Defiant Daimler

With the company struggling, Schrempp's expansion strategy is under attack. Can he make investors swallow his moves downmarket?

Jurgen E. Schrempp is exasperated. The athletic CEO of DaimlerChrysler is a risk-taker who always trusts his instincts--in the African bush or in the boardroom. To him, the need for bold moves is so evident that it's annoying when investors question his strategy. So when asked by reporters why he didn't stick to the high-margin luxury segment Daimler knows best--powerful Mercedes-Benz cars--he springs out of his chair to explain. On a blackboard, he draws a big rectangle that represents the luxury-car market and then begins: "Let's say you only made Mercedes S- or E-Class cars with very high margins. And there you would live peacefully forever because no one would attack you? What nonsense! Everyone's moving into that segment. Everyone." That, he explains, is why he bought Chrysler: to outflank his rivals before they outflanked him.

These days, however, Schrempp must spend much of his time defending himself and his aggressive expansion strategy. Since Daimler-Benz merged with Chrysler in November, 1998, the stock has plunged from a high of 103 to 53 and change on July 26. That's a wipeout of more than $49 billion in market value. While the luxury Mercedes-Benz Div. is humming along--on July 26 it announced a profit jump of 22% for the second quarter--Chrysler is experiencing one setback after another. Chrysler's 12% quarterly earnings drop is flattening operating profit for the whole company, which should have close to $160 billion in sales this year. Worse, the company issued a profit warning for the third quarter.

CRAZY DISCOUNTS. That's not what investors had in mind when they overwhelmingly endorsed the merger. They wanted to see payoffs from synergy, runaway hit models, and a supremely capable management from the German-American fusion. Instead, they've got a Chrysler that's discounting like crazy just to move the metal. Meanwhile, Schrempp's new Japanese partner, Mitsubishi Motors Corp., is losing money hand over fist, while Hyundai Motor in South Korea, Schrempp's newest auto alliance, is wracked by family feuds.

Yet just two years ago, Schrempp was flying high. Almost single-handedly, he engineered the biggest industrial merger ever when his Daimler-Benz swallowed No. 3 U.S. auto maker Chrysler Corp. The watershed deal set off a wave of consolidation in the automotive industry and signaled that German companies were prepared to play aggressively on the world stage.

Inside Germany, it marked the beginnings of a shift from traditional bureaucratic capitalism to market-based competition.

Schrempp epitomized the changes. He had transformed Daimler-Benz from a money-losing mess when he took the top job in 1995 to a company with $5.7 billion in profits in 1998. He liked to test his top deputies' allegiance to shareholder value by quizzing them without warning on the company's share price. In an early spot check, eight of the managers he phoned couldn't even offer an answer, and two got it wrong.

Today, the same guys would get it right. But nobody--not Schrempp, his managers, or his shareholders--is happy with the answer. Schrempp complains that investors just don't get it: "The merger is judged on the basis of the stock price, which I appreciate is not where it should be. But that's not the point. The point is, we are a solid company."

It's a message that's not getting through. Since the $36 billion Chrysler merger, Schrempp has articulated a grand vision for the group to compete in every segment of every major market. And he's well on his way to putting the pieces in place.

Moving downmarket into small and midsize cars is at the heart of Schrempp's strategy. He is committed to the tiny Smart car. This year, he established a foothold in Asia by acquiring stakes in Japan's Mitsubishi Motors and Korea's Hyundai Motor for $2.4 billion. Next he wants to expand into auto insurance and other services. "We have the whole spectrum of products, and we're the most technologically intensive car company in the world," Schrempp says.

Schrempp flogs this vision to investors tirelessly. One former insider recounts how Schrempp rehearsed for two days for the first DaimlerChrysler annual meeting. "Nothing he does is by accident," says this former executive.

But with each deal, Schrempp has further alienated investors. "The falling share price tells you what the market thinks of: first, Chrysler; second, Mitsubishi; and third, Hyundai," says car analyst Christopher Will at Lehman Brothers. Adds Klaus Martini, director of European equities at DWS Investment, one of the largest German institutional investors in DaimlerChrysler: "It's a well-run company. But we don't understand their strategy to go from high-margin businesses to the small-car segment."

The big question: Can Schrempp the dealmaker earn his stripes as Schrempp the manager? The 55-year-old native of Freiburg rose through the Daimler ranks buying, closing, or selling businesses based on his gut instincts. But it's one thing to put four carmakers together, and another to run them. BMW gave up this year on its six-year-old British acquisition, Rover, and dumped it. It took Ford Motor Co. a decade to get Jaguar in shape.

Schrempp's idea is to win by leveraging DaimlerChrysler's excellent but costly technology across a much larger range of products. "Everything that you see in technology in cars has been invented here--everything," he says. Daimler-Benz' recent innovations include not only night-vision and anticollision radar systems but it's fuel-cell engines that Schrempp sees as the next big thing. Fuel-cell cars are powered by electric engines that can run on clean fuels such as hydrogen. The shift to hydrogen will take decades, but Schrempp and his team figure the mammoth costs involved will completely vindicate the logic of the DaimlerChrysler merger.

ROCKY. But has it really been a merger in the full sense? The promise of the deal was to save nearly $3 billion a year from achieving huge efficiencies in purchasing and technology sharing--everything a global company can do. But right now, a real, synergy-producing merger between the two giant companies seems to have stalled.

The Daimler-Chrysler marriage has been rocky from the start. Cultural differences between the Germans and Americans proved difficult to overcome. Little wonder, then, that in September, 1999, Schrempp decided it was best to let Chrysler and Mercedes operate as separate business units. That may have smoothed ruffled feathers, but it suddenly diluted the benefits of the merger. Says the ex-president of the U.S. operation, Thomas T. Stallkamp, himself a casualty of the culture wars: "Obviously, when you run a company as [separate] business units, you do redundant things, and you can't run as efficiently as when you put things together."

That's why the company is focusing on cost cuts. Having rejected the classic merger model, where operations are combined to achieve efficiencies, DaimlerChrysler plans to cut costs by $5.6 billion over the next three years. That includes $2 billion that Chrysler President James Holden wants his troops to squeeze out of Chrysler's operations. The effort could result in a lower headcount through attrition.

Insiders say big synergies will come with time. "You don't just instantly have everything combined," says Holden. "There's a lot going on behind the scenes." Through a joint Automotive Council, engineers are already collaborating. They meet quarterly to compare notes on product designs and look for components that could be shared. "That is where the money lies, and [it's] how you should run a company," says Schrempp.

Schrempp also already has a model for global integration: the Mercedes truck division, which has increased its margins despite harsh market conditions. The division has skillfully absorbed Ford's Freightliner unit, with Stuttgart coordinating the sharing of engines, transmissions, and axles. "The important thing is to integrate activities around the world," says truck boss Dieter Zetsche.

Schrempp's executives have made a start at duplicating Zetsche's efforts. Chrysler and Mercedes have started combining their research and development operations for key technologies such as fuel cells. Last year, Mercedes began building its M-Class sport-utility vehicle in Chrysler's plant in Graz, Austria. Still, achieving synergies will take time. "Many things you can only implement in one generation of products, which takes four to five years," says Schrempp.

Yet investors gripe that Schrempp is not forthcoming enough about the merger's synergies. After announcing that DaimlerChrysler had saved $1.4 billion in 1999, the first full year of the merger, through joint purchasing of steel and other commodities, Schrempp says he will no longer disclose any information on synergies because it is now one company. "DaimlerChrysler's unwillingness to break out synergies creates the impression that they're not coming through at the anticipated rate," says Christian Breitsprecher, an auto analyst at Deutsche Bank.

Even sharing interchangeable parts has proved tough. German and American engineers agreed early on that Chrysler could share Mercedes' rear-wheel-drive technology: Key components in Chrysler's rear-wheel-drive Hemi 300C convertible concept car were "lifted right from the E-Class," says Chrysler's retiring design chief, John E. Herlitz. But when Chrysler engineers wanted to incorporate some of those components into the next-generation Dodge Intrepid and Chrysler Concorde, the Germans dragged their feet, according to sources close to the company. The Germans apparently worried they would be be caught short of supplies if demand soared for the more profitable Mercedes cars. A spokesman says any such issues would revolve around practical questions of supply, not political infighting.

TOO PRICEY? The friction of the merger has certainly sent many Chrysler middle managers fleeing. Most senior executives retired shortly after the merger anyway, but what really hurt was the defection of several highly regarded engineers and manufacturing executives. The latest executive preparing to leave: Treasurer Thomas Capo. Yet Holden says the atmosphere has improved lately. "The fear of the Germans is gone." Schrempp himself, at Holden's request, is regularly holding "town hall" meetings with Chrysler employees in the U.S.

One question still hanging over the merger is whether Schrempp overpaid. "They bought [Chrysler] at the peak of its earnings and model cycle. Now, they have to suffer through the hard times," says Breitsprecher. Chrysler executives accept the blame for holding back earnings, but they say it's temporary. The Chrysler unit's sales fell 10% in June, compared with the year before. Many of Chrysler's most popular models, such as its five-year-old Dodge Caravan minivans, are losing ground to competitors offering improved features.

A series of hits would do plenty to wipe away the anxiety about the merger. The red-hot PT Cruiser is a good start. And this fall, Chrysler will release a stream of new cars and trucks, including a new generation of minivans and a new family of midsize sedans and coupes. "The pipeline is still so full that their lineup will remain one of the freshest on the market," says John Casesa, an analyst at Merrill Lynch & Co.

Getting Chrysler's performance on a par with the Mercedes division would boost profits tremendously. Mercedes sedans are having a strong year, especially in the U.S. Worldwide sales were up 10% in the first half of 2000. The redesigned C-Class sedan is proving a hit, with its moderate price of $25,000 and cutting-edge technology such as integrated navigation, phone, and voice-activated audio system. The product range has widened from four core models in 1995, when Schrempp took over, to eight, including more sports cars and SUVs. A C-Class hatchback is in the works. Unlike Chrysler, Mercedes has no problem with aging models.

TENSION. But Schrempp worries that rivals will attack DaimlerChrysler's luxury niche. While Schrempp has been busy trying to match Ford's and Volkswagen's global reach, the two giants plan to put out a range of luxury sedans. Ford alone has a stable that includes Lincoln, Jaguar, Aston Martin, Volvo, and Land Rover. "We take the competition seriously," says Jurgen Hunger, a Mercedes dealer outside Stuttgart.

And Mercedes has struggled in executing some car launches. Small-car manufacturers in Europe tensed up when Mercedes-Benz started working on minicars in the early 1990s. But their anxiety disappeared when first the A-Class compact and then the Smart two-seater rolled over during a strenuous road test. The $15,000 A-Class car is starting to sell, but the cost of fixing the rollover problem has sent production costs soaring. DaimlerChrysler is losing money on the Smart.

Despite these problems, the company persists with its small-car plans. The reason: With the U.S. and European markets close to saturation, the next big sales surge will take place in emerging markets, where drivers will want to buy small, affordable cars. The deals with Mitsubishi and Hyundai are Schrempp's way of getting in on the action. He agreed in March to buy 34% of Mitsubishi for $1.97 billion. The Japanese company is deeply in debt, but it makes excellent small engines and transmissions. The two partners will produce a platform that will serve as the skeleton for a small Mitsubishi car and also for the next generation of Smart cars.

Korea plays a role, too. "Hyundai is interested in buying the [Mitsubishi-DaimlerChrysler] platform, and it would increase the economies of scale if they also bought components," says Jurgen Hubbert, a management board member in charge of Mercedes and Smart cars. DaimlerChrysler agreed in June to buy a 10% stake in Hyundai for $428 million. Chrysler may market Hyundai's low-priced, fuel-efficient Atoz as a Dodge in the Mexican market. Small-car production will be shifted away from Mercedes so as not to tarnish or exhaust that business.

DaimlerChrysler has little flags in all the right places--the U.S., Europe, and Asia. But managing its Asian partnerships will be tricky. Mitsubishi President Katsuhiko Kawasoe insists on running his operations independently, while DaimlerChrysler has three board members and only two senior management posts. Schrempp does not, he says, want to trigger the same "fears and anxieties" at Mitsubishi that were aroused at Chrysler.

Handling Chrysler, cajoling Asian partners, developing a new engine technology, building a world-beating small car: These tasks would tax the best manager in the world. Schrempp manages this raft of tasks in this way: communication, confrontation, and competition. He values personal contact with senior managers, logging 600 hours of flight time last year. He uses symbols effectively. A former Daimler executive said Schrempp gave managers involved in the DaimlerChrysler integration half a share certificate at the start, telling them they would get the second half when the integration was complete. "And if it wasn't, not only would you not get the second half, you'd be short of a job," he says. According to the same former executive, Schrempp plays people off each other: "For almost everything, there's a red team and a green team--with the guys competing against each other. That can drive you crazy."

To date, no one has used the stock's tumble and Chrysler's woes to challenge Schrempp. He still seems to have the support of the supervisory board. "There's probably no other company in the car industry that performs as well and is rated so badly in the stock market as DaimlerChrysler," says one supervisory board member. The question persists, though: How many operations can he actually merge?

Schrempp has drawn a clear boundary around Mercedes to protect the premium brand. So far, there are no plans for platform-sharing between Mercedes and Chrysler vehicles. After all, no one would buy a $35,000 Mercedes E-Class if he could get practically the same car under the Chrysler brand for thousands less.

TOO CAUTIOUS. Yet if taken to extremes, the fear of infecting Mercedes limits the potential of the merger. D. Garel Rhys, professor of motor industry economics at the University of Wales in Cardiff, says that if DaimlerChrysler doesn't share platforms and manufacturing, the company will have ignored the biggest reason for a merger. "They're erring too much on the side of caution," he says. If they continue to operate as separate companies, says Rhys, they won't achieve the same kind of global reach as Ford, which shares some parts among its upscale brands with the lower-cost Ford brand.

For his part, though, Schrempp has no doubts: "Our message will change the market's perception into the right one...DaimlerChrysler is a unique company, uniquely positioned." Supremely confident, as always. But if Jurgen Schrempp fails, he will be remembered as the man who mangled the world's most prestigious carmaker and a cherished American brand.

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