Downshifting Ambitions at DaimlerChrysler

Under pressure, CEO Schrempp braces for rougher times

Just eight months ago, DaimlerChrysler (DCX ) CEO Jürgen Schrempp was in the hot seat. Chrysler was expected to lose billions, and some shareholders and commentators were calling for his ouster. But Schrempp dug in his heels, centralized decision-making, and agreed to meet tough performance targets: at least $1.1 billion in operating profit this year.

Chrysler indeed is losing billions--$1.7 billion in the first three quarters, to be exact. But thanks to draconian cost-cutting at Chrysler and the consistent strength of the Mercedes-Benz luxury car business, Schrempp still expects the company to meet his 2001 target. Investors were pleased that Chrysler's third-quarter losses, bad as they were, weren't worse. In the meantime, Schrempp has expanded his grip on power. On Sept. 27, DaimlerChrysler's supervisory board extended his mandate by two more years, to 2005.

Schrempp is definitely a survivor, but he can't rest easy. With U.S. consumer confidence at a seven-year low and recession clouds gathering in Europe, all auto makers are facing tense times. Schrempp, being Schrempp, has set ambitious goals. In his turnaround plan unveiled on Feb. 26, he pledged to boost operating profit in 2002 to at least $5 billion. That target assumes Chrysler will break even next year.

September 11 has thrown all these calculations off. Schrempp has already told division chiefs to rethink their numbers in light of the deteriorating economy and get back to him in December--the first sign he may have trouble meeting the 2002 target. "It's a tough situation we're all in," Schrempp told BusinessWeek in a joint interview with Jürgen Hubbert, head of the Mercedes-Benz car unit, at DaimlerChrysler's Stuttgart headquarters.

Next year will test all of Schrempp's management skills. The company estimates that industry sales will decline by 5% to 8% in the U.S. and 2% to 3% in Europe. With incentives surging in the U.S. market, Chrysler may have to cut costs even more next year than planned. It already has eliminated 26,000 jobs, slashed procurement costs and cut capacity by 15%. "Like Ford and General Motors, we might have to idle additional plants for two or three weeks, depending on the market," says Schrempp.

Chrysler is hardly the only problem. Earnings at the commercial-vehicles unit have been nearly wiped out by losses at troubled U.S. truck business Freightliner llc. On Oct. 12, DaimlerChrysler announced a $330 million restructuring at Freightliner, which has been battered by a 40% plunge in U.S. heavy-truck sales since 1999. Merrill Lynch & Co. analyst Stephen Reitman in London estimates that Chrysler will lose nearly $1 billion next year and that DaimlerChrysler will report an operating profit of $2.4 billion, less than half Schrempp's target. On Oct. 31, Standard & Poor's downgraded the company's bond rating.

In the meantime, pressure on Mercedes is growing to share parts or operations with other DaimlerChrysler marques. The biggest component-sharing operations will take place among the group's middle-market brands. Some cars made by Mitsubishi Motor Corp., in which DaimlerChrysler has a stake, will share platforms with Chrysler and Smart models. A plan to develop a new four-cylinder gasoline engine to be used in Chrysler, Jeep, Dodge, and Mitsubishi vehicles was easily waved through DaimlerChrysler's six-man executive automotive council. That will save millions of dollars by allowing the group to reduce the number of four-cylinder gas engines to seven from 12. "That's where we're really making progress in pulling the company together," Schrempp says.

Requests for Mercedes components generate more debate. "We had a long discussion on the Crossfire," says Schrempp, referring to a roadster Chrysler will build using Mercedes transmissions and engine technology. The challenge for Schrempp and his team is to weigh the potential synergies against the risk to Mercedes-Benz's image. "One million Mercedes customers a year are willing to pay a premium for something that is better than what the competition is delivering. We have to be very careful to make sure they feel that what they're getting for their money is unique," says Hubbert.

SAFEGUARD. The premium Mercedes charges is crucial to the group. It's the only thing keeping DaimlerChrysler's operating income in the black this year. Mercedes-Benz contributed $2.1 billion to earnings in the first nine months of 2001. Over the same period, Chrysler lost almost as much, although it sold more than twice as many vehicles. DaimlerChrysler's supervisory board clearly understands this. When it extended Schrempp's mandate on Sept. 28, it also asked Hubbert, 62, to delay his retirement until 2005. John Lawson, car analyst at Schroder Salomon Smith Barney in London, believes the extension of Hubbert's contract was aimed at safeguarding Mercedes from intense, short-term pressures to give up the goods. "[Chrysler CEO Dieter] Zetsche and Schrempp might have been tempted to throw more of Mercedes at the Chrysler rescue," Lawson says.

Schrempp is sticking to his vision of turning DaimlerChrysler into a mighty global group offering a full range of vehicles, from subcompacts to heavy trucks, in all major markets. But with Chrysler's outlook deteriorating by the day, balancing long- and short-term goals--especially the interests of Mercedes and Chrysler--will keep getting harder and harder. The survivor still has to learn how to thrive.

By Christine Tierney in Stuttgart

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