushed his team to devote the entire two minutes of airtime the company purchased for $9 million on one brand and one model, the revived Chrysler 200. He even helped edit the final version hours before it ran. An unabashed Apple admirer, Marchionne has the Steve Jobs gift of absolute focus.

His willingness to buy into Chrysler’s people, who were unloved by their former German masters at Daimler and overwhelmed by the financial meltdown as part of private-equity company Cerberus, has made him a cult hero. Many on the 21-person management team that reports directly to him are Chrysler veterans aching to prove that they are not the monumental foul-ups who nearly destroyed the Motor City, the people that some Republican Senators wanted to finish off. The Italians who moved to the U.S. to help transfer Fiat’s marketing and technology skills to Detroit have seen this turnaround movie before–and they are sticking around for a Marchionne rerun. Many don’t plan to return home. “We burned the ships,” says Pietro Gorlier, who runs Chrysler’s Mopar aftermarket business, one of the many tattered parts of the company that have been restored.

In fact, with European auto sales heading south with the continent’s struggling economy, Chrysler is becoming more vital to Fiat’s strategy. There are few regional auto companies left because it’s just too hard to compete with globe-straddling giants like Renault-Nissan, Volkswagen, GM and Toyota, which can share platforms, sourcing and costs over a vast scale. Although Fiat sells in 140 countries and produces 2.2 million vehicles annually, it’s too small, too small-car-focused and too Eurocentric. Together, Fiat and Chrysler produce 4.2 million vehicles a year. Marchionne figures he needs to make 6 million worldwide to be a player.

Helping Out the Family

If there’s a prototype of a bicontinental auto executive, the binational, bilingual Marchionne, 59, might fit it. Born in Chieti, Italy, he moved to Toronto as a teenager and got business and law degrees in Canada. But he is also a jazz freak and has been known to rip around Fiat’s test tracks at 150-plus m.p.h. (240-plus km/h). Marchionne began his career as an accountant for Deloitte & Touche in Toronto. By the time Fiat came calling in 2004, he was running Socit Gnral de Surveillance (SGS), a Swiss industrial-testing and monitoring firm whose specialty was establishing standards. But it was no ordinary call: SGS is the second largest investment of the Agnelli family, the powerful Italian dynasty that founded and still controls Fiat. After a dinner in Geneva and “too many grappas” with Fiat chairman John Elkann (grandson of Giovanni Agnelli), Marchionne agreed to the Fiat job.

Elkann admires Marchionne’s ability to “manage friction”–and of that there was plenty. Fiat was even in worse shape than Chrysler, losing $5 million a day. Picture GM and Caterpillar combined in a company that builds everything from farm tractors to construction equipment to cars. Marchionne eventually divided the firm into two separate pieces: Fiat S.p.A. and Fiat Industrial. His analytical, accountant side–vital to a precision industry like auto manufacturing–could be conveniently ascribed to a Canadian coolness. But it can’t restrain the passionate Italian with the sometime Vesuvian temper. (“You’ve got to be dyslexic in this industry,” he explains.) He infuriated former Italian Prime Minister Silvio Berlusconi by stating that Europe needs better leaders. He has ticked off North American and European labor leaders, not to mention global bankers, by reminding them that today’s crises can’t be solved with traditional approaches.

Which is what he also told the Obama Administration. In the depths of the financial crisis in 2009, he muscled the White House auto task force into handing over everything but the keys to the presidential limousine before he would take the wheel of Chrysler. Obama’s car czar Steve Rattner, in his book Overhaul, called the negotiations particularly brutal. Marchionne refused to put a nickel of Fiat’s money into play and got billions in government loans. “I told them, I said, ‘You’ve got more than money on the table,'” Marchionne recalls. “‘You’ve got me … You’ve got Fiat.'”

Chrysler seemed like an impossible turnaround, but Marchionne had figured it out. “I had road tested it already at Fiat,” he points out. It starts with the cars. At Fiat, he resized the company, flattened the organization and overhauled the product line in record time, launching the Fiat Bravo in 18 months–half the normal development timing. To do that, he took advantage of Fiat’s prowess in computer modeling to do everything from design to virtual product testing. Similarly, manufacturing was revamped to improve quality, lower costs and bring labor peace–although the latter is always temporary in Italy.

With Chrysler, there was no financial risk, since he was playing with (White) house money. Absent economic chaos, Chrysler had a good chance of reviving for one simple reason: people need cars and trucks. In 2009 only 10.4 million vehicles were sold in the U.S., down 35% from the 16 million sold in 2007. Yet given the automobile scrappage rate, about 5% annually, the U.S. needs something on the order on 11 million to 13 million new vehicles just to keep people on the road.

Even though people held on to their cars longer in 2008 and 2009, demand had to recover; it was only the rate of recovery that was in question. “We knew instinctively that the recovery was going to be a lot slower than people had hoped it would be,” says Marchionne. “So we retooled this house to deal with a market which is not exciting, where you’ve really got to fight a lot harder than you would in a market that’s growing back at 10-plus percent a year.”

Chrysler faced what he calls execution risk: Can I do what I set out to do? If the company could build decent products, there would almost certainly be a market for them. “Once it’s execution, then you’ve got to look into your shorts and you’ve got to say to yourself, Do you actually have–do you–I mean I, as a person, do you have the wherewithal to get this done?”

In a move that signaled where his heart is, earlier this year Marchionne became CEO of Chrysler Group. His office is on the fourth floor in the engineering department, not the executive penthouse, now sitting empty, where a chairman and three vice chairmen used to rule. “I don’t have an office of the chairman. Which is what used to run this joint,” he says, quickly adding, “with all due respect.” And implying all due disdain. He spends half his time in the U.S., although he technically still resides in Switzerland.

Now for the Hard Part

The revamped Chrysler has proved it can make cars, minivans and trucks that people will buy. But that has only bought time for the company. Now it has to prove it can make vehicles people will love. Next year the sales comparisons won’t be so easy, and Japanese rivals like Toyota, which suffered supply shortages because of Japan’s earthquake, will be at full output. Chrysler plans to launch eight new models next year, beginning with a new Dodge compact based on Fiat’s Alfa Romeo Giulietta platform. “We were lean on product and really needed to survive the second half of ’09 and pretty much all of 2010, which we did,” says Reid Bigland, head of the Dodge brand and Chrysler Canada. “Now the cavalry of product is coming.”

Chrysler is repositioning its brands too, so that each stands for something unique and cars and messages don’t overlap. Dodge becomes a lifestyle brand, from muscle cars with attitude, like the Viper, to fun crossovers like the Journey. Ram is pickups and other trucks, and perhaps Fiat-made, Ram-branded vans. Chrysler is style and a little luxury and will eventually own all things minivan. Jeep is king of the off-road and SUVs. Fiat’s return to the U.S. market gives dealers a small-car brand with European flair. Alfa Romeo will also be reintroduced via Fiat dealers. “When you put the two organizations together,” says Bigland, “it’s the perfect Fiat.” Forgive him, he’s a car salesman.

To better understand why Fiat took on Chrysler, you also need to look at the auto industry the way carmakers do. The nomenclature they use is alphabetical. Mini cars like the Ford Ka or Toyota Yaris are A class, the subcompact Ford Fiesta is B class, the compact Corolla is C, and so on until you get to E-class luxury cars. Fiat is a small-car and small-engine giant, an A-B-C-D-class specialist, with cars like the Uno, which has been essential to its growth in developing countries like Brazil.

Chrysler is more of a D-E-M-J-class company, with M and J standing for minivans like Town & Country and SUVs like Jeep. They require V-6 and V-8 power, which has been provided by Chrysler’s durable Pentastar and Hemi engines.

The combined strengths of the two companies lower costs and improve quality. In the C- and D-class segments, for instance, they will be able to reduce the number of platforms from eight to two. Less is more in manufacturing. Fiat is a leader in small displacement engines like the 1.4-L fully integrated robotized engine that gives the 500 model some real oomph. But some of that technology can be transferred to the revered Pentastar V-6, making it more powerful yet more efficient. The power gains will let Chrysler eliminate six other V-6 engines. Fiat is also miles ahead of Chrysler in diesel and alternative fuels too.

Then there’s the increasing number of shared parts, which Marchionne figures will yield nearly $3 billion in savings by 2014 as the companies increase the number of shared suppliers and decrease unit costs.

A Little Italian Love

When fiat took charge of the Jefferson North assembly plant, one of the last auto-assembly lines left in Detroit, it was a wreck: the roof leaked, bathrooms were falling apart, and one shift had been idled as then owner Cerberus fought desperately to merely survive. Rather than close the plant for renovation, Fiat paid assembly workers to rebuild it. They painted, made repairs and reconfigured all the conveyance systems. Fiat made lots of cosmetic changes too, installing new locker rooms and an atrium break area.

More important, Fiat sent over some two dozen workers from its Pomigliano plant in southern Italy to teach its World Class Manufacturing program. Rather than bringing in squads of industrial engineers to dictate the exact sequence of each assembly process, workers were trained to use analytical tools to help them understand each process in the 400 or so workstations on the floor–for example, what’s the most efficient and most ergonomic way of tightening a seat bolt.

The emphasis is on safety and increased knowledge, which boosts productivity because workers, not engineers, own the quality-control process. “The people are much more proactive. You don’t see the hierarchy typical of manufacturing, [so] we had very, very strong support from the UAW,” says Stefan Ketter, global manufacturing boss for Fiat and Chrysler. Team leaders now take part in warranty-analysis meetings, where Marchionne is known to show up unannounced.

Jefferson North is producing one of Chrysler’s showcase cars, the $60,000 Jeep Grand Cherokee SRT8, with a 470-horsepower bruiser under the hood and European luxury on the inside. In Fiat’s view, it’s a car that can conquer Mercedes and Range Rover customers, so it had better be perfect. It’s also one that Fiat can sell globally in its own showrooms. It has plans to double Jeep sales by 2014.

The first totally new car of the Fiat-Chrysler combination will arrive next year, when Dodge debuts a new C-class car to replace its dopey Caliber sedan. The Dodge Dart will seek to combine Italian engineering with Dodge’s sports-car heritage. Based on the platform of Fiat’s upmarket Alfa Romeo Giulietta, though wider and longer for American roads, it’s all in all a much sexier compact than anything Chrysler has ever designed.

Marchionne has pledged to invest $23 billion to develop new cars for Chrysler through 2014, all of which can be adapted by Fiat wherever it makes sense–for instance, as platforms for Fiat’s Lancia brand. It’s a ton of product in a relatively short period, and some analysts are openly doubtful he can pull it off in a slower-growth, highly competitive economy.

Those doubts are not present within Chrysler or Fiat. “Leadership is not a quantitative thing. People either smell it in you or they don’t,” says Marchionne. “People need to trust you that you’re going to pull them out and that they will follow you when you pull them out. If they don’t get that comfort, they’re going to drop you. This is true of organizations. It’s true of countries.”

And across auto manufacturing, they can smell the power of new leaders like Marchionne, who have hauled their wrecked businesses into the shop and restored some of the lost luster of American industrial power.