Daimler and Chrysler file for divorce Print E-mail
March 2007 Business

As the U.S. carmaker posts losses, Dieter Zetsche weighs his options - By Ulrike Fokken

When strategies don't work, they have to be fixed. Dieter Zetsche, CEO of DaimlerChrysler, based his actions on this tenet of management when, on Valentine's Day at Chrysler headquarters in Auburn Hills, he announced that "all options are open" for the fiscally bleeding carmaker. That effectively buried the vision of his predecessor Jürgen Schrempp, who wanted to forge a global car company from Stuttgart.

Sometimes it takes a while for reality to sink in. German and American car executives didn't accept that buying preferences among American car shoppers have changed. They were still counting on SUVs, family vans, and pickups while consumers had turned to economical Japanese cars and eco-friendly hybrid models. The trucks of Chrysler's Dodge and Jeep brands remained in dealership parking lots because for American drivers, gasoline was becoming too expensive to waste.

Chrysler management hadn't expected this swing in buyer behavior. Yet instead of parting company with their "big is beautiful" approach, they reached instead for their marketing bag of tricks. Chrysler granted huge rebates on SUVs to shore up the drop in sales. Yet the dumping-price tactics couldn't fend off structural change, let alone replace an obvious lack of strategy.

"Chrysler's rebate strategy was a classic case of shooting yourself in the foot," analysts at Deutsche Bank's think tank concluded. The price-cutting since late 2001 simply kept sales "at an artificially high level" while avoiding necessary production changes. "Managers have to listen to the weak signals from the periphery," says Bolko von Oetinger, senior vice president at Boston Consulting Group, Germany.

After Sept. 11, though, the signals for U.S. auto executives were neither faint nor far away. Detroit could certainly have predicted future trends such as rising oil prices and faltering economic growth. Climate change and its effects on politics and public opinion likewise remained completely unheeded. A growing number of the environmentally conscious no longer wanted to drive their children to the playground in a gas-guzzling SUV.

The management failures in the largest transatlantic company come at a high price for Chrysler employees. Many will lose their jobs. Zetsche wants to slash the payroll by 13,000, with 5,800 Chrysler workers in North America slated to go this year alone. Zetsche has also commissioned investment bankers JP Morgan to find solutions for the disastrous U.S. venture of the company based in Stuttgart. There, DaimlerChrysler builds its hot-selling, upmarket Mercedes-Benz models and wants to prevent at all costs Janis Joplin's classic line "O Lord, won't you buy me a Mercedes-Benz" being rephrased into "Would you buy Mercedes?"  

Zetsche has to stem the losses at Chrysler and analysts believe that a sell-off would be the most plausible option. The buzz over prospective investors has certainly been good for the stock-trading business in Frankfurt. DaimlerChrysler's share price has been growing steadily since Feb. 14, posting daily gains of up to 5 percent and climbing within four trading days from ?48 to more than ?56. But that still didn't equal the value of Daimler stock before the merger.

Since mid-February, new daily rumors have been sparking investors' imaginations. First the word was that the Korean Hyundai Corporation was looking closely at Chrysler, then it was Nissan that was the knight in shining armor. Finally, General Motors was believed to be interested in its U.S. competitor. The market gurus said the American carmakers, reeling in the current crisis, could bundle their energies in development, production and sales. Hyundai and Nissan soon declined further action, while GM is still waiting to see Chrysler's books. Perhaps swallowing its eternal rival would bring a kind of satisfaction.

Yet ego trips rarely produce solid balance sheets, as the merger of Chrysler and Daimler-Benz demonstrated. "A merger and its subsequent integration process amount to a huge distraction for management from the actual business," says Hermann Simon, who as CEO of his eponymous consulting firm is constantly shuttling between Germany and the United States. "During the first two years, the directors are completely occupied with resetting the pecking order and fighting for position."

From the beginning, hubris and estrangement were integral parts of this "marriage made in heaven," as former Daimler CEO Jürgen Schrempp called the merger in 1998. For half a year, Schrempp pushed his pet project with Chrysler forward, aided by top consultants from Goldman Sachs. On the other side of the Atlantic, in Chrysler's Auburn Hills headquarters, CEO Bob Eaton was working out the deal's final details. During the 1990s, he led the world's most profitable carmaker, and when, on May 7, 1998, the two men announced the merger, Schrempp joked that "the bride is beautiful and the groom, very, very potent."

Schrempp's favorite pose was that of the virile corporate lion. During the restructuring of Daimler-Benz some years before, Schrempp had already gained the nickname of Rambo. He buried his predecessor Edzard Reuter's vision of an "integrated technology company" by cutting the financial lifeline to airplane-maker Fokker, jettisoned aerospace company Dornier together with a 300-million-mark dowry, and broke up appliance maker AEG into several components. Schrempp's new strategy was of a global corporation, which was why he bought up Chrysler and took a stake in Mitsubishi Motors.  

His ambition had its price. After 30 years of marriage, Schrempp separated from his wife Renate in the same year as the merger. "She wanted me to gradually put on the brakes and I wanted the merger with Chrysler," he said in an interview. "I was faced with the choice: work or marriage. And I realized that the challenges of this new venture meant more to me than anything else in the world."

Yet Schrempp failed in making his strategy of a global carmaker work. Just under two years ago, Dieter Zetsche took the reins of DaimlerChrysler and has since been trying to salvage what he can. He plans on spending ?1 billion ($1.3 billion) this year alone on restructuring Chrysler. Factories are on the chopping block and production is being throttled: 400,000 fewer cars per year. Finally, Zetsche and his proconsul in Auburn Hills, Tom LaSorda, plan on investing in eco-friendly hybrid engines, which use less gasoline and therefore emit less carbon-dioxide gas.

Those engines will also be the only future available to Mercedes in Europe. EU Environment Commissioner Stavros Dimas has taken up the fight against the auto industry's polluters and climate killers. If Dimas gets his way, carbon dioxide emissions of new European cars will sink from 160 grams per kilometer today to 120 by 2012. A fat Mercedes sedan produces almost twice that amount.

Car industry lobbyists and German politicians will try to prevent the worst in Brussels. Yet it's questionable whether German carmakers can count on Berlin for the support they'd like. For weeks, climate change has become a pet topic for Chancellor Angela Merkel (CDU) and her ministers for the environment and transportation, both Social Democrats. Both parties need to seize the high ground on this issue for their own political futures.

- Ulrike Fokken is a freelance journalist in Munich.

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