York keeps hammering on quality at Chrysler
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By Bradley A. Stertz, The Detroit News

The string of problems Earl Berry encountered with his two Chrysler
vehicles taught him a lesson in the cost of quality.

The Dearborn Heights retiree owns a Dodge Dynasty that needed a new
engine block after just 2,500 miles, and a Chrysler
minivan that needed a new air conditioner.

His vehicles have also required rebuilt transmissions, a new starter,
a new power steering pump and a new rack and pinion
steering assembly.

Many of Berry's problems were covered by the warranties. But he
figures he spent about "$1,000 per vehicle -- insurance
against Chrysler's shortcomings."

"It cost me a lot of inconvenience, too," he said. "And it had to cost
Chrysler a fortune in parts and $58-an-hour labor."

Trying to get the total cost of warranty claims and other expenses is,
as auto analyst Gerald Paul of Sanford C. Bernstein in
New York put it, "like trying to uncover state secrets."

But estimating the impact quality is having on Chrysler Corp.'s bottom
line has taken on new momentum as Las Vegas
billionaire Kirk Kerkorian continues to stalk the company's board and
management.

"Quality is a structural issue that could materially and adversely
affect the company over a period of years," said Jerome B.
York, the former Chrysler and IBM Corp. finance chief brought on last
month as Kerkorian's top strategist.

York, in his continuing study of Chrysler's finances, calculates
Chrysler could have added $1.8 billion to its value just by pulling
its car quality up to the industry average in this year's J.D. Power
and Associates ranking. That improvement would come from
lower warranty and incentive costs as well as from a bigger share of
U.S. vehicle sales.

York estimates that Chrysler's overall tab for fixing cars and trucks
under warranty is approaching $2 billion.

Chrysler, in advance of today's speech by Chairman Robert J. Eaton to
major institutional stockholders in New York,
countered York's thrust on quality with a nationwide advertising
campaign. In it, the company said it "has improved its quality
by 26 percent over the past three years (as measured by reported
warranty conditions.)"

York, however, questioned why Chrysler compared itself with its past
performance instead of against competitors in the letter
signed by board members and top Chrysler executives. Three years ago,
York noted, Chrysler ran up big warranty costs when
it was replacing faulty A604 automatic transmissions in vehicles such
as minivans.

"They should have better warranty claims than three years ago," York
said.

Concerns that Chrysler wasn't improving quality quickly enough last
year spurred Kerkorian, Chrysler's largest shareholder
with a 14.1 percent stake, to consider buying the rest of the company.
His $23-billion takeover bid on April 12 ultimately
failed.

Now, Kerkorian and York are pressing Chrysler to relax its
conservative financial strategy and turn more money over to
shareholders. If the company balks, York will take his case directly
to major shareholders. There, he is expected to raise
questions on issues such as Chrysler's quality improvements in hopes
of winning seats on the automaker's board of directors.

Kerkorian and York signaled their intent to contest the effectiveness
of Chrysler board members by hiring one of the nation's
most vocal shareholder activists. Ralph Whitworth, the former
president of the now-defunct United Shareholders Association,
will help York in questioning whether Chrysler's board followed
shareholder-approved guidelines on executive pay.

Directly measuring how quality has affected Chrysler's sales is
difficult. But a comparison of demand for its trucks and its cars
provides clues.

Chrysler has enjoyed much greater success from its overhauled truck
lineup, which ranked above average in this year's J.D.
Power and Associates quality survey this year, than from its lineup of
redesigned cars, which ranked below average on initial
quality.

Adding just a quarter point of market share could boost Chrysler's
pretax profits by $225 million, York estimated. An extra full
point of market share boosts the company's results by nearly $1
billion before taxes.

Those numbers grab the interest of shareholders.

"Chrysler has taken steps toward improving quality," said Charles
Mayer, co-manager of the Invesco Industrial Income Fund in
Denver. "I'm sure a number of additional things could be done there,
and I'm sure they'll find them once Jerry York gets on
board."

The big impact quality can have isn't unique to Chrysler. General
Motors Corp.'s decision to close the Willow Run assembly
plant in Ypsilanti showed how even modest quality gaps can make a huge
difference.

GM, in court documents, said warranty costs on the Chevrolet Caprice
and other big sedans built at Willow Run hit $313 per
vehicle compared with $246 per vehicle for the same models built at a
plant in Arlington, Texas.

"It becomes apparent pretty fast that if you don't keep up on quality
you're going to be dead," said George Hoffer, an
economics professor at Virginia Commonwealth University. Of the 10
brands at the bottom of the 1991 J.D. Power initial
quality ranking, only four remain. Out are Yugo, Sterling, Isuzu cars,
Alfa Romeo, Peugeot and Daihatsu.

More painful to companies of Chrysler's size, Hoffer said, is the toll
quality can take on resale value. A study by Hoffer "clearly
showed that poor quality related to poor resale value." In turn, that
discouraged consumers "who didn't want to get burned
again" by buying the same company's products, Hoffer said.

A study by Swedish automaker Volvo AB found it cost three times more
to attract a new buyer in advertising and rebate
expenses than it did to persuade an existing customer to return. Volvo
found quality played a key role in bringing consumers
back.