By Gail Edmondson DaimlerChrysler Chief Executive J?rgen Schrempp looked weary. He didn't have a good story to tell on Feb. 10 as the company's Mercedes Car Group reported a 47% drop in 2004 operating profit, to $2.1 billion. Revenues last year fell 4%, to $63.5 billion, giving the world's No. 1 luxury carmaker an anemic operating margin of 3.3%. "We will be in control of the challenging situation at Mercedes-Benz within the next 12 months," he insisted, adding that he wasn't satisfied with the financial results.
That's a well-worn refrain at the Stuttgart headquarters of $181 billion DaimlerChrysler (DCX). Since the merger between Daimler-Benz and Chrysler in 1998 -- a move Schrempp vowed would create the most profitable car company in the world -- the ambitious son of a university clerk who started his career as a mechanic has spent most of his time putting out fires, first at Chrysler, then Mitsubishi, and now Mercedes.
Two years ago DaimlerChrysler suffered a second big earnings blowup, following the big $2.8 billion blooper in 2001. In 2003, Schrempp excused the setback, insisting his team had things under control and promised that by 2005, DaimlerChrysler would be churning out robust profits again.
QUALITY PROBLEMS. Now that pledge is looking hollow, too. As Chrysler moves into the black, the Mercedes Car Group has hit the skids and could even post a quarterly loss this year, analysts warn. Losses at DaimlerChrysler's smart division, a part of the Mercedes Group, which analysts estimate at $512 million a year, and quality problems at Mercedes-Benz are expected to puncture Mercedes Group's results again in 2005.
Last year, the Mercedes brand ranked 27th - below Chrysler -- in J.D. Power's vehicle-reliability survey, with an average 327 problems per 100 cars. The quality problems that have dogged the Mercedes brand for the past few years are requiring extensive investments to repair, sapping profits. And industry experts say the losses at smart aren't easy to fix quickly either - short of selling the division, a move Schrempp has ruled out. Morgan Stanley forecasts Mercedes profits will fall by an additional 50% this year, to $1 billion.
Schrempp and new Mercedes Car Group boss Eckhard Cordes sought to reassure investors, noting that a cost-savings program would restore $3.8 billion to Mercedes' operating profit, bringing its margin to a respectable 7% by 2007. But those numbers baffled analysts, since no details were offered about how and where costs would be cut or efficiency improved. Commerzbank analyst Adam Collins put the numbers through his calculator and found a big "inconsistency," in the revenue and profit projections. If Mercedes were to reach an operating profit of $5.96 billion by 2007, revenues would have to grow by 10% annually for the next three years - not an easy feat in a stagnant world auto market.
MITSUBISHI MUDDLE. Schrempp, who now prefers to be addressed by the title of "professor" in Germany after having received an honorary degree, told analysts on the conference call to do the math themselves, since they were better at it. The company's calculations "raise doubts about how much detailed thinking has gone into the plan to date," Collins says.
The 60-year-old Schrempp, whose contract was extended by three years through 2008 by the board of supervisors last April, insists that the progress at Chrysler and a turnaround in the truck division show he and his management team are capable of creating value.
The track record also shows that he and his team have been just as adept at making poor decisions that destroy value. Less than a year ago, Schrempp was lobbying to pump billions more into ailing alliance partner Mitsubishi Motors, a decision the board of supervisors and some of his own managers torpedoed. Losses at Mitsubishi in the first nine months of its fiscal year ended in December doubled to $2 billion, and the company, recapitalized last summer by the Mitsubishi Group, now needs another huge injection to survive.
The reality is that seven years after the Chrysler merger, Mercedes is making an operating margin that is less than half of the 8.5% earned by luxury rival BMW. DaimlerChrylser as a whole, which made an operating margin of 4% last year, even underperforms mass-market auto makers like Renault, which turned in a glowing 5.9% in 2004. If Schrempp held his own performance up to the best in the business, instead of to the mediocre results of the previous year, he would have a lot more explaining to do. Edmondson is a senior correspondent for BusinessWeek in Frankfurt