Chrysler's Rescue Team
It was a sobering New Year's message. Over the holiday weekend, DaimlerChrysler Chief Executive Jurgen E. Schrempp told German media it could take two to four years to turn the tide at Chrysler. Because of weak sales and out-of-control costs, the U.S. auto maker posted a $512 million loss in the third quarter and is expected to lose $1.3 billion in the fourth. It's a debacle--a scenario that couldn't be any further from the global synergies Schrempp had extolled as the driving reason for Daimler's purchase of Chrysler in 1998.
Schrempp's admission revealed the enormity of the task facing the band of executives struggling to turn Chrysler around in a weakening U.S. car market. But this time, Schrempp isn't just breathing down the necks of some hapless U.S. managers. He's putting the reputation of his best German managers on the line as well. The new CEO of Chrysler Group is Dieter Zetsche, 47, a veteran Daimler executive who turned around the company's U.S. truck unit, Freightliner LLC, in the early 1990s and later helped restructure Mercedes-Benz itself. Zetsche has chosen as his backup Chief Operating Officer Wolfgang Bernhard, a 40-year-old whiz kid who earned kudos for the way he handled the launch of Mercedes' flagship S-Class sedans. They're struggling to deal with what Zetsche describes as Chrysler's "breathtakingly fast decline of the bottom line."
But if there's something unusual here, it's that Zetsche and Bernhard are the only two Germans on Chrysler's new seven-member rescue team. For all the talk about the Germans invading the executive ranks of Chrysler, Schrempp has sent only a pair of workout guys to handle the biggest workout in the automotive world. For the rest of the team, he is relying on Chrysler veterans who have been plucked from relative obscurity following a rash of high-ranking defections. They include Controller James D. Donlon, the bean counter who is believed to have alerted Germany to Chrysler's spiraling costs; Thomas W. Sidlik, Chrysler's head of procurement and supply; and manufacturing chief Gary L. Henson.
At least these Americans won't have to wait for scary transatlantic phone calls to find out what the Germans are thinking. Yet while Zetsche is clearly the man in charge, he is critically dependent on his American executives to understand Chrysler's problems and come up with a rescue plan. The presence of so many Americans points to something else: a tacit acknowledgement by the Germans that they have a lot to learn about the workings of a mass-market giant like Chrysler.
MINIVAN GLUT. The next few weeks will be crucial to the development of the rescue plan, which needs the cooperation of everyone, from the factory floor to the dealer showroom to the executive suite. On Feb. 23, Zetsche will present a detailed plan to the DaimlerChrysler supervisory board, which has presided over one of the biggest destructions of shareholder value in German corporate history. The plan has to work, and the pain will be tremendous.
Zetsche has already gone to work. In December, he outlined plans to save $2 billion this year and an additional $4 billion over the next two years by cutting supplier costs. He's already cutting Chrysler's product line. On Jan. 4, the company said it would eliminate the Jeep Cherokee this summer, a year earlier than planned. The best-selling Grand Cherokee remains i n production.
More severe actions are expected. Details are still being worked out, but there's talk of trimming the 33,000 white-collar workforce by as much as 15% and shutting factories as well. The most vulnerable assembly plants are an aging Jeep plant in Toledo, Ohio, a small-car assembly plant in Belvidere, Ill., and a full-size van plant in Windsor, Ontario. "The basic game plan for this company was built on the assumption of strong growth--which worked for a while," says Zetsche. "We're now facing a reality pretty different from these assumptions." One reason for Chrysler's current crisis: Executives miscalculated demand for the company's aging minivans as it prepared to bring out a new model. The glut of old minivans meant Chrysler had to offer thousands of dollars in incentives for each vehicle sold in 2000. When the inventory of old minivans lingered on, Chrysler ended up offering incentives on the new models, too.
Already, suppliers are resisting Zetsche's demand for immediate 5% price cuts on components, while many of the company's 4,400 dealers are wary of the new team. Zetsche, aware of the crucial role the dealers will play, met with a few of the leading ones only days after taking the top job on Nov. 17. Dealers say they were impressed that he said he intends to involve them in important sales and marketing decisions. But they are watching closely to see whom Zetsche will tap to replace ousted sales and marketing chief Theodor C. Cunningham. They fear a German would cut incentives and sour relations. "As far as we're concerned, there's a lot riding on who gets the sales and marketing job," says Tom Barenboim, chairman of the Chrysler-Jeep National Dealer Advisory Council. "It will determine how we work with the company." Zetsche is expected to fill the sales and marketing post any day.
Zetsche and Bernhard are conducting their own cram course on Chrysler. They're making a habit of eating in the employee cafeteria rather than the executive dining room at the headquarters in Auburn Hills, Mich., so they can mingle with Chrysler people. And they're huddling with designers to learn about the products in the pipeline. After the recent media unveiling of a new concept car, Zetsche and Bernhard stayed late to pore over the vehicle. While climbing around in the car, Zetsche even ripped the slacks of his trademark three-piece suit.
Yet the ambivalence about the Germans' presence remains palpable. "I don't want a German here," but if it has to be so, "Zetsche is the best man for the job," says Bud Liebler, who is Chrysler's senior vice-president of global marketing.
"ROUND TWO." It helps that Zetsche has a proven turnaround in the U.S., where he worked with other American executives to succeed. At Freightliner, Zetsche fired 20% of the white-collar workforce, closed one engine plant, and slashed purchasing prices. "It was difficult, but it got done," says Freightliner President Jim Hebe, who likes Zetsche's ability to laser in on the key issues and delegate the rest to others. At Freightliner, Zetsche was personally involved in cutting fixed costs and supplier costs. "He set a goal which we felt was unachievable. But there was no negotiating, and we got there," says Hebe, who once wrecked his car driving through an ice storm to attend a meeting called by Zetsche. And while Zetsche shared information openly with the management team, once he made a decision, it was final. "He can be extremely personable one minute," says Hebe. "And the next minute, you'd wish to God you were somewhere else."
After Zetsche, the star of the team clearly is Bernhard, a Columbia University MBA whom detractors label a know-it-all but who admirers think is one of Daimler's best executives ever. A former McKinsey & Co. consultant who counted Daimler as a client, Bernhard was running the launch of the Mercedes S-class when he was just 34. He helped cut production costs by 20% and brought the assembly line up to full speed in just seven months--half the time it took for the previous model. Recognized quickly as fast-track material, Bernhard was tapped in 1998 to head AMG, a car-customizing business that Mercedes was absorbing. Within 18 months, he had doubled Mercedes-AMG's revenues and operating profits.
Cost-cutting, says Bernhard, is familiar stuff to him, thanks to the experience with Mercedes, where he was charged with cutting 25% out of $8 billion in supplier costs: "This is just Round Two for me. I've been here before." Bernhard approaches his search for cost savings the way an archaeologist hunts for artifacts. He lays out an imaginary grid over the company and "turns over each square, examining it, trying to see what kind of cost savings might fall out," he says.
Although Bernhard undoubtedly has enormous influence at Chrysler, he also knows who runs the company. In meetings, observers say that the chief operating officer tends to wait to show his feelings until he knows which way Zetsche is leaning, and then he throws his support behind the boss.
FACTORY CLOSINGS. In contrast, some of the Americans working on the turnaround can be more argumentative, even though none of the insiders on Zetsche's team has the high profile or track records of such former Chrysler executives as Robert A. Lutz or Francois Castaing, who were behind Chrysler's spectacular rise to stardom in the mid-1990s. "Maybe it's not the strongest or best-known back bench," admits one insider. Yet Zetsche needs the insights of his American executives to pull the plan together. "I would be the first to say that I'm not smarter than the people who are here," he says.
No one American has emerged as the most powerful. Donlon is seen as key on cost-cutting. Well-respected in Stuttgart, he was the first senior executive from Auburn Hills to move to Germany after the merger. So when things started to fall apart at Chrysler last fall, Schrempp sent him back to see just how bad things were. His dire assessment may have contributed to the firing of former CEO James Holden. Donlon's dogged pursuit of cost-cutting initiatives--like cracking down on suppliers--that seemed out of favor under previous managers are now getting more attention under Zetsche.
Manufacturing boss Gary L. Henson, who joined Chrysler in 1994 after a 32-year career at General Motors Corp., has a key role in the turnaround plan. He is studying how to cut Chrysler's production to match its expectations of slower growth. The likely options include closing factories, cutting workers' shifts, and reducing assembly line speeds. He's also looking for ways to boost plant flexibility and efficiency. His biggest project to date has been dramatically increasing the flexibility of Chrysler's Windsor (Ont.) minivan plant by making it possible to build more than one line of vehicles there.
The other Americans have important roles, but they keep lower profiles. Richard O. Schaum, executive vice-president of engineering, is stepping up efforts to find synergies among Chrysler, Mercedes, and two Asian auto makers in which DaimlerChrysler has a stake, Hyundai and Mitsubishi. Except for Mercedes, the companies are expected to share vehicle platforms as well as parts. One analyst even predicts that Hyundai will build the next Dodge Neon. Chrysler and Mitsubishi already build cars together in the U.S., and Mercedes smart-car division and Mitsubishi are cooperating on a small car. Sidlik is the driving force behind Chrysler's efforts to squeeze further savings from its suppliers. On the fringe, playing the role of "elder statesman," according to one Chrysler insider, is Gary C. Valade, who played a key role in negotiating the 1998 merger and, with Sidlik, is the only senior-level executive left from before the merger.
At the moment, this odd blend of saviors and survivors--ironically, the first true German-American management team at DaimlerChrysler--offers Chrysler's best shot at renewal. The Germans must be praying this works. A prolonged period of restructuring is likely to exact a heavy toll in Stuttgart as well as in Michigan. As Chrysler's red ink mounts--operating losses could go as high as $1.9 billion in 2001, not counting restructuring charges--it's bound to cut into the development plans of Daimler's flagship Mercedes unit and the future plans of Schrempp himself. So far, he has the support of the DaimlerChrysler supervisory board. But the strength of that support depends on what a handful of Germans and Americans can achieve in Detroit.