Can Chrysler show Detroit the way? The smallest of the Big Three has done the most to transform itself.

Striding into DaimlerChrysler's assembly plant in Saltillo, Mexico, recently, Chrysler Group President Tom LaSorda broke away from a gaggle of executives and the carefully rehearsed tour they had planned for him. "He blew by all the executives and went into the plant and started to talk to workers," says Tom Landry, a close associate and president of Chrysler Canada. "That's where he goes first," Landry says. "LaSorda taps a worker on the shoulder and asks, 'What are you doing?'"

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The Canadian-born LaSorda has a unique relationship with autoworkers. His father, Frank, is a retired executive of the Canadian Auto Workers Union. Because of that, Tom LaSorda grew up with close ties to the men and women who actually build vehicles. He knows both sides of the autoworker's life--the middle class prosperity it can provide and also the insecurity that's inflicted when the industry is in a tailspin. "I know what it's like to have a father out of work for six months and the impact that can have on a family," LaSorda says.

From those modest origins, LaSorda has emerged to represent the future face of the American Big Three. At press time, many of the world's top auto executives were in Detroit's Cobo Hall for the North American International Auto Show, unveiling new models and concept cars. But all the glitzy displays and glamorous models in striking costumes couldn't camouflage the deep distress in the boardrooms of General Motors and Ford.

Toyota is on course to surpass Ford as the No. 2 brand in the U.S. in a couple of years (see charts, p. 17). It already seems destined to vault past GM in global sales this year. Can the Big Three really stop the Japanese and Koreans and claw their way back to more respectable market shares? The outcome is uncertain, even with the massive plant closings and job cutbacks that GM and Ford are beginning this year.

If there are answers, they may come from Chrysler, which is still considered one of Detroit's Big Three even though Germany's DaimlerChrysler owns it. It is the only one currently making a profit, and is considerably ahead of GM and Ford in taking the tough steps necessary to survive: less contentious relationships with labor, streamlined "flexible" manufacturing and more efficient links with suppliers.

Chrysler's restructured plants could produce up to 3.7 million cars annually by the end of 2007. With Ford expected to shutter more than 10 plants in the coming two years as part of its massive cost-cutting program, its capacity would slip to 3.3 million units annually. That would allow Chrysler to rocket past Ford in production and trail only GM as the largest North American auto manufacturer. In short, what LaSorda and before him Dieter Zetsche have done at Chrysler is a case study of what the entire U.S. auto industry must do to prosper once again.

LaSorda spent 20 years at GM, rising to become one of the industry's most innovative manufacturing experts. LaSorda created GM's plant in Eisenach, Germany, which became the template for the company's future factories containing flexible and lean manufacturing, incorporating some Japanese techniques. Colleagues call LaSorda the "Dean of Lean."

But Chrysler lured LaSorda away from GM soon after his Eisenach success. The smallest of the Big Three lagged its Detroit competitors in manufacturing and desperately needed to modernize its plants. As manufacturing chief, LaSorda became a close collaborator of Zetsche, a Mercedes executive who became president and COO of the Chrysler Group five years ago when it was broke. LaSorda helped Zetsche guide the company through a bloodbath of cost cuts and staff reductions.

Setting a Tone With Suppliers

The drastic measures required sacrifices from stockholders and suppliers who were asked to reduce prices. Dealers were required to take reduced margins. "Every part of our value chain made contributions," LaSorda says." Ford and GM also have pressured suppliers for lower prices, but are mired in the problems of their former in-house parts makers, Visteon and Delphi.

It was no surprise when Zetsche picked LaSorda to succeed him as head of Chrysler when he returned to Stuttgart last year to become chairman of DaimlerChrysler. Zetsche in his five-year tenure rebuilt Chrysler into a totally solvent enterprise with some of the most exciting cars and trucks available today. The Chrysler 300C and Dodge Magnum are among Detroit's few offerings that don't require hefty incentives.

In an interview in his 15th floor office, LaSorda says the company he inherited is in good shape. It earned $1.4 billion in the first three quarters of 2005 while other members of the Big Three were deep in red ink. But Chrysler's 2005 profits are still considerably below what the company was earning before its 1998 merger with Daimler-Benz. LaSorda forecasts it will take three to five years to boost Chrysler profits to pre-merger levels.

For that reason, LaSorda is anything but comfortable with the status quo. He notes that material costs have risen, including prices of steel, resins and petroleum-based products. Transportation costs also have climbed. These affect both suppliers and Chrysler. "Our relationship with the suppliers is such that we deal with them one at a time," LaSorda says. "We try to work out our challenges and theirs and I think that works." That's a very different tone than GM and Ford have set.

Chrysler also has learned to please its customers. Steve Walukas, Chrysler's vice president of corporate quality, says that LaSorda has "a laser-like focus on customers." Walukas spends hours with LaSorda discussing ways to improve the quality of Chrysler and Jeep vehicles. "We have almost daily meetings on quality," Walukas says. "It's consistent, not just a nine to five thing."

Walukas shared a recent letter he received from Robert Auge, a Dodge Chrysler Jeep dealer in Belen, N.M., for more than 30 years. "They are sure not building them like they used to, and it's a damn good thing," Auge wrote. Quality saves money. Walukas reveals that Chrysler has reduced warranty claims by more than 40 percent in the past five years. However, he admits that Chrysler quality still lags that of Toyota. "We're getting better, but we have to get more reliable and durable," Walukas says.

What offers the most potential for cost savings in the auto industry? Creating highly automated plants that work around the clock. "When I took over [Chrysler] manufacturing, I found that flexibility really wasn't there," LaSorda says. "That was a big menace to [Chrysler's] future." He challenged Frank J. Ewasyshyn, who succeeded him as executive vice president of manufacturing, to change that.

Even though he is a fellow Canadian who attended the University of Windsor at the same time as LaSorda, Ewasyshyn did not meet his boss until at Chrysler. One of the first assignments LaSorda gave Ewasyshyn was to give Chrysler plants flexibility without investing in expensive hard tooling. "Frank, being a process expert, knew exactly what I meant about that," he says. In a few months, Ewasyshyn created a 3D simulation of his boss's vision and got an okay to build a prototype.

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He went on to create a system that replaced single-purpose tooling and gave robots the flexibility to change tools and assemble multiple pieces for different products. This was a huge breakthrough in an industry that typically produced only a single model per assembly line. "By changing the tool at the end of the robot, we change the product that we're building," he explains. The result was that robots could apply adhesive or weld--or do any other task that's required. "We were building different parts in the same cell using robots and no hard fixtures," Ewasyshyn explains. "I couldn't believe it."

Chrysler first demonstrated this technology by building a front rail assembly for a Pacifica and then producing a Jeep's body side. "We were able to build two completely different parts that would not normally be processed together," Ewasyshyn says.

It might even be possible for Chrysler to change a model on the assembly line in 42 seconds, Ewasyshyn theorizes. "That's where manufacturing is going," he says. "The whole auto world is going that way." Chrysler is putting its new manufacturing protocol in action while changing over to new models at its Belvidere, Ill., and Sterling Heights, Mich., plants. Those plants have been totally revamped under Ewasyshyn.

A bonus of the new manufacturing protocol is that it also improves quality and reduces worker-hours in assembling a vehicle. "We will do every other plant as [time comes to renovate them]," LaSorda says. When that's accomplished within the next few years, Chrysler will have a totally new flexibility model. The flexibility strategy will allow the company to increase production if the marketplace demands it, LaSorda says. "We can move from model to model and it's just a matter of suppliers giving us more volume [when needed]." Best of all, this will allow Chrysler to increase sales volume without more bricks and mortar. "I see no need to build new plants for a long, long time," LaSorda says. "We can convert many plants to three shifts and that's the strategy we will use." Chrysler is ahead of GM and Ford in terms of the percentage of its plants that have been converted.

But LaSorda is not content with this situation. "As we design our flexibility strategy for today, like the computer industry, it's already obsolete," LaSorda says. He wants to focus strategy on the next idea in the way great companies like Microsoft and 3M do. "As soon they launch a [new] product, they're working on another one to make it obsolete," he says.

That's the cultural framework LaSorda wants to drive through Chrysler. "Innovation and technology can make us great," LaSorda says. He has a group studying how to reinvent the car and how it is built. "As an example," he asks, "why couldn't we one day build cars without a paint shop?" That could happen in his lifetime, LaSorda says.

The message to GM, Ford

Surprisingly, LaSorda expresses less concern about dealing with union demands that have entangled his competitors. While the UAW threatens to strike Delphi and imperil GM's supply chain, LaSorda is sanguine about UAW demands. "I would never categorize our relations with the union as adversarial," he says. "That may have been true 20 years ago, but not today."

He says he doesn't believe that because of his unique background the unions make it easy for him. "What we're dealing with are professionals who represent the work force," he says. "When you lay out the facts and you communicate, the dialogue that results has to be a win-win situation."

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The overall message for GM and Ford is that they are in the relatively early stages of their transformation attempts. CEOs Rick Wagoner of GM and Bill Ford of Ford can't just save their way back to prosperity. Both companies have undergone huge restructurings in the past that didn't stop their market share erosion. They need to create cultures that really buy into streamlining production and work with their unions to control health costs. Above all, Ford and GM must produce high quality, durable cars that can be sold without ruinous incentives.

The 2005 sales results contain more bad news for Detroit. Japanese and Korean sales soared ahead again, and those of the Big Three tanked. Chrysler and Ford sales were down 5 percent each and GM finished 2005 with 4 percent fewer sales than the year before. Significantly, however, Chrysler actually gained a half point market share, proving that it can be done.

While those results mean more red ink for Ford and GM, they continue production based on unrealistic forecasts of how many vehicles they can profitably sell. History shows that maintaining scale for the sake of scale is ruinous. The sooner they implement proposed programs for cutting capacity, without necessarily declaring Chapter 11, the quicker they can stop insane incentives and start making money on their products. LaSorda, for one, thinks they can do it. "Don't count Ford and GM out," he says. "I think they will be around for decades to come."