Realignment At The Big Three

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It was a stunning coup. On Jan. 24, after only 24 days on the job, new DaimlerChrysler Chief Executive Dieter Zetsche called his top 200 lieutenants to Stuttgart and announced a radical management overhaul for the $173 billion German auto maker, slashing 6,000 headquarters jobs and moving senior executives from plush offsite corporate offices back to the gritty old engine factory across town where founder Gottlieb Daimler produced his first motor over a century ago. "It's a very strong signal -- it goes far beyond cost-cutting," says one manager close to the company. "Zetsche is going back to Daimler's roots at Mercedes."



The back-to-basics move, which aims to streamline management and cut costs by a net $1 billion a year, is a dramatic reversal of the imperial management culture and high-flying ambitions of predecessor Juergen Schrempp. The former CEO, who stepped down Dec. 31, dreamed of transforming DaimlerChrysler (DCX) into the world's leading transportation company -- he even dubbed his vision, "World Inc."



But under Schrempp's 10-year reign, the all-important Mercedes division suffered from management neglect following a slew of global acquisitions that erupted in losses. Management distraction and infighting under Schrempp are largely to blame for Mercedes' chronic quality problems, plunging sales, and huge losses. Zetsche, an engineer who previously headed product development at Mercedes, now insists DaimlerChrysler needs "a fact-driven automotive culture. No bullshit, no politics, no nothing. Just working to improve this company as fast as we can."



TRUCKS ON THE BLOCK?

Under Zetsche's new management model, the Mercedes Car Group regains its once-dominant position as the core business of DaimlerChrysler. The company's autonomous research and technology unit is being merged with Mercedes Car Group development. With R&D folded into Mercedes, Zetsche aims to speed time-to-market for future technologies, focus on innovations Mercedes' consumers want, and better coordinate the sharing of technology between Mercedes and Chrysler.



At the same time, the commercial-vehicle division is being split in two, with trucks hived off from vans and buses. Analysts say that may be a precursor to spinning off one or more units down the line. "Zetsche is distancing himself from the truck division and holding Chrysler close to his vest," says Adam Jonas, a London-based analyst with Morgan Stanley. "The argument for trucks being sold goes up, and for Chrysler being sold goes down."



For now, Zetsche aims to retain the position of Mercedes boss too, a position which he took over Sept. 1. By doubling up assignments for himself and other top managers, Zetsche is shrinking the management board by 25%, from 12 members to nine. He also plans to disband the group's so-called Executive Automotive Committee, since the management board is the automotive board. "This is a full-fledged counter-takeover by the Mercedes' boys," says one Frankfurt-based analyst. "Zetsche is flattening anything that smacks of corporate overlayers"



SLIMMING DOWN.

The new organization will drive greater collaboration between Mercedes and Chrysler, from technology sharing to common modules and purchasing. So far, sharing between the two automotive divisions affects only 5% of total production. Using one electronic architecture for a new generation of cars at both divisions is one area where pooling R&D could reap huge savings. "That's why Porsche bought Volkswagen," says Jonas. "Working together on a common electronic architecture is a no-brainer."



To streamline group operations, one group-wide executive will take charge of administrative functions such as finance, human resources, strategy, and communications, eliminating redundant functions across divisions. It leaves Mercedes and Chrysler leaner and quicker -- better focused on automotive development, production, and sales. "This is where our bread is buttered," said Zetsche in a conference call with analysts and journalists.



Analysts hailed Zetsche's move as a brilliant maneuver that should help to speed up problem-solving and eliminate the warring fiefdoms that cropped up under Schrempp. Those factions undermined the company's ability to spot and respond to problems quickly.



AUTO FOCUS.

"We should see a lot of change in the next 12 to 18 months -- visible improvements in finances, production, and quality control," says Garel Rhys, professor of automotive economics at Cardiff Business School in Wales. The streamlining at headquarters also gives Zetsche a chance to clean house and "get rid of people that think the old way," says Jonas. "It's important to make a clean break with Schrempp."



Over the past five years, Schrempp's jet-setting headquarters elite, based at a campus-like office complex in Moehringen outside Stuttgart, fomented an intense internal rivalry with the core Mercedes division that traditionally earned the greatest profits.



By slashing 30% of headquarters management positions and 20% of overall administrative jobs, Zetsche is now clearly putting the focus back on cars, as opposed to the unsuccessful global wheeling and dealing under Schrempp.



"Moehringen is the symbol of the global conglomerate that was supposed to go beyond cars. It's physically away from where the engineers sit. Zetsche is going back to where the real stuff is happening -- in the car factory," says a consultant close to DaimlerChrysler. That's a change some managers will need to get used to.



Still, for all its woes, the situation at DaimlerChrysler isn't as tough as the crises facing Detroit's auto giants. Here's a rundown on where they stand:



General Motors



GM's (GM) problems are many. Topping the list: The company has labored with too many plants and workers for years. Union contracts won't let GM lay them off without pay. So Chairman and CEO G. Richard Wagoner Jr. adopted a strategy of discounting his cars through rebates, no-interest loans, or employee prices for everyone.



The goal was to keep sales -- and hence assembly lines -- humming at a fast clip. Wagoner figured that if he had to pay the workers either way, he should get the sales. But the strategy ran out of steam, and now lower net pricing has many of his models losing money.



One result: After price cuts and incentives, GM's revenue per car is $3,500 less than Toyota's (TM), says analyst Ronald Harbour of Troy [Mich.]-based Harbour & Assoc. Adds AutoPacific analyst James Hall: "The product planning organizations at [GM and Ford] are marginally broken."



HEALTH TAB.

Ford (F) and GM share another problem. Unable to shed workers, both companies have often designed and engineered new vehicles so they could be built in an under-used factory. Or they made look-alike vehicles sold under different brands to satisfy dealers, who always want another model in their showrooms. The customer often took a backseat. Their brands became muddled due to lack of unique models, and consumers now see them as a bargain house.



Throw in the fact that they have massive health-care costs -- $1,500 per vehicle for GM and $1,100 per car at Ford -- and it's even tougher to make money in a competitive market. GM's retiree health-care costs siphon off close to $6 billion a year in cash that could be used to develop better models or make their plants more flexible.



But there's finally a glimmer of hope for a turnaround. Wagoner cut a deal with the United Auto Workers to slash 30,000 jobs and 10 assembly plants. That will take out 1 million vehicles worth of production in North America, where GM now builds about 5.2 million cars and trucks.



"CAGE MATCH."

The hope is that GM will downsize its network of factories to build fewer models so it doesn't need rebates and big price cuts to move unwanted vehicles. The other side of the plan is to retool the factories to make several different types of cars or SUVs under one roof, so the company can move to the market's demands.



Most analysts think the plan is credible. Says Sean McAlinden, chief economist at the Center for Automotive Research: "GM will finally be selling cars to the people who actually want them." But it will take a few years for the whole recovery to happen. GM will have to buy off some of the 30,000 workers with retirement deals, and pay others who are on furlough. That all hits profits and eats cash.



Fixing weak brands like Pontiac and Buick also will take years -- if they ever make it back to being desirable. Meanwhile, the Asian auto makers continue to pour on the heat with new models. "This market used to be a knife fight," says AutoPacific's Hall. "Now it's a cage match, and everyone has chain saws."



Ford



If Ford Motor (F) has a unique set of problems compared to its rivals, it's because the auto maker hasn't felt the sense of urgency that a bolder, more aggressive executive than Bill Ford might have brought to the task.



Rivals have been tougher. DaimlerChrysler dispatched Dieter Zetsche and Wolfgang Bernhard from Germany to perform surgery and rehabilitation on Chrysler Group in October, 2000. Even General Motors CEO G. Richard Wagoner Jr. went out and surprised the industry by recruiting maverick executive Bob Lutz to redesign GM's product development from top to bottom in 2001.



Ford, on the other hand, has drawn only on Ford executives, one after the other, in the hope of finding the right combination of talent. So many operating heads have come and gone in Bill Ford's tenure that it has been difficult to generate momentum behind a coherent strategy.



PROFIT AND LOSS.

The result is that while Ford's European, Latin American, and Asian operations are marginally headed in the right direction, the North American auto operations -- Ford's most important global business -- is operating in the red. The company now says it will continue to lose market share and won't be profitable until 2008 at the earliest.



Where Ford's challenges look similar to its American rivals is in the need for better execution of new products than the company has shown in the last four years, and a more visionary approach to design. Ford has a bona fide winner in the 2005 Mustang redesign, which sold nearly 150,000 units last year with nary an incentive. But Ford's manufacturing and product-development system are so far behind the Japanese and even Chrysler's that, according to analysts and Ford insiders, it doesn't make profit on the hot vehicle.



Other new products like the Ford Five Hundred and Freestyle crossover SUV have bland styling that deliver scant, if any, profit and don't command price premiums. Ford's newest vehicle, the Fusion sedan, has been well received by the auto press, but the mechanically identical and visually similar Mercury Milan and Lincoln Zephyr haven't been embraced.



PEAS IN A POD.

While gaining cost efficiencies, Ford appears to be slipping back into a time-worn recipe of failure in Detroit called "badge engineering," or selling essentially the same car under three different brand umbrellas. "The marketplace has shown time and again that it doesn't value products that are badge engineered," says consultant Dan Gorrell of San Diego-based Strategic Vision.



Ford has demonstrated an ability to develop differentiated and compelling products off the same engineering platform, such as the Mazda3, Ford Focus, and Volvo S40. But it has also shown in some of its newest products that when designs for Fords, Lincolns, and Mercuries sharing the same underpinnings come out of its Detroit design studio, they're often hardly different at all.



The Ford Five Hundred and Mercury Montego sedans are twins, and the Ford Edge crossover and a forthcoming Lincoln crossover have the same mirror-image problem, despite unique front grilles and interior appointments and pricing $8,000 to $10,000 apart.



VICIOUS CYCLE.

"There's no question that some of our new products reflect what was efficient for us to build rather than what the customer may want," says Mark Fields, Ford's president of the Americas, not referring specifically to the Edge and Lincoln model.



Going forward, Ford believes its comeback lies in getting its overhead costs in line with its market share, so it isn't compelled to force-feed Explorer SUVs or Taurus sedans to the market by piling on rebates just to keep factories humming and cash pouring in. That vicious cycle has eroded the value and desirability of Ford's brands.



Indeed, for an executive who has had to plot the shuttering of factories and clipping of headcount, Mark Fields has talked a blue streak the last two months about refocusing each of the Ford, Mercury, and Lincoln brands around a consistent marketing idea that designers, engineers, and advertising staffers can rally around for the next five to 10 years -- rather than the next five to 10 months, as has been Ford's recent history.



OUT WITH THE OLD.

"Each brand has to stand for something," says Fields, pointing to Honda and BMW as brands with longstanding consistent brand images. "We have had difficulty articulating what they stand for, so how's the consumer supposed to know?" asks Fields.



A new low-cost manufacturing campus to be built somewhere in North America in the next five years is meant to enable Ford to deliver compelling products aimed at young car buyers with less than $20,000 to spend, something that Ford's inflexible, high labor-cost plants has made impossible so far.



Based on the factories to be shuttered in the next five years, the company likely will be paring away aged products and model names -- such as Lincoln Town Car, Mercury Marquis, Ford Crown Victoria, Ford Freestar, Ford Ranger, Ford Taurus -- that are bought mostly by retiree-aged consumers and that embody Ford's attachment to status-quo product development. Ford didn't spell out the futures of these models by name, not wanting to orphan them while they're still on dealer lots.



It will take a few years to close all the plants on the chopping block. Still, Fields's mantra, being repeated all over Detroit, is that Ford has to "Change or die." The question is whether he has the right stuff to move the company fast enough in the right direction.