Can This Man Save Chrysler?

It's a tall order, but Zetsche may be just the one to make real progress

The midsummer sun was setting over Upper Long Lake in Bloomfield Hills, Mich., as Chrysler Group's new CEO, Dieter Zetsche, sipped wine and chatted with Detroit's elite at a fund-raiser for the United Way. Now that the German executive is a captain of U.S. industry, he receives invitations to all kinds of charity events. What made Zetsche's presence at this party so remarkable, however, was that the host was James P. Holden, the American he had replaced.

At the end of the evening, Holden cornered Zetsche on the terrace to ask some pointed questions about Chrysler's troubles. It was the first time they had spoken since November, when DaimlerChrysler CEO Jurgen E. Schrempp fired Holden after less than a year on the job and dispatched Zetsche to take over the struggling U.S. unit. As a member of DaimlerChrysler's (DCX ) management board, Zetsche had frequently second-guessed Holden when Chrysler's business began to sour in the summer of 2000. Now, in the most professional way possible, of course, Holden in effect said: "I told you so. Fixing Chrysler is a little more complicated than it looked, isn't it?" Zetsche didn't argue.

What could he say? Not so long ago--in 1998, say, when Daimler-Benz and Chrysler linked up--Chrysler earned more on each vehicle than any other major carmaker and it had a well-deserved reputation for eye-catching design. Today, it is bleeding money: It will lose at least $2 billion this year, and by its own calculations probably won't make a dollar of profit until 2003. Although it offers huge discounts, Chrysler's market share is shrinking. Since the merger, it has fallen from 16.2% to just 13.5%. And after bringing out the new, $17,000 Jeep Liberty sport-utility and an updated, $18,000 Dodge Ram pickup this year, Chrysler won't launch another major vehicle until early 2004. Even then, there's no telling if what's in development will be enough to revive Chrysler.

CASH HOARD. The merger didn't lead to this sorry state, but the turmoil that followed didn't help either. For the first two years, Chrysler's executives floundered as they tried to work with their German colleagues, and almost two-thirds of the senior management was fired or resigned. At the same time, Chrysler's fortunes were shifting rapidly. The company owed much of its success to its ability to avoid competition by creating such innovative, high-margin vehicles as the minivan. But as more efficient rivals such as Honda Motor Co. (HMC ) and Toyota Motor Corp. (TM ) moved swiftly into the U.S. with similar vehicles and prices began to fall, Chrysler continued to add more expensive features. Before too long, the U.S. auto maker started to suffer. Now, Zetsche, 48, has to turn Chrysler into something it hasn't been for a while: a low-cost producer. "I'm pretty confident we'll get our act together," says Zetsche. "But it's taking longer than I thought when I first came in."

For Daimler, the acquisition has proved costly indeed. In 2000, Chrysler's operating profit tumbled 90%, to just $500 million, on $64.2 billion in sales. As a result, Stuttgart itself reported only $4.9 billion in profits, a 49% drop, on sales of $152 billion. It will probably take two more years before DaimlerChrysler even comes close to the profit level it enjoyed during the first full year of the merger. Investors have seen their shares lose more than half their value since peaking in January, 1999, at $108. The stock now trades at about $43. Still, DaimlerChrysler has plenty of cash on hand, some $11.5 billion. And Schrempp has often dismissed the possibility that he might walk away from Chrysler. The company is integral to his global strategy, he says, and he's not about to abandon that simply because of Chrysler's current problems. "In the financial markets, there is great support for our strategy--and still a question mark about whether we are able to implement it, which I think is a fair assessment," he says.

It is Zetsche who has to prove that Schrempp is right about Chrysler. In February, he started a three-year, $3.9 billion restructuring. He has announced 26,000 layoffs and has wrested big concessions from dealers and suppliers. Zetsche is also driving out inefficiencies in Chrysler's vehicle-development process to reduce costs and boost quality: DaimlerChrysler ranks only fifth among the seven largest auto makers, according to J.D. Power & Associates Inc. Certainly sharing some Mercedes components should help down the road. In all, he hopes to save $8.1 billion by 2003. "We're feeling more positive," says Klaus Martini, chief investment officer at Frankfurt's DWS Investment, which owns 1% of DaimlerChrysler's stock.

Along the way, the German engineer has confounded his critics in Detroit, who included almost everybody he works with, by turning out to be a decent, even likable fellow. He has spread a lot of misery, but he has done it with such sensitivity--and often in person--that potential antagonists usually decide to cooperate instead. After so many layoffs, no one expected Zetsche to address a United Auto Workers convention in Las Vegas in March. Indeed, few CEOs have ever ventured to speak at the union's gatherings. Zetsche not only gave a speech but also mingled with the delegates for five hours. "The union and the company are working very well together," says UAW Vice-President Nate Gooden, who handles relations with Chrysler.

While trying to blend in at Chrysler, Zetsche is slowly insinuating himself into Detroit's clubby community. He joined Detroit Renaissance, a nonprofit group of CEOs dedicated to revitalizing the city's economy and has jumped right into the discussions, especially those on school reform. "He's intellectually curious," says the group's president, Paul Hillegonds. These days, Zetsche speaks well of the state he now calls home: His family passed up their usual European summer vacation to explore the wilds of northern Michigan. And they recently bought a new, lakefront house. Zetsche is no golfer, so he wasn't interested in joining the Bloomfield Hills Country Club, where the auto set gathers. Instead, he can be found at the Bloomfield Hills Hunt Club coaching his 13-year-old daughter in show jumping, or more likely, he laughs, "cleaning up [manure]." Zetsche himself used to be a competitive stunt rider.

GRIM FACTS. But even Zetsche admits his new posting would have been a lot rougher if the auto market hadn't been as strong as it was last year. And "was" is the operative word. Chrysler's sales fell 24% in August from a year earlier, and the grim reality that it won't introduce any new mass-market vehicles until 2004 poses a real danger. "The company's not prepared to deal with the competitive onslaught," says John Casesa, an auto analyst at Merrill, Lynch & Co. For now, Zetsche has to resort to such risky tactics as lowering prices in hopes of moving away from incentives for good.

Of course, Zetsche is also trying to restart development of higher-margin, must-have vehicles, in the vein of the retro PT Cruiser. "We can do it," says Zetsche. "It's in our genes." An even more macho and smooth-riding Dodge Ram pickup that will sell for almost $1,000 less than current models should help Chrysler compete against the offerings from Ford Motor Co. (F ) and General Motors Corp. (GM ) Zetsche is also keen on expanding the Jeep lineup: He'll probably start with an entry-level vehicle priced below the $15,000 Wrangler. And by working with Mitsubishi Motors Corp., the struggling Japanese auto maker in which DaimlerChrysler holds a controlling stake, Zetsche hopes to reinvigorate Chrysler's car business. They will develop small and midsize cars to sell in North America and Asia.

Making Chrysler more efficient is a manageable, if time-consuming, problem for Zetsche. Making DaimlerChrysler the carmaker that Schrempp had in mind, however, is another sort of challenge altogether. The $36 billion deal was the biggest ever among carmakers, and it pushed rivals around the globe to seek out partners of their own. Schrempp's idea was to create a company that would couple Mercedes' engineering with Chrysler's marketing and design savvy to develop a vehicle for every kind of driver, a colossus that would sell cars everywhere from Buenos Aires to Beijing. It would be extremely competitive: Chrysler and Mercedes could share parts and the cost of developing expensive new technologies. It would be an unprecedented combination of prestige and market power. It would be the global standard.

But so far, the merger has fallen disastrously short of that goal. Distrust between Auburn Hills and Stuttgart has made cooperation on even the simplest of matters difficult. Coming to terms with such prickly issues as deciding which parts image-conscious Mercedes-Benz would share with scrappy, mass-market Chrysler was all but impossible. Meanwhile, the U.S. company was deteriorating quickly. By the time Schrempp sent Zetsche over, Chrysler had become Daimler's biggest problem.

DIRE STRAITS. Predictably enough, that's what seems to have finally forced the two to attempt to make their union work. Of course, for the Germans it helps that one of their own is now in charge in Detroit. The first Chrysler vehicle to use Mercedes parts extensively will be the Crossfire, a sensuous two-seat roadster that will be available in 2003. Insiders say it will include a Mercedes transmission, engine, and axles. And starting in 2004, Zetsche plans to install Mercedes parts in a widening array of mainstream Chrysler cars, from the next-generation Grand Cherokee SUV to the Dodge Intrepid sedan. But even so, it will be years before DaimlerChrysler can live up to its promise. In the meantime, it may well be that the greatest benefit for the two companies will be that they share technology. It will be a success, but a smaller one.

If Zetsche manages to rebuild Chrysler and integrate it into Daimler, he will vindicate his boss, the 56-year-old Schrempp. And Zetsche will no doubt greatly improve his chances of one day running the auto giant. But if Zetsche fails, the deal will be condemned as one of the biggest flops in corporate history--and both men could find themselves on the wrong side of the DaimlerChrysler supervisory board. "This is a test of a young executive with a lot of brains and charisma," says Ronald Harbour, president of automotive research firm Harbour & Associates. "It really doesn't matter how good he is. He couldn't have a tougher time to try to make this transformation."

Chrysler has been in dire straits before. It took a federal bailout to save the company in 1979 and a complete product overhaul to recover from near-bankruptcy a decade later. Today, however, globalization has transformed the industry. Japanese and European auto makers have edged out the Big Three in the car market and are pushing into trucks and SUVs as well. That's a particular threat to Chrysler, which last year looked to its minivans, Jeeps, and pickups for 80% of sales. While Zetsche is careful not to criticize Holden or any other former executives, he's certain that the strategy Chrysler used to great advantage in the 1990s wouldn't work in today's more brutal environment. "Competition is everywhere," he says.

That's why Daimler Benz and Chrysler began their grand experiment in globalization. But the Germans and the Americans have been out of sync from the start: The two proud management teams resisted working together, were wary of change, and weren't willing to compromise. Daimler and Chrysler have combined nothing beyond some administrative departments, such as finance and public relations. Talk of synergy might as well have been verboten. Mercedes executives worried their buyers might feel cheated if they shared parts with the American auto maker; Chrysler resented the implication that its technology was inferior.

The strange truth today is that only a German can save the American icon. Even Holden admits Zetsche has a better chance of succeeding at Chrysler than any U.S. executive would. Zetsche wants to be called a "Chrysler guy," but the fact that he worked at Daimler for 25 years makes all the difference. First, he has Schrempp's confidence: Holden was fired after predicting that Chrysler wouldn't turn a profit until 2003. When Zetsche made the same forecast, Schrempp accepted it. And Zetsche's relationships with managers in Stuttgart--especially Mercedes boss Jurgen Hubbert--have made it easier for him to pry loose technologies and components that no American could get his hands on. Of course, the crisis helped. For example, DaimlerChrysler may save $100 million in engineering costs by cloning a Mercedes transmission for Chrysler sedans coming out in 2004. "Being in trouble makes it easier to understand that you have to change," says Zetsche. "In Germany, they understand we are in one boat." But it took a German to make them understand.

Few were surprised that Schrempp chose Zetsche to take on DaimlerChrysler's greatest challenge. He's fast, decisive, and an experienced troubleshooter. Zetsche revived Daimler's Freightliner truck business, in Portland, Ore., by cutting a quarter of the workforce and reducing capacity. (The company and the U.S. industry, however, are now in a slump.) As chief engineer at Mercedes in the early 1990s, he fought off Japanese rivals by expanding his lineup and making development more efficient. At 38, he was the youngest member ever of Daimler's management board. Later, he took over Mercedes' sales and marketing and came away with a keen understanding of the consumer side of the business.

DECISIVE. As it turned out, Zetsche had just the combination of humility and warmth to ease tensions among Chrysler's demoralized staff. He eats in the cafeteria, interrupts plant tours to talk with workers, and even promised to shave his head (he's already half-bald) if the new Dodge Ram again topped the J.D. Power & Associates quality survey. His town hall meetings are so popular that plant officials resort to a lottery to choose participants.

Zetsche's decisive leadership is welcome relief for an outfit that drifted aimlessly after the merger. "There's not an employee around here who didn't know this company was in trouble," says James D. Donlon III, senior vice-president and controller. "They just needed somebody to get up and tell it like it is." That's true for those outside Chrysler as well. Three weeks into the job, Zetsche demanded that suppliers swallow an immediate 5% price cut. That alone should save Chrysler $2 billion this year. And to keep Chrysler's business, suppliers must wring out a further 10% by 2003, which should cut Chrysler's costs by an additional $4 billion. Zetsche has explained to many suppliers just how dire things are. While about one-tenth of them walked away, among those remaining "the violent anger is gone," says Neil DeKoker, managing director of the Original Equipment Suppliers, which represents auto-parts makers. "It has been replaced with sincere frustration. You wish you could help."

So far, Zetsche is ahead of schedule in his cost-cutting, partly because more people than expected retired early and plant managers found unexpected ways to save. Shutting down the escalators at one factory, for instance, saved $80,000 a year. Manufacturing boss Gary L. Henson says he can probably cut $1 billion annually, three times his target. A second-quarter operating loss of just $125 million was a better result than Wall Street had predicted.

But as sales continue to slow, Zetsche needs to keep buyers coming in the door without offering big incentives. "We need to find the sweet spot between volume and profits," he says. To get away from the rebate game, he is lowering base prices: The 2002 Jeep Grand Cherokee will now start at $25,400--$2,000 less than the sticker price of the 2001 model--and the 300M sedan will sell for $28,300--$1,200 less than last year's model. It's a potentially dangerous move, however, since other auto makers could respond with their own aggressive cuts.

In terms of product development, Zetsche wants Chrysler to balance style with thrift--an approach he calls "disciplined pizzazz." He is overhauling the vehicle-development process to put more focus on the earliest stages. By pulling together teams from all areas of the company--design, engineering, marketing, manufacturing, and purchasing--Zetsche hopes to reduce waste and resolve nagging quality problems without diminishing Chrysler's creative instincts. It's an approach that Chrysler itself pioneered in 1989 but couldn't stick with. Zetsche is also borrowing Mercedes' system of "quality gates." This allows Zetsche and his team to review a vehicle at each of 11 checkpoints throughout the three-year development cycle. If they don't think the vehicle is ready to pass through, they send it back for work. "If he can combine Chrysler's passion for design with German engineering and drivability, he may pull it off," says Christopher W. Cedergren, an analyst at Nextrend Inc., a Thousand Oaks (Calif.) research firm.

Still, skeptics contend that selling $50,000 sedans has not prepared Zetsche to deal with the cutthroat business of moving Dodges. "He's got experience in America, but it's with Mercedes. It's not trying to put Neons over the curb," says Steve Rossi, who was a public relations executive for both Chrysler and Mercedes in the U.S. and is now CEO Of McLaren Performance Technologies.

Certainly nobody rolled out the welcome wagon when Zetsche arrived in Detroit in November. For resentful company veterans, Zetsche's appointment confirmed their worst fear: that Chrysler had lost what remained of its independence. Naturally, tensions were high at an early press conference when a reporter asked the question on nearly everyone's mind: "How many more Germans are you going to bring over?" Zetsche leaned into the microphone and answered: "Four." A wry smile appeared through his enormous moustache. "My wife and three kids."

DIPLOMACY. That disarming response, brilliantly timed, helps explain why the workout guy from Germany is one of the most popular executives in Detroit these days. He's diplomatic in an industry more used to hostile encounters. In January, he told Chrysler dealers the company planned to take away subsidies worth $300 to $500 per vehicle. This could save Chrysler as much as $1 billion. When dealers balked, Zetsche agreed to consider alternatives that would deliver the same result. In the end, he accepted a proposal that would allow dealers to make up the lost money with bonuses for beating new sales targets.

In putting together the cost-cutting initiatives, Zetsche has counted on Wolfgang Bernhard, 40, his bright, German chief operating officer. (O.K., so he brought five Germans over.) Bold and at times brash, the high-energy Bernhard is a sharp contrast to the thoughtful, analytical Zetsche. But the two have a close working relationship, partly because they're outsiders. "When we came over, it was just the two of us," explains Bernhard. "You feel like you're in a life raft in the ocean. You can only work together if you have complete confidence in each other."

Zetsche is also devoting a good deal of time to making sense of the merger. DaimlerChrysler is expected to announce soon that by yearend Chrysler will offer Mercedes diesel engines in the Grand Cherokees and the PT Cruisers it sells in Europe. The Crossfire will be only a niche model, but it wowed enthusiasts at this year's auto shows, and Chrysler hopes it will generate excitement about the company's full-size sedan and its next-generation Jeep Grand Cherokee, which will borrow parts from the updated Mercedes M-Class SUV.

Zetsche admits that a "not-invented-here" syndrome kept Chrysler and Mercedes from sharing much in the beginning. It took a group of senior executives several months to put together what Schrempp calls the company's brand bible, which decrees what is sacred about both Mercedes and Chrysler. In fact, it was Zetsche and Holden who led the effort; Zetsche jokingly called himself the brand pope. And while each request is still carefully debated in Stuttgart by a newly established executive automotive committee, "certainly the momentum is stronger now," he says. Schrempp agrees: "It's as if somebody took their foot off the brake."

NO RANCOR. Zetsche is paying close attention to vehicles already in the works when he arrived, especially a sport wagon due in 2003 (it will look like an SUV but drive like a car). Chrysler had planned to sell the vehicle as a luxury car, in the range of $35,000 to $38,000. But Zetsche persuaded the planners to make it more affordable by stripping out a few features: Now, it will start around $28,000. "He has a great way of removing some of the emotion," says Richard O. Schaum, executive vice-president for product development and quality. Zetsche also felt "there wasn't enough tension" in the design of the sport wagon's grille. And he told the engineers to reinforce the car's structure to ensure it would earn a five-star crash rating from the government, even though it meant a six-month delay at a crucial time.

But executives have to know when to trust their managers, too. Consider the case of Aerosmith--that's right, the heavy-metal rock band. A few months ago, James C. Schroer, the Ford executive Zetsche recruited to head Chrysler's sales and marketing, presented him with the idea of using Aerosmith to promote the new Ram. Zetsche asked a few sharp questions and then agreed, although he was only vaguely familiar with the band. He made a point to find out, though. Two weeks later, he, Schroer, and other Chrysler executives attended the Aerosmith concert kicking off the campaign. Zetsche liked the match of the band's in-your-face music and the brawny Ram, but there was nothing on stage that said Dodge. Zetsche leaned over to Schroer, smiled, and shouted: "I see more Dodge Ram or I cancel the program." It was the kind of brush-back Zetsche is known for: humorous, not rancorous.

Still, it must be galling to Zetsche that he's in such a precarious position. But no one has ever become a Chrysler guy without going through a near-death experience. And if he can actually help turn DaimlerChrysler into a successful global auto company, then Zetsche can pretty much call himself whatever he wants. Otherwise, his name will likely join the list of other casualties of a $36 billion mistake.

By Joann Muller in Auburn Hills, Mich., with Christine Tierney in Frankfurt

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