Commentary: A Secret Weapon For German Reform

The victory of Social Democrat Gerhard Schroder in Germany has some executives and investors, both at home and abroad, deeply alarmed. All along, they feared that a left-leaning government would be even less friendly to business than Chancellor Helmut Kohl's administration, which failed to lower sky-high taxes and labor costs. Now they worry that Schroder and his likely coalition partners in the environmentalist Green Party will crush any hope of real economic reform.

But Schroder's team may find itself facing an odd business adversary, a kind of Trojan Horse within German walls that could be a huge catalyst for change. DaimlerChrysler, the new German-American company, has U.S. shareholders and managers who aren't likely to take threats to their company's competitiveness lying down. The auto giant is sure to keep up the pressure on Bonn for tax and other reforms. And other German companies will be watching closely for cues on how to lower costs, operate more efficiently, and motivate managers.

The sheer bulk of the $130 billion merged carmaker--the world's fifth largest--will give it enormous clout. With its $90 billion market capitalization, DaimlerChrysler will account for nearly 13% of the DAX index of 30 German blue-chip stocks. Thus, it will be a benchmark for investors scanning German shares. It already has an advantage, with higher margins and a price-earnings ratio of just 13 on estimated 1999 earnings, vs. 19 for the DAX. Other German blue chips will be under pressure to improve profitability or risk losing investment to the more attractively valued giant.

As Europe's biggest industrial company outside the oil industry, DaimlerChrysler will have lots of weight to throw at Schroder's policymakers. Its ultimate weapon is the threat of relocating its headquarters to the U.S. should Germany's business climate remain hostile. The auto maker can also wield its power in the form of capital investment. If labor and taxes remain prohibitively expensive, DaimlerChrysler will build plants elsewhere--or perhaps close facilities in Germany.

PAY WATCH. Corporate boards across Germany are already monitoring just how far Daimler Benz Chief Executive Jurgen E. Schrempp will go in Americanizing the Stuttgart-based company. The most visible disparity is executive pay. Chrysler Corp. CEO Robert J. Eaton and Schrempp will co-chair the new company for three years, when Schrempp will take over. Eaton makes more than eight times as much as Schrempp does. But Daimler supervisory board chairman Hilmar Kopper has made it clear that Eaton's total compensation--$10.9 million in 1997--won't be matched.

Meanwhile, for its 1,600 upper level managers, DaimlerChrysler is setting up a performance-related pay scale unlike anything seen in Europe, Schrempp claims. Base pay will be lower than Germans are used to, with more variables such as stock options. The new packages will include another U.S. import: phantom shares, which track the market price and are paid out when earnings targets are met. That could help forge a German management class that is more vociferous in demanding lower taxes.

The ground is already fertile. Daimler set a trend in 1993 as the first German company to list its shares in the U.S. The new DaimlerChrysler will have even more reason to keep shareholders happy. Some 53% of its shareholders are American, and over two-thirds of its cars and light trucks are sold in the U.S. As Daimler absorbs the American giant, "DaimlerChrysler will influence how German companies are managed," says German consultant Roland Berger.

DaimlerChrysler could also help bring down German wage costs and ease work rules without any policy changes from Bonn. The merged company will continue to include a works council in its decision-making--a structure mandated by German law. That means DaimlerChrysler's labor representatives, too, will be more attentive to U.S. attitudes. Watch for more contract talks allowing flexible labor rules, and changes in the tone of industrywide collective bargaining in Germany.

Daimler won't be all-American, of course. Key elements of German corporate culture will remain, including the two-tiered system of a supervisory and a management board. But Corporate Germany and Schroder had better keep their eyes on Stuttgart. It may turn out that what's good for DaimlerChrysler is good for Germany.

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