Daimler Fights for Its Future

A high-rise building says a lot about the condition of the Daimler Group, the parent company of Mercedes-Benz. More than 18,000 people work at the main Mercedes plant in Untertürkheim outside Stuttgart, but there is complete silence—and not a person in sight—in the company's 13-story concrete headquarters building.

Daimler (DAI) CEO Dieter Zetsche is next door, in the former Mercedes-Benz Museum, where a large room has been subdivided into offices. There are model cars on some of the shelves, while others are still empty. The building was meant to serve as temporary office space while the headquarters building was being renovated. But now drastic cost-cutting measures have brought the renovations to a halt. The old headquarters building will not be torn down, though. "That, too, would cost money," says Zetsche. Instead, the company has simply closed the building and locked the main doors.

Some might call this pragmatism refreshing, especially after the grand ambitions of Zetsche's predecessor, Jürgen Schrempp, who planned to build nothing less than a major global corporation. Nevertheless, it is a little irritating to hear Zetsche deprecatingly describe his current work area: "My office has four walls. It's 100 degrees Celsius (38 degrees Fahrenheit) in the summer and 10 degrees (-12 degrees Fahrenheit) in the winter. What else could you want?"

Daimler could be characterized as the pride of German industry. For many people, the Mercedes star is a symbol of the country's economic strength. But now sales are plunging, by 27 percent for cars and almost 40 percent for trucks. Two figures illustrate how difficult the situation is. The first figure is the €2 billion ($2.8 billion) in fresh capital brought in by Abu Dhabi, the company's new co-owner. The second figure is €1.3 billion ($1.8 billion)—the amount of money Daimler lost in the first three months of this year.

Daimler is seeking a partner, and for years it has been talking to BMW (BMWG.DE), Toyota (TM), Peugeot (PEUP.PA) and now Porsche (PSHG_P.DE). The sports car marker, which bit off more than it could chew in its takeover of Volkswagen (VOWG.DE), is seeking an investor. Perhaps Daimler could invest in Porsche, also headquartered in Stuttgart, instead of the Emirate of Qatar. Zetsche is examining every current possibility. Everyone is in talks with everyone else. But Daimler doesn't have much capital to invest.

Of its workforce, 47,000 are now on short-time working schedules, while the remainder have seen hours and wages reduced. Because of these measures, layoffs have been ruled out, but only until the summer of 2010. No one knows what will happen after that.Will Daimler be the next Opel?

The question sounds heretical. But two years of heavy losses could quickly eat up Daimler's equity capital, at which point the group will need fresh capital, either from its new co-owner Abu Dhabi, another investor or the government. If and when that happens, layoffs will be all but unavoidable.

This is the grimmest scenario—the one Zetsche prefers not to talk about. He believes that sales in the automobile industry will likely return to pre-financial crisis levels in three years. But even then the situation would be difficult for Daimler. In the interim, the company will have to save billions, while at the same time increasing investments in the development of alternative power trains—a virtually impossible contradiction.Small Cars Becoming Daimler's Best-Sellers

Daimler is also under pressure because of another development: The company's smaller model series, the Smart and the A and B Class, now account for close to a one-third of total sales. Small cars produce slim profit margins, if they are profitable at all.

Daimler's business is also complicated by the fact that the definition of luxury around the world is no longer consistent. Understatement or, as Zetsche believes, "green luxury," is in demand in Western Europe. To address this market, the company is building a hybrid S Class that consumes less than eight liters of gasoline per 100 kilometers (the equivalent of 47 miles per gallon in fuel efficiency). In Eastern Europe and China, on the other hand, customers want big cars and powerful engines, which forces Mercedes-Benz to offer them 12-cylinder vehicles. The need to perform this balancing act in the model strategy "doesn't make things easier," says Zetsche.

A man like Zetsche doesn't allow himself to be deterred by the difficult cards he has been dealt, at least not visibly. The Daimler CEO is an optimist to the core. At the end of the crisis, he says, Mercedes-Benz will be in a better position than many automobile manufacturers, because the company is continuing to invest in fuel efficiency technologies while others are cutting back such programs. Zetsche also believes that luxury carmakers like Mercedes-Benz and BMW will be the first to emerge from the crisis, because their customers will benefit from a possible recovery first.

This is the positive scenario, and it is quite possible that it will materialize. In times of financial crisis, says Zetsche, one can only think in terms of scenarios. The apparent certainty of the past, in which Daimler could set precise sales targets for each model series in the context of five-year plans, is over.

Today, in contrast, a sense of uncertainty has taken hold at various levels in a company once characterized by an almost exaggerated self-confidence.

Mercedes-Benz introduced short-time work once before, in 1993. But it was "only for a couple of days," says Harald Utzing, a 25-year Daimler veteran. He currently assembles the S Class, and until recently, he says, he felt "almost like a civil servant—you couldn't be fired unless you did something seriously wrong."

But now all that has changed. For weeks, Utzing was no longer on the assembly line, because of short-time work, prompting his wife to comment on how much time he was spending at home. She wondered whether the company couldn't let him go after all, despite its commitment not to lay off any workers until the summer of 2010. "Short-time work is everything but a vacation," says Utzing.

Another employee, Johann Sommer, also felt a growing sense of uncertainty. "You have a lot of time to think," says Sommer. He is the sole wage earner in his family, and his son is just finishing high school and will need to be supported for a while longer. "I am a bit worried," says Sommer."Our Livelihoods Are at Stake"

The two Mercedes workers, as well as all of their fellow employees, were supposed to receive a €1,900 ($2,660) profit-sharing bonus in April for the past year. Many were depending on the money to cover personal expenses. Sommer, for example, wanted to repay his mother-in-law money he had borrowed to buy a new oven. But then the employees were told that Mercedes was putting the bonus payment on hold.

The company is withholding a total of €280 million ($392 million) in bonus payments. Later, the money is to be converted into Daimler shares, but now it's missing from the employees' accounts, giving rise to even more uncertainty. Is the fact that Daimler is forced to borrow money from its own employees a sign of how bad things have gotten at the company?

A government subsidy that was normally being paid on top of the wages of workers on short-time schedules has been reduced, and a negotiated wage increase postponed. Those who were not placed on short-time schedules have seen their hours—and wages—reduced by 8.75 percent. All of these measures combined are saving Daimler €2 billion ($2.8 billion) in wage costs. This is helpful, but is it enough?

Erich Klemm, the chairman of the Daimler works council, which represents employees' interests inside the company, says: "Our livelihoods are at stake." The company's extensive separation from Chrysler, which Klemm and Daimler Supervisory Board Chairman Thomas Klebe of the German Metalworkers' Union (IG Metall) called for long ago, happened just in time, in 2007. The financial crisis erupted only a few weeks later. If the crisis had begun any earlier, says Klemm, the banks would not have provided financial investor Cerberus with the funding it needed to acquire Chrysler, and the US carmaker wouldn't be the only company in bankruptcy today. In fact, the entire DaimlerChrysler Group would be in the balance. Daimler would be Opel.

The fact that things have been allowed to reach this point, says Klemm, is the result of years of management mistakes. "We could be the leader in environmentally friendly engines," according to Klemm. The company's board of directors, he says, is responsible for the fact "that we haven't been doing this until now."

Klemm is pinning his hopes on new cars. "We have to redefine luxury," he says. Mercedes will continue to build big cars, but they will have to be outfitted with the most advanced environmental technology available, says Klemm. By driving a Mercedes, customers will be demonstrating that they have invested a lot of money to protect the environment.

In this sense, Klemm is almost on the same page as CEO Zetsche, who says: "We must reinvent the automobile."Lagging Behind

Unfortunately, however, this is the sort of claim we currently tend to associate with Toyota, with its hybrid models, or BMW, with its fuel-saving technology. The inventor of the automobile is lagging behind the competition. But why?

A few answers can be obtained behind a glass door that doesn't open until a secret combination of numbers has been entered into a keypad. It leads to Leopold Mikulic's office in Untertürkheim. Mikulic is the keeper of the company's most important secrets. The man with the Austrian accent is in charge of power train development at Mercedes-Benz.

Mikulic talks about engines as if they were people. Engines have their own characters, in his view. A Mercedes-Benz engine, he says, is characterized by its supremacy and its inconspicuousness. For decades, it took as many cylinders as possible and a large cylinder capacity to achieve these characteristics. But now smaller, significantly more fuel-efficient motors are capable of doing the same thing.

"This doesn't mean that we have to develop smaller cars," says Mikulic, who notes that reduced emissions and greater fuel efficiency are also possible with big cars, and that Mercedes is often a leader in these developments. In 2006, for example, Mercedes was the first car company to introduce a fuel-efficient gasoline direct injection system.

Mercedes-Benz as a pioneer in fuel efficiency? That would be something new. But why does BMW currently offer fuel-saving technology in all of its model series, while Mercedes-Benz offers it in only one model?

Mikulic doesn't answer. People in the industry know why. Three years ago, BMW decided to use its progressive fuel-saving technology in all of its vehicles. But Daimler executives did not believe in the importance of fuel efficiency at the time. Mercedes engineers even developed a start-stop technology ahead of the Munich-based competition, but executives decided not to use it, arguing that it wouldn't be worthwhile, because customers would refuse to pay a premium for the technology.Three Faces in Two Decades

It is now becoming clear that the managers who ran the Daimler Group for almost two decades found their fulfillment in concocting grand visions. From 1987 to 1995, the then Daimler CEO Edzard Reuter tried to establish an integrated technology group that would produce not only automobiles, but also locomotives, aircraft and space probes. His successor, Schrempp, dismantled this entity and, from 1995 to 2005, built his global company, with the acquisitions of Chrysler, Mitsubishi and Hyundai.

Meanwhile, competitors like BMW, Audi and Toyota focused on their core business. For Schrempp, the automobile was a vehicle designed to produce profits, profits and more profits. There is no evidence that Schrempp was interested in the character of an engine.

Mikulic, the engineer, is a reserved person and would never discuss this. But he does smile to himself when asked whether he is held in higher esteem in the company now that Zetsche is in charge. He also mentions that he and Zetsche test-drove a new hybrid car only a few days ago.

An engine, the OM 651, is set up in front of Mikulic's office. The sculpture-like machine is the pride of the company's engine developers: a four-cylinder diesel engine with the torque of an eight-cylinder gasoline engine. It consumes less than five liters of fuel (76 mpg in fuel efficiency) in the C Class.

This high-tech engine apparently symbolizes what Mercedes developers call "green luxury." For them, it represents environmental sustainability without the need to dispense with luxury. The OM 651 symbolizes a sea change.Banking on Greener Technologies

CEO Zetsche is banking on fuel-efficient engines, battery operation and fuel cells. Reducing emissions is not a fad, says Zetsche. "Whoever sets the tone here may not be at the head of the pack economically in 2009 and 2010, but will be viable in 2015 and beyond—while others will not."

The question is: How can Daimler survive in the interim period, while it invests billions in alternative engines that will not produce any profits initially?

One of Zetsche's answers to the problem is that the company will have to cut costs even further. This will spark growing conflicts between the executive board and the works council. For instance, the board is sticking to its plan to build a new plant in Hungary, but works council chairman Klemm wants to see this decision reexamined. Why build a new factory, he wonders, when existing plants are not even operating at full capacity?

Zetsche's counterargument is that the company's plant in Rastatt, in southwestern Germany, can only survive if there is another plant in a low-wage country like Hungary. Only mixed calculation, says Zetsche, will make it possible to continue building the A and B Class in Germany.

Based on this logic, it would make the most sense economically to eventually produce compact cars exclusively in Hungary, and Mercedes would be forced to close a plant in Germany.

No, no, Zetsche says defensively. The company has invested billions in Rastatt. Closing the plant makes no sense, for economic reasons. "We aren't nomads, who can set up their tents here one day and someplace else the next."

Nevertheless, the company will employ fewer and fewer people in its German plants. Productivity is going up while car sales are going down. Even if sales increase again to pre-crisis levels in three years, it will not be enough to secure jobs. This is Zetsche's dilemma.The Rejected Suitor

There is another area where the Daimler CEO is making no progress. Zetsche and BMW CEO Norbert Reithofer have met many times to examine the possibility of close cooperation. The two companies are a natural fit for each other. But BMW has more or less rebuffed Zetsche, agreeing only to an arrangement in which it would join forces with Mercedes-Benz to purchase parts.

BMW feels strong enough to survive the crisis on its own. This could be a fallacy, however, because BMW faces essentially the same problems as Daimler. Meanwhile, Zetsche finds himself in the unfortunate position of the rejected suitor—not exactly the sort of role the head of Daimler wants to be in. He isn't complaining, though, but instead is talking to other manufacturers about joint ventures and possible stakes in those companies. Many options seem possible. Zetsche cannot yet paint the big picture showing what the company will look like in a few years. Daimler plans to survive this major crisis, and the only question is: In what form?

The Daimler CEO doesn't see this uncertainty as a flaw. The company, says Zetsche, has "allowed itself to be guided by dreams for too long, while neglecting the hard work." But success, he adds, is based on "one percent inspiration and 99 percent perspiration."

Perhaps the company headquarters next door will be renovated after all, when things begin to turn around. To make sure that the building doesn't seem too gloomy until then, the company is keeping one engine running, so that the Mercedes-Benz star on the roof will keep on rotating.

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