Online Extra: DaimlerChrysler: Divorce, German Style?

Automotive expert James Schrager discusses where Jürgen Schrempp went wrong -- and how to fix the outfit. For one, get rid of Chrysler

"A huge mismatch." That's how University of Chicago Graduate Business School Professor James Schrager describes the 1998 merger of Daimler and Chrysler (DCX ). Schrager, president of Great Lakes Group, a South Bend (Ind.) strategic consultancy, is an active consultant to a variety of auto-centric companies.

Schrager, who was named by BusinessWeek in 2000 as one of the top teachers in the University of Chicago's business program, recently spoke by phone with Special Correspondent Ann Therese Palmer about the strategic problems newly announced DaimlerChrysler CEO Dieter Zetsche faces, with Jürgen Schrempp stepping down on Dec. 31 (see BW, 08/15/05, "Dark Days at Daimler"). Edited excerpts of their conversation follow:

Q: Why were Schrempp's deals a mistake?


They were a mistake because the strategies –- for Mercedes and Chrysler and all of its associated brands -- were so different. For years, Mercedes' car brand sat at the top of the world as far as prestige, durabilty, and reliability. Starting in the mid-1970s through the mid-'90s, with the iconic 450-series, it was the ultimate car brand. It was the finest-engineered car you could buy.

Contrast this with Chrysler. During the same period, it was constantly looking for what rabbit it needed to pull out of its hat to stay alive. Were it not for the minivan, introduced in 1982, Chrysler would have been gone sometime in the 1980s. Schrempp has done a great deal of damage to a company that had a rock-solid reputation by cobbling it together with a company that slithers from crisis to crisis. We have a huge mismatch here.

Q: Did he compound that mistake with his management decisions?


Schrempp's challenge in buying Chrysler was understanding the dramatic differences in the two organizations. His actions directly after the merger -- wiping out car guys like Bob Lutz, who had kept Chrysler patched together -- made it easy for anyone watching this drama to conclude major-league trouble was ahead.

Hats off to Dieter Zetsche, who left his post in Europe and brought in powerful talent to fix Chrylser. They have a big hit in the Chrysler 300. They're selling that car at big money for what it is, making SUV-style money on it, which is unusual for a car.

But you stand back and say, at what price? Mercedes very quietly has had a huge string of issues. So many people had to leave Daimler and its subsidiaries to bail water out of the sinking ship at Chrysler. That has really hurt Mercedes.

Q: What about Mitsubishi Motors, Maybach, and the Smart car?


Zero-for-three. Schrempp needed to understand what he bought in Mitsubishi: a second-tier player in Japan, third-tier in the U.S. He did nothing to help; in fact, it could be argued Mitsubishi sunk even lower during its partnership with Mercedes. Schrempp fought in the boardroom to keep his dream alive, despite all objective evidence that Mitsubishi was going nowhere.

With the [low-price, low-profit] Smart minicar in Europe, it was a different strategy from the Mercedes core brand, which is big cars at a giant price. Once again, Schrempp proved he was not able to deliver a workable strategy.

With the ultraluxury Maybach, it's missing all sales projections. It's wildly expensive, sells in low quantities. Schrempp absolutely didn't understand what he bought in Chrysler.

Q: So what is Zetsche inheriting?


Except for Chrysler, every brand is in free fall. It's only a matter of time before the folks who were dispatched to fix Chrysler are sent back to Stuttgart to fix Mercedes.

Q: If you were Zetsche, what would you do and why?


Mitsubishi is already gone. The Smart car should be stopped, because even if it becomes a winner, Zetsche hasn't won anything. He can keep the Maybach for the heck of it if he wants.

Q: What about Mercedes?


Dieter [Zetsche] may be the one guy who can keep Chrysler and Mercedes together because he knows what it took to fix Chrysler, direct it, and what it's going to take to keep it in good health. But he has bigger fish to fry -- Mercedes.

He's got to fix a series of unfortunate moves that Schrempp made: making small cars at small prices, diluting Mercedes' image of exclusivity, performance, and prestige for the sake of volume. That's a big problem.

Second on the agenda is making Mercedes cars the true world standard again. They need fewer electronics as well as better quality in Germany and to fix the U.S. plant in Alabama, where the M-Class is produced.

Zetsche needs more midsize and large cars. [Mercedes] is being attacked on all sides. Audi and Jaguar have fabulous all-alloy cars. They've been getting ahead while Schrempp was worried about boardroom fights over Mitsubishi and Smart.

Q: Should DaimlerChrysler be broken up?


I would get rid of Chrysler. The job of fixing Mercedes-Benz is so big and the boat anchor of Chrysler is so heavy that I'd try to float Chrysler on its own.

I'd shop it quietly right now to well-financed private groups. There are folks out there who have a great deal of capital. Chrysler today is a saleable company. Car companies make lots of money on the upswing. They are highly operationally leveraged, which means when their plants are full, costs are covered and margins grow.

I would bring the cash into Mercedes for the central mission. If you want a performance-oriented car, you buy a BMW. If you want a little bit more exclusivity, it's Bentley, owned by Volkswagen.

If you want value, but a nice-driving, dependable, well-built car, then you go to Lexus. If Mercedes gets its act together, it can be an absolutely top-flight company again.

Q: Could DaimlerChrysler be the target of a hostile takeover?


I doubt it. Deutsche Bank (DB ) and the board seem to be firmly in control. Dieter's their guy. He fixed the unfixable Chrysler. He's the reason the board finally [moved]. My guess is they've been anxious to get Schrempp out for awhile, but they didn't want to do it without a plan. Dieter is that plan, and a credible one.

Patricia O'Connell

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