Daimler: Same Driver, Same Woes

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DaimlerChrysler (DCX) Chief Executive Jurgen Schrempp pulled off a stunning act of survival on Apr. 29 at the troubled auto maker's board meeting. Speculation had run high in Germany that a management revolt a week earlier against Schrempp's proposed $5.3 billion bailout of partner Mitsubishi Motors and a sputtering Asia strategy could cost him his job. Yet, he walked out of the meeting with the full endorsement of the board to remain at the helm and to recast Daimler's approach in Asia.
Schrempp survived thanks to the continued backing of major shareholder Deutsche Bank (DB) and longtime supporter Supervisory Board Chairman Hilmar Kopper. But the road ahead looks bumpy for the 59-year-old former mechanic and for the auto giant he has headed for nine years.
Jurgen Pieper, an auto analyst at Bank Metzler in Frankfurt, sums up the lingering discontent: "I can't understand that outcome when the result of the present management is so poor." The carmaker has lost $40 billion in shareholder value since the 1998 merger of Daimler and Chrysler.
RESTLESS SHAREHOLDERS. Furthermore, Schrempp's efforts to build a global business have been sideswiped by strategic setbacks and management failures that have hammered earnings. Among the most recent: Chrysler's $1.2 billion second-quarter 2003 loss, which dragged full-year results down to an operating loss of $637 million. Now, Mitsubishi expects to lose $685 million for the fiscal year ended Mar. 31, on a 10% drop in sales, to $23.5 billion.
Many shareholders are growing restless with Schrempp's seeming inability to weld successful operations out of U.S. and Asia acquisitions (see BW Online, 4/29/04, "A Shaky Automotive Menage a Trois"). "He has worked for five years without any positive result," says Joerg Pluta, a Munich-based lawyer and representative of minority shareholders.
Schrempp could not be reached directly for comment for this story. A DaimlerChrysler spokesperson said the company would need additional time to pose BusinessWeek's questions to him for a response.
SAME GOAL. The CEO is mindful of the grumbling. At the Apr. 7 shareholders meeting, he acknowledged that he wasn't satisfied with Daimler's performance for 2003, either, but he said Chrysler would generate a positive result in 2004. "Some criticism is highly justified about Chrysler and Mitsubishi. But please realize we have a mid- to long-term strategy."
In a recent letter to DaimlerChrysler employees thanking them for their hard work, Schrempp pointed to a group operating profit of $1.78 billion, up 10% for the first quarter, and insisted that the decision not to participate in the recapitalization of Mitsubishi "has not altered our strategic goal of establishing firmly our presence in Asia." A week before the Apr. 29 meeting, DaimlerChrysler's management board had voted 8-3 to cut off funding for the troubled Japanese partner -- against Schrempp's wishes.
Chief Financial Officer Manfred Gentz, Mercedes Car Group boss Jurgen Hubbert, and Chrysler CEO Dieter Zetsche were among the eight who argued for a change in strategy, Daimler insiders say. Gentz noted during the debate that the financial payback for the $5.3 billion bailout would take 22 years, according to a report in the German weekly Der Spiegel.
GOVERNMENT PENALTIES. After a week of skillful maneuvering, however, Schrempp was firmly in the driver's seat, winning the support of the board to lead DaimlerChrysler forward and sidelining one of his harshest critics, Wolfgang Bernhard, who had been poised to take over at the Mercedes Benz division on May 1. But Schrempp's fate ultimately will depend on his ability to squelch internal dissent, improve profitability, and avoid any additional financial disasters in the months ahead -- a tough challenge.
The carmaker's first-quarter results were punctured not just by losses from its Mitsubishi investment. The German government levied penalties against DaimlerChrysler for failure to deliver a toll-collection system for trucks. Group net income fell 33%, to $468 million. And the losses from Mitsubishi and the toll project may not be over, according to Gentz. Schrempp's team must now meet a new deadline to deliver the toll-collection system, and additional penalites will result if it's not working by yearend.
Ongoing losses at Mitsubishi could also affect DaimlerChrysler's bottom line. And difficulties collaborating with the Japanese, who expressed surprise and anger at the German about-face, could jeopardize collaboration on joint car development of small and midsize models that's slated to run for the next four years.
SLOWING MERCEDES. One bright spot: The Chrysler unit doubled its operating profit to $355 million in the first quarter of 2004 year-over-year, even though net prices tended lower. But cost-cutting "is the big driver," says Pieper of the improved results. The launch of a slew of new models hasn't dramatically improved Chrysler's fortunes, as promised.
Many analysts think that, barring any more surprises, DaimlerChrysler will be able to exceed 2003's operating profit of $6.7 billion as global growth improves and the restructured commercial-vehicle division benefits from a boom in truck demand. But already, a possible sign of trouble is on the horizon: Unit sales of Mercedes Car Group -- DaimlerChrysler's key profit engine -- fell 9% in the first quarter. Revenues declined 6%, as profits slipped 7%, to $760 million. The outfit forecasts that sales will likely to pick up in the second half as new models are launched, including the new generation C-Class and SLK roadster.
Even if Mercedes' profits recover in the second half, DaimlerChrysler isn't producing the industry-beating earnings that Schrempp promised at the time of the merger in 1998 -- or meeting return-on-capital targets for his globe-spanning investments. A recovered Nissan (NSANY) is now setting the industry benchmark with operating margins of nearly 11%, while rival BMW boasts a healthy 7.7%. In 2003, DaimlerChrysler's auto business managed to scratch out an operating margin of 2.6%.
LAST ONE INTO CHINA. Questions also loom about the effectiveness of Schrempp's management style and signs of growing internal friction. "War has broken out among the top management," says one top DaimlerChrysler manager, who worries that internal battles are diverting attention from daily business. Finance Chief Gentz says Schrempp has the support of top management. A spokesperson replied that the company doesn't comment on "inside reports" or analysts' statements.
In the opinion of many analysts and fund managers, Schrempp's management team has stumbled repeatedly, overpromising on returns and falling to spot trouble early. DaimlerChrysler's Asia strategy has been called into question. It's last to the game in China as rivals such as Audi and BMW reap big gains in Middle Kingdom market share. And it's newest acquisition, Mitsubishi Fuso Truck & Bus, could see orders shrivel if Japanese anger over DaimlerChrysler's exit from Mitsubishi prompts government officials to order from rivals Toyota (TM) and Isuzu. Some 40% to 50% of Fuso's orders come from the Japanese government.
Chrysler's problems with overcapacity and difficulties competing against better-quality cars and trucks produced by Japanese rivals such as Toyota, Nissan, and Honda (HMC) still cloud the auto maker's future. In the first four months of 2003, Nissan boosted its U.S. sales by 29.6%, and Toyota's jumped 13%, while Chrysler edged up only 2% and partner Mitsubishi continued to slide, with a 23% drop. No question, Schrempp the survivor has his work cut out for him.