Zetsche’s Next Term Turns on Closing 220,00 Mercedes Gap

Daimler AG’s board is set to extend Chief Executive Officer Dieter Zetsche’s contract by five years, handing him the chance to deliver on his goals or risk the Mercedes brand falling further behind its competitors.

Daimler’s supervisory board will meet Feb. 21 and probably extend Zetsche’s contract to the end of 2018, according to a person familiar with the matter, who asked not to be identified because the discussions are private. Zetsche, 59, took over seven years ago and unwound the empire-building strategy of predecessor Juergen Schrempp.

During his next term of office, Zetsche has to close a 220,000-car gap to Bayerische Motoren Werke AG to make good on his promise of taking back the sales lead and boost profitability after twice missing a goal to do so. Daimler’s fourth-quarter earnings are forecast by analysts to have declined 14 percent, versus a 22 percent increase at Munich-based BMW and a 15 percent gain at Volkswagen AG.

“Daimler may have gone precisely nowhere in recent years, but it probably would have gone bankrupt without him getting them out of Chrysler” before the carmaker was bailed out by the U.S. government in 2009, said Max Warburton, an analyst at Bernstein Research in Singapore. “He needs to find a way to ensure Mercedes makes cars that people want to buy again. Without that, Mercedes’ independent future becomes less certain.”

When Zetsche took charge, the manufacturer was laboring under Schrempp’s expansion. A failed merger with Chrysler, an aborted rescue of Mitsubishi Motors Corp. and the uncomfortable role as the German government’s voice at European Aeronautic Defence & Space Co. overshadowed Mercedes, the main profit maker. After agreeing to exit EADS in December, Zetsche doesn’t have any of those distractions left.

Losing the Lead

The extension of his contract shows the board’s confidence in Zetsche’s strategy to regain the lead in luxury-car sales that it lost to BMW in 2005. Adding insult to injury, Mercedes dropped to third in 2011 behind Volkswagen AG’s Audi, once an also-ran in the segment.

Daimler shares have fallen 17 percent over the past five years, cutting the company’s market value to 45.2 billion euros, while the shares of VW and BMW have doubled. This Thursday’s profit report probably won’t do much to change investors’ view.

Fourth-quarter earnings before interest and taxes are expected to decline 14 percent to 1.88 billion euros, according to the average estimate of eight analysts surveyed by Bloomberg.

Mercedes Man

The latest slip means Daimler, also the world’s largest maker of heavy-duty trucks, will post an operating margin of 7.3 percent for 2012, trailing BMW’s 10.8 percent. Daimler is still set to beat the 6 percent margin at VW, which controls truckmakers MAN SE and Scania AB.

Zetsche, a 36-year Daimler veteran, took over from Schrempp in 2006, three months after his appointment as head of the Mercedes division. He has retained that job ever since in a sign of the importance of the company’s roots in carmaking after Schrempp and CEO Edzard Reuter sought to dilute Daimler’s reliance on luxury autos.

The focus on Mercedes is set to become evident in the coming years. Kicked off by the revamped A-Class compact -- Daimler said the “A” stands for attack -- the carmaker has vowed to roll out new models to fill gaps in its lineup and outpace growth at competitors. Daimler’s plan calls for overtaking its rivals in sales and profit by 2020 at the latest. It will be a tall order to fill.

“Daimler is still lacking a competitive spirit,” Christoph Stuermer, a Frankfurt-based analyst with market researcher IHS. “It’s a company very much focused on itself.”

Missed Goals

Those internal distractions of realigning the company contributed to Mercedes falling further behind last year. Deliveries of the brand rose 4.7 percent to 1.32 million cars and sport-utility vehicles. Sales of the BMW nameplate climbed 12 percent to 1.54 million vehicles. Audi delivered 1.46 million autos, also a 12 percent gain.

On top of lagging sales, Zetsche last year postponed a profit target for the second time. Mercedes will now reach a goal of generating an Ebit margin of 10 percent of sales in 2014 at the earliest, at least four years later than originally planned. The latest slipup hasn’t knocked the confidence in him from former colleagues.

“If there is anyone who can lead Daimler to future success, it’s Dieter,” said Tom LaSorda, who worked side by side with him when Zetsche led Chrysler from 2000 to 2005, when it was part of Daimler. He is a “true natural leader who can lead, coach and drive for results.”

S-Class Strategy

The turnaround will be based on 10 additional models, including the CLA compact four-door coupe and four other entry-level models to appeal to younger drivers. To underscore its position in the upper end of the segment, Mercedes plans to double the number of variants of its S-Class flagship to six after it overhauls the model this year.

Zetsche has also moved to address sluggish growth in China, appointing Hubertus Troska to a new board position overseeing operations in the world’s largest car market. He also merged two Chinese sales units to streamline operations and agreed to buy a 12 percent stake in the car unit of Chinese partner Beijing Automotive Group Co. to push growth.

“Zetsche brought the Mercedes brand back to the forefront,” said Jean-Marc Gales, head of European auto-supplier group CLEPA, who worked as global sales director at Mercedes from 2006 to 2009. “He’s very competent. It’s very rare in our business that the best suggestions come right from the top.”

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