The Bulldozer At Daimler Benz

Schrempp's push is paying off--but roadblocks remain

For months, Daimler Benz's top brass had been unnerved by a string of moves made by CEO Jurgen E. Schrempp. So on Jan. 24, the day after Germany's biggest company swept away its unwieldy corporate structure by folding in auto maker Mercedes-Benz, some 1,300 top executives flocked to the company's Stuttgart headquarters. After Schrempp spoke for an hour, the executives peppered him with questions for another two. The bottom line: Hundreds of them would soon be gone--all in the name of making Daimler healthy again.

However painful the remedy, there's no doubt Daimler's vital signs are starting to improve. Investors have hiked the stock more than 80%, to about $70, on the bet that Schrempp's take-no-prisoners tactics can turn the company around. In 20 months at the helm, he has slashed 40,000 jobs, sold or dumped 12 unprofitable businesses, and flattened the management structure. J.P. Morgan Securities analyst Nick Snee expects Daimler to produce a net profit of $1.1 billion for 1996--a dramatic contrast to losing nearly $4 billion in 1995.

Now, Schrempp faces a tough new task. The 52-year-old executive must prove he can shape what remains into a solid money-maker. He must do that without the help of Mercedes CEO Helmut Werner, who was the most spectacular casualty of Shrempp's management changes (BW--Feb. 3). Sipping banana juice and chain-smoking Marlboros during a recent interview, Schrempp told BUSINESS WEEK: "I'm very unhappy that Helmut Werner is not on board anymore. We tried everything in the book (to keep him)." Schrempp also says some units are

several years away from full health. "These are all great challenges," he says. "The fruit isn't hanging that low anymore."

CRUCIAL LAUNCHES. If Schrempp's drastic overhaul produces results at his $63 billion company, it will send a clear message that German industry is serious about restructuring. His moves could spur other German companies to adopt similar management priorities, such as focusing on shareholder value and making financial accounting more transparent. But if he falters, the restructuring of Germany Inc. could be set back several years. A stumble "would support defenders of the status quo," says Thomas Mayer, Goldman Sachs' senior economist in Frankfurt.

For Schrempp to maintain the momentum, he can't ease up. Productivity at Daimler Benz Aerospace (DASA) still lags rivals. The company's European truck division has been losing market share since 1992 and is a chronic money-loser. The Temic computer-chip operation may be a hopeless case. And the highly profitable car business faces four crucial new-product launches in the next two years--without the guiding hand of Werner.

Yet after five years of losses, DASA may finally be pulling out of its downward spiral. Schrempp promises that the latest round of cost-cutting, which will eliminate about 6,000 jobs by 1998, will make DASA as efficient as rivals such as Boeing Co. "Once our competitiveness program is completed, we have nothing to fear," he says. Analysts such as Falk Frey at Bank Julius Baer think Daimler's aerospace business will post a small operating profit this year, after losing about $360 million in 1996. That's partly due to a stronger U.S. dollar and an uptick in production at Airbus Industrie, the passenger jet consortium Daimler has a 38% stake in. To handle the heavier Airbus workload, Schrempp is pushing DASA to boost productivity.

The struggling European truck operations, which posted an estimated $370 million operating loss in 1996, may also be turning around. A just-introduced heavy truck, the Actros, has fewer parts than its predecessor and is 30% cheaper to produce. A new medium-duty model, which shares many Actros components, is due next year. And concessions, such as reduced pay for workers, are lowering labor costs. Schrempp expects the unit to become profitable by 1998.

But Temic, a maker of microprocessors, could be headed for the block. It's had a rocky earnings record, and analysts say it slipped into the red again in 1996. The company's automotive engineers are lobbying to keep the business because it collaborates in the design of increasingly sophisticated computer systems in cars. But Schrempp has given Temic managers until this summer to come up with a viable plan to make it profitable or else he'll dump it.

Such hard-headedness continues to give investors hope that Daimler is truly on the mend. "Schrempp's going in the right direction," says Christoph Bruns, fund manager at Frankfurt-based Union Investment Inc., which holds a $220 million Daimler stake. Now, Schrempp must show that he is as adept at fine-tuning as he has been at scrapping Daimler's broken bits.

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