Daimler Has A New Curve To Negotiate

A power struggle is delaying the conglomerate's restructuring

In just 18 months as Daimler Benz's CEO, Chief Executive Jurgen E. Schrempp has engineered a remarkable turnaround at Germany's biggest industrial company. In place of the top-heavy holding-company structure he inherited, Schrempp carved the conglomerate into 36 operating units, each reporting directly to the Daimler board on strategy and profit goals. This hands-on management system is expected to turn the floundering behemoth's 1995 loss of $3.7 billion on sales of $67 billion into a $1.2 billion profit this year.

Daimler's brightening prospects could be dimmed, though, by a power struggle that has broken out between Schrempp, 52, and Helmut Werner, CEO of highly profitable automotive subsidiary Mercedes-Benz. Schrempp wants to complete his streamlining of the conglomerate by formally absorbing Mercedes, which accounts for 80% of the group's sales and most of its net profits, into parent Daimler. Werner, 60, would become Daimler's deputy CEO in charge of autos. But Werner is resisting this curb on his power, arguing that Mercedes needs to retain its own strong identity and brand name.

DAMAGE CONTROL. The result will be to delay completion of the much needed makeover to achieve Schrempp's goal of a 12% return on capital, or more, by 1998. An Oct. 22 meeting of the presidium, or inner sanctum, of Daimler's board of supervisors postponed a decision on a new corporate structure until early next year. The four-member group, including Chairman Hilmar Kopper, chief executive of Deutsche Bank, and Deputy Chairman Karl Feuerstein, a leader of the IG Metall labor union, also delayed until next year the renewal of Werner's five-year contract with Daimler, which runs until the end of 1997.

What's hanging fire is the final stage of Schrempp's rescue of Daimler from the failed scheme of his predecessor, Edzard Reuter, to turn Daimler into an "integrated high-tech company." In pursuit of his vision, Reuter made Daimler a holding company in 1989 with four separate operating companies: Mercedes for cars and trucks, Daimler Benz Aerospace (DASA), the Daimler Benz InterServices (Debis) financial-and computer-services company, and engineering concern AEG. The scheme flopped because the hoped-for synergies didn't materialize. And the auto business, which Reuter expected to decline, has remained Daimler's core.

Schrempp, who has spent his whole career at Daimler since starting as an auto engineering apprentice, prescribed a hard-nosed, radical cure for this costly fiasco. With Werner's support, he effectively swept away Reuter's divisional structure, though he left the old legal entities in place. He shed management layers and modeled the Daimler empire on the U.S.'s General Electric Co. After a year of bloodletting, including the closure of AEG and pulling the plug on DASA's earlier acquisition of Dutch planemaker Fokker, 25 business units remain, 11 of them under Mercedes' corporate banner.

LAST CHANCE? Schrempp, to bolster his case for restructuring, had U.S. investment bank Goldman, Sachs & Co. study the 50 largest global conglomerates earlier this year. His aides say the still unpublished study shows that those with an arm's-length holding company structure--such as Reuter's Daimler--consistently underperform those, such as GE, that provide hands-on management to operating businesses.

The presidium's failure to act means the decision on restructuring will be thrown back to Daimler's full executive board, which currently favors Schrempp 6 to 1. But Werner has powerful allies. Chairman Kopper, for one, has said that Daimler doesn't want to lose Werner.

Still, Werner could be painting himself into a corner. Although he led a scintillating performance by Mercedes in passenger cars this year, thanks to new models that are likely to pump profits higher than last year's $1.5 billion, there are dark spots. The European trucks division, by some estimates, may lose $650 million this year. And many insiders read the delay on Werner's contract renewal as a last-chance warning to him to get into line.

The last thing Daimler needs, as it emerges from the barren years under Reuter, is a debilitating battle over management turf. And Germany Inc. will benefit from a successful Daimler makeover as a spur to the country's corporate renewal.

Before it's here, it's on the Bloomberg Terminal.