Dustup At Daimler

How Schrempp ejected one of his best executives--and why

As usual over the Christmas holiday, Helmut Werner headed for the ski slopes with his family. But even trying out the newfangled carving skis at the Austrian resort of Lech couldn't keep the fun-loving Mercedes-Benz chief executive from thinking about the unsavory business that lurked back at the office. Werner, 60, knew he would soon have to turn his back on what he had repeatedly called "the best job in the world."

In fact, by the time the silver-haired executive resigned on Jan. 16, the outcome seemed inevitable. The German press had speculated for months that Werner would go. A reorganization of Mercedes' parent, Daimler Benz, which is expected to be rubber-stamped by company directors on Jan. 23, will meld the two entities and erase Werner's job.

RISKY MOVE. No one disputes that the rejiggering makes sense. It replaces an unwieldy structure set up during the 1980s for Daimler's ill-fated diversification. In one sweep, it will eliminate 300 managers and save $125 million. But Werner's exit leaves troubling questions unanswered. Why didn't Daimler CEO Jurgen E. Schrempp and directors do whatever it took to keep one of the company's most successful executives? And will Werner's departure derail Mercedes' turnaround? "The bit [of Daimler] that didn't need fixing was Mercedes," says Salomon Brothers analyst John Lawson.

Indeed, tinkering with success seems mighty risky. Financially, Mercedes carries Daimler. Auto operations, with 1996 sales of about $47 billion, accounted for all of Daimler's estimated $1.5 billion in 1996 operating profit. If Werner's strategy to expand into developing markets and diversify into small cars and sport utilities goes according to plan, that figure could jump to $2.6 billion by 1998, figures J.P. Morgan Securities analyst Nick Snee.

Both Werner and Schrempp declined to be interviewed for this story. But since mid 1994, when he was chosen over Werner to become Daimler CEO, Schrempp steadily angled to overpower his rival. Werner, meanwhile, miscalculated. He thought Mercedes' strong performance would protect his power and job. "Werner allowed himself to be pushed further and further into a corner," says one industry consultant.

Schrempp, 52, launched his first major challenge to Werner before he had officially succeeded Edzard Reuter as Daimler CEO in May, 1995. That spring, he demanded a review of Wer-ner's pet project, the $10,000 SMART microcar, a daring joint venture with Swiss watchmaker SMH Swatch. Mercedes' supervisory board had already approved the project a year earlier. Werner finally silenced criticism in May, 1995, by inviting Schrempp and other Daimler board members to drive the SMART at the dome-shaped building in suburban Stuttgart, where Mercedes executives view future products. They loved it.

That fall, Schrempp began to mull a remake of Daimler. He wanted to ax the holding company Reuter had created as part of his failed effort to build a diversified technology company. That would mean bringing the car company, which Werner ran almost independently, back into Daimler, where Schrempp would call the shots directly. In October, the German weekly Stern published a story saying the two execs were on a collision course.

Early in 1996, Schrempp hired a consultant to help fine-tune his plan and commissioned Goldman, Sachs & Co. to study the world's 50 biggest conglomerates. Goldman concluded that holding companies were less efficient than companies with closely held subsidiaries. This launched a yearlong debate within Daimler over the company's future form. From the beginning, Werner argued that Mercedes was at a crucial juncture in its turnaround and should remain autonomous.

Indeed, when Werner took over as Mercedes CEO in 1993, the venerable company was struggling. Out of touch with customers and burdened by the industry's highest costs, it was losing sales to archrival BMW and to Japanese luxury brands such as Lexus. Losses that year mounted to $713 million. Werner quickly reined in spending, built factories outside Germany, and unleashed a product offensive. Besides the SMART car, due in 1998, Mercedes this year will introduce the M-class, a $35,000 sport utility line, and the A-class, a $20,000 subcompact. Analysts say Mercedes can't afford to bungle these key launches.

LEAKS FROM THE TOP. While the debate raged, Schrempp became increasingly involved in the car business. He began scheduling visits to Mercedes factories and offices, often without alerting Wer-ner. One such visit, in late August, was a three-day trip to Mercedes' new plant in Tuscaloosa, Ala., that this spring will begin building the M-class for the truck-crazed U.S. market and export. The intensity of his interest "really sent a message" that Schrempp was becoming more hands-on, says one plant official.

By last fall, seven of eight managing directors were lined up behind Schrempp's reorganization. Werner's was the only dissenting vote. Schrempp decided to force the issue. He began leaking details of the plan--and Werner's resistance--to the German press. Werner had even turned down the job of vice-chairman, stories said. Hilmar Kopper, the Deutsche Bank CEO who chairs Daimler's supervisory board, demanded that the leaks stop. Schrempp's aides went right on talking to reporters.

On Nov. 6, the supervisory board postponed a final decision on the restructuring, but Kopper ordered Schrempp to come up with a plan that Werner could live with. The fight only worsened, however. Schrempp and Werner each sent out letters to company officials supporting their respective positions. On Dec. 10, Schrempp, Werner, and Kopper met at Deutsche Bank headquarters in Frankfurt in a final effort at compromise. But by the end of the meeting, Werner knew he had only one choice.

He vows not to retire to the ski slopes. He will coordinate plans for the upcoming world exposition in Hannover, Expo 2000, and both Ford Motor Co. and General Motors Corp., according to industry scuttlebutt, want to talk to him. Schrempp, meanwhile, can turn his full attention back to fixing Daimler now that the power struggle is over. He has lots to do. Although Daimler Benz Aerospace has cut nearly 25,000 jobs since 1993 and jettisoned money-losers such as Dutch aircraft maker Fokker, the division lost an estimated $350 million in 1996.

But the forcing out of a star lieutenant has some observers wondering whether Schrempp isn't following in his predecessor's autocratic footsteps. With Wer-ner gone, there's no one left at Daimler to balance Schrempp's power. It's now up to shareholders and Daimler's board to make sure he uses it wisely.

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