Online Extra: "There's One Target: Profitability"

DaimlerChrysler truck division boss Eckhard Cordes on how the giant can leverage its position and how it's handling Mitsubishi

DaimlerChrysler (DCX ) board member Eckhard Cordes has kept a particularly low profile during the past decade as senior manager at Germany's automotive giant. But now, the trim, easy-going boss of the $35 billion truck division is suddenly in the spotlight. Insiders say he's a front-runner in the contest to replace Jürgen Hubbert, head of the $64 billion Mercedes Car Group, who retires next spring.

Cordes, who was head of corporate strategy and mergers and acquisitions in the 1990s, has been a staunch ally of Chief Executive Jürgen Schrempp and was instrumental in the decision to clinch the merger with Chrysler in 1998 and take a 37% stake in Mitsubishi in 2000. From his office in Stuttgart, he recently spoke with BusinessWeek Senior Correspondent Gail Edmondson. Here are edited excerpts from their conversation:

Q: You're best known for your analytical skills as controller and strategist -ñ is the job in the truck division your first experience on the factory floor?


Absolutely not. My first 7-8 years at Daimler Benz were in the Sindelfingen plant ñ- until the end of 1983. As personal assistant to the plant manager, I worked on investment planning and assessing the economic feasibility of investments. And I worked in the truck division in Brazil after that. Those jobs had nothing to do with strategy. It was corporate development.

Q: What kind of decisions were you analyzing on the shop floor in Stuttgart?


At that time, we were looking at the cost benefits of increasing the degree of factory automation. We were looking at the pay-back time for investments. If you invest in assets, you raise your fixed costs. That's fine if you have the volume. But you're worse off if demand is low. So it's not a no-brainer analysis. I believe in analytical tools.

Q: What did you find when you took control of the truck division at the end of 2000?


In 2001, the U.S. market for trucks collapsed by 55%, and there was no growth in the global market in 2001, 2002, and 2003. We assumed that markets wouldn't recover, and we figured that against a backdrop of flat markets what we had to do to return to sustainable profits. We assumed there would be no tailwind of growth.

In the U.S., we had to cut wages and headcount and close factories. In Germany, we didn't close plants, but we did cut wages, especially in the bus units, and we outsourced some activities. We reduced overhead significantly.

Q: Following an acquisition binge, DaimlerChrysler is now the world's largest commercial-vehicle maker, but not the most profitable. Can you leverage the size better going forward?


Volume does matter. If you manage the business in an intelligent way, you can reduce costs per unit. Our volume is more than double that of the closest competitor. But so far, we haven't leveraged our position.

In heavy-duty truck engines, for example, we have four different families of engines. So even though we have the largest volume, it's split among four engine types. Starting in 2007, as new truck models hit the market, we will introduce a common engine family, so the core engine will be the same for Freightliner in the U.S., Mercedes-Benz in Europe, and Fuso in Japan.

Q: The global truck market has rebounded, so you're getting strong growth to help bolster your turnaround. If you stripped away that effect, would the improvement still be convincing?


We had turnaround in 2003, and there was no global growth. It was a totally flat year for the market. We went from a $425 million loss in 2002 to a $1.1 billion profit in 2003 -- that's a swing of $1.5 billion.

We're still below our critical return hurdle of 13% return on net assets. So we're still not where we should be. But we are making progress, and 2004 will be better than 2003. It depends on developments in Japan with Fuso. We're wrestling with some challenges there.

We have taken $1.1 billion in annual costs out at Freightliner, and we met our targets ahead of schedule, but the full impact of our restructuring will hit the bottom line in 2005.

Q: Freightliner got into trouble because it had a policy of pumping sales with generous buyback terms. That seems to be a common thread, with incentives at Chrysler and Mitsubishi where strategies designed to boost sales led to an implosion of profits. Is DaimlerChrysler's management fixated on market share at all costs?


That's definitely not true. As a board member, I can say there's no philosophy that volume is what counts. That has never been the policy.

Our policy at the truck company is crystal clear. It's not to go for additional market share. There's one target: profitability. Freightliner's strategy in the 1980s had been to aggressively push market share ñ- and they more than doubled it. That went well as long as markets were growing. But we changed the policy. Whoever did buybacks would be fired.

Q: Could you give an update on the situation at your new acquisition, Mitsubishi Fuso, the outlook on the cost of recalls for the defective parts that were covered up by former management, and your potential claim against seller Mitsubishi Motors?


There is no news on the potential claim. We have to calculate costs incurred to do the recalls. The claim against Mitsubishi Motors will be based on the recall costs. We need months to determine the costs. There are 43 points on which recalls are being made, for problems all stemming from the 1990s.

We're developing technical solutions for these issues ñ- and only a limited number involve safety. Those are first priority, and the technical solution will be available this month. Another set of solutions will be ready in August and a third set in October. We will have an estimate of the costs in the fourth quarter, and we will settle the claim with Mitsubishi in 2005.

Our philosophy is that we will clean up the place. The problems were concealed, and we have asked employees to tell us everything they know. We only learned about the problems in May of this year ñ- two months after we took a 65% stake in Fuso.

Q: What kind of impact will the problems have on sales at Fuso?


Up until May, Fuso was on track on market share. But we will see a drop in the coming months. The government-related business of Fuso is 7% to 8% -- or up to 10%. The government is canceling orders for the next 18 months, but the business will come back. We don't understand that frankly. We're coming in as the new shareholder to fix the place, and the government says they won't buy from us. It's counterproductive.

Q: Are you disappointed in the acquisition?


The recall is a one-timer. Fuso has a very prosperous future. Unfortunately, it will cost money to fix it. But we will get the cash back. It's a good investment. We have to solve the problems. We will have the cost impact first and get the money back later.

Q: The financial condition of your automotive partner Mitsubishi Motors is so dire some say it may not survive. Why did you vote at the May board meeting in favor of continuing to invest in Mitsubishi?


Nobody voted in favor of investing more. What we were deciding on was whether it was worthwhile to go back to the negotiating table with Mitsubishi to see if we could participate in a capital increase under certain conditions. The question was: Should we continue negotiating? I voted in favor of going back to the negotiating table.

Q: What's the take-home lesson to DaimlerChrysler from the Mitsubishi experience?


The business-plan exercise showed that if we do it in the right way, Mitsubishi could become a successful player. Some mistakes were made. The question is, how do you avoid making mistakes ñ- as the U.S. management of Mitsubishi did with the 0% financing.

It's not easy, especially if you have a policy of decentralized power and decision-making. We try to encourage management to take an entrepreneurial approach. We must ask ourselves if it can be done in a better way. My view is that there's no guarantee. There's always a certain risk that you get into trouble.

Q: The merger with Chrysler is now widely viewed in the industry as a mismatch between a premium auto maker and a mass-market producer. The expected profits and growth have not materialized. What went wrong?


Nothing really went wrong. In hindsight...we created expectations in the market that were higher than we could deliver. That was probably a mistake.

My conviction is that we can reap a lot of benefits from the merger in different areas. We can save on overhead in sales organizations even if we have different outlets. We combine wholesale activities. There are synergies on the logistics side. There's a lot on the purchasing side, even if parts are different. It's total volume ñ- sheer size matters here.

Q: Can Chrysler reach the corporation's internal rate of return on assets hurdle of 13%?


Definitely, yes.

Q: Management has demanded $620 million in cost cuts at Mercedes. Why are the alarm bells suddenly going off now? Did Mercedes fail to keep pace in terms of its factory efficiency?


The internal discussion about costs has been going on for quite a while. The decision point has come now because we have to lay the groundwork for producing a new generation of C-Class.

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