|[an error occurred while processing this directive]||[an error occurred while processing this directive]|
JURGEN SCHREMPP: THE AUTO BARON (int'l edition)DaimlerChrysler's Jurgen Schrempp has built an empire of tremendous scope. Can he steer it through the global crisis?
One August day four years ago, while climbing the 3,905-meter Ortler mountain in the Italian Alps, Jurgen Schrempp descended a sheer wall and got stuck. Groping about, he couldn't find a hand- or toehold. He was roped to mountaineering legend Reinhold Messner, the first person to climb Mt. Everest without oxygen. What would happen, Schrempp shouted up, if I fell? I'd catch you, replied Messner, and lower you down. Marvels Messner: ''So he jumped.''
Courageous or crazy, it was vintage Schrempp. The lean, chainsmoking 54-year-old chief executive of Daimler Benz (DAI) took a similar leap of faith last January when he approached Chrysler (C) CEO Robert J. Eaton in his office in Auburn Hills, Mich., with a scheme to merge their two companies. In a steak house with Daimler colleagues after the 17-minute chat, Schrempp worried that he may have been too bold. His fears were unfounded. America's scrappy No. 3 car company and Germany's most revered brand name will combine to become the world's fifth-largest carmaker when shares in DaimlerChrysler (DCX) begin trading on Nov. 16.
The new giant is off to a good start. More than 97% of Daimler shareholders switched into DaimlerChrysler shares by Oct. 23, beating the 90% needed to avoid $33 billion in goodwill charges over 40 years. ''Isn't this a glorious day!'' declared Schrempp three days later, nearly skipping in excitemEnt as he prepared to announce the news at Daimler's Stuttgart headquarters.
Schrempp and Eaton are entering into an unprecedented business experiment. The auto industry has long been among the world's most international. But the DaimlerChrysler merger ushers in a new phase of global competitiveness, when the very biggest players in the world's main regions unite as industrial powerhouses of tremendous scope. SchRempp will be judged both on his ability to run this ungainly giant and on whether he can emerge as Europe's most forceful business leader.
He was certainly the dominant player in forging the merger. ''I wasn't going to sit passively and be the object of someone else's decision,'' Schrempp told 1,000 of Munich's glitterati as he introduced the new Mercedes S-Class sedan last month. Schrempp had talked to Ford Motor Co. (F) in 1997, but the U.S. company's family-ownership structure would have complicated a merger. Sources close to Daimler say that Schrempp also approached Honda Motor Co. (HMC), but found the cultural differences too great.
The timing of the DaimlerChrysler merger puts enormous pressure on the two companies. Schrempp and Eaton are trying to pull off their deal amid a global economic crisis that is expected to hit the world auto industry next year. Schrempp sees 1999 industrywide unit sales slipping by 4% in the U.S., by 2% to 3% in Western Europe, and stagnating in Germany.
As a global company, DaimlerChrysler will get a new kind of chief executive. Schrempp, who will take over on his own by 2001--and perhaps sooner--comes across as a macho, take-charge guy. But he is also a subtle man in many ways. He listens carefully to others before taking action. His close friends include artists, photographers, and mountain climbers, as well as other powerful executives.
Long tours of duty outside Germany have given him a business perspective broader than many of his countrymen's. As in mountain climbing, his clear thinking is balanced by instinct. ''Many people think emotions are not needed in business,'' he says. ''I think emotions, what I call the stomach and the heart, are the decisive factor at the end of the day.''
The deal's acid test will come in the interplay of Schrempp's personality with those of Eaton and other Chrysler executives. ''We, from day one, have been extremely direct with each other and open,'' Eaton says. If this merger is going to work, human factors will be of paramount importance.
LOGIC. There's plenty of logic behind the marriage. Chrysler's minivans and sport-utility vehicles--staples in suburban driveways across the U.S.--stretch Daimler into North America's vast middle market. Daimler can boost Chrysler's 1% market share in Europe, while also upgrading the Detroit carmaker's quality and technology with Mercedes' gold-plated engineering. Together, the auto makers believe they can conquer emerging markets in Asia by jointly developing a low-cost car.
Eaton and Schrempp are trying at every turn to demonstrate trust and cooperation. Last month Schrempp arrived for a meeting of 35 executives at a Stuttgart restaurant, after Eaton had spoken. ''Whatever Bob said, I'll automatically sign on to right now,''he said.
The first priority for both co-chairmen is to meet their pledge to cut $1.4 billion in costs in 1999. They will search for ways to save money in everything from shared overhead in finance and personnel to getting a better deal on steel. ''First, we have to prove something to the world,'' says Schrempp, pounding his fist on the table over breakfast in his Stuttgart office. ''We have to put that $1.4 billion on the table.''
Preserving distinct brand identities while cutting costs will be tricky. The two companies will avoid a platform strategy that would muddy the Mercedes and Chrysler images, since customers might balk at paying up to 93,000 for an S-Class sedan with a Chrysler drive train. But there is room for common design and engineering in less visible areas, such as sound systems. And some production can be shared. For example, Chrysler's Jeep plant in Graz, Austria, will build the Mercedes sport-utility vehicle, the M-Class.
In the core markets of Europe and North America, Chrysler and Mercedes will maintain separate showrooms, even if they are owned by the same dealer. But combining logistics, service, warehousing, and technical training will dramatically boost sales volume, analysts figure. In markets where the companies have a weak presence, such as Asia, they are considering mixing the brands, perhaps selling Mercedes' heavy trucks and Chrysler's light trucks together, for example, to cut costs.
The company's big challenge will be reacting speedily to new trends with just the right models. While the U.S. will see a continued blurring of lines between cars and trucks, Europe has room to catch up in minivans and leisure vehicles. Schrempp expects to see several versions of sports cars. Inspired by Volkswagen's popular new Beetle, he has also asked his designers to think about a car with a retro look.
Yet at its most fundamental level, DaimlerChrysler's success hinges on melding two starkly different corporate cultures. Daimler's methodical decisionmaking could squelch Chrysler's famed creativity. Mercedes' reputation for luxury and quality could be tarnished by Chrysler's downmarket image. If they can't create a climate of learning from each other, warns Ulrich Steger, a management professor at IMD, the Lausanne business school, ''they could be heading for unbelievable catastrophe.''
If that happens, it won't be the first time. Big cross-border mergers have a poor track record. In most cases, the hoped-for savings are not realized, the weaker partner is stripped of its best assets, and margins plunge. For instance, BMW's merger with Rover is foundering because BMW lacked a clear strategy, and the companies' models cannibalized each other. BMW has asked the British government for aid.
To avoid a similar fate, Schrempp and Eaton analyzed 50 large-scale mergers from many industries before launching their own. They found that 70% had stumbled, most for lack of clear targets and speed. ''What you don't do in the first 12 to 24 months will be very difficult to do later,'' Schrempp says.
That's especially true for two industrial icons from business cultures that couldn't be more different. Chrysler is the very symbol of American adaptability and resilience. Having survived a near-death experience that required a 1979 government bailout, it scrambled under legendary CEO Lee A. Iacocca, and then Eaton, to become one of the world's leanest and nimblest car companies.
Daimler Benz, meanwhile, has long represented the epitome of German industrial might, its Mercedes cars the purest examples of German quality and engineering. But despite Schrempp's shakeup at the top, its middle ranks exemplify the hierarchical, procedure-driven German management style that could smother an agile company like Chrysler.
So over the next two years, he and Eaton will forge an identity for the new auto maker, creating a global company with its own product lineup and personality. For example, labor relations will break new ground. Based in Stuttgart, the company will retain the German two-tier board system, but a member of the United Auto Workers will join German union and Daimler works-council members on the supervisory board, which oversees management.
Schrempp and Eaton will also spend the next two years taking inventory. They'll look at the strength of each model and brand and decide which market segments to target. Schrempp sees potential in Europe for Chrysler's 300M, a luxury performance sedan. More pickups and heavy trucks will be directed to South America. Mercedes must decide whether to sell the little A-Class hatchback in the U.S. and what to do with Smart, the tiny city car built with the Swiss maker of Swatch that debuted to mixed reviews in October.
Together, the co-CEOs will assign a budget, select the appropriate technologies, and set a specific quality standard for each model. Once that process is completed in 2001, Eaton, now 58, will retire. There is much speculation in Detroit that he might leave earlier, and Eaton recently told senior Chrysler executives: ''At any point that I feel redundant, I will go.''
As far as products are concerned, DaimlerChrysler will start life in good health. Mercedes has a sexy new lineup, having launched 10 new models in the past three years, including the sleek SLK roadster. Daimler has little overlap with Chrysler, which brings strength in minivans, sport-utility vehicles, and pickups. Financially, too, the new company is strong. Daimler and Chrysler are among the world's most profitable carmakers. Salomon Smith Barney analyst John K. Lawson figures next year the combined company will have operating earnings of $7.06 billion on revenues of $155.3 billion. And with a cash stash of $19.4 billion, it could weather even a deep recession.
This auto juggernaut will loom large in Germany Inc. It will be the country's biggest industrial company by far, its shares amounting to a huge 13% of the DAX stock index. As DaimlerChrysler moves toward U.S.-style, profit-motivated management and compensation, the changes will reverberate throughout Germany's egalitarian business culture.
Schrempp, too, may come to represent a formidable presence on Germany's business landscape. If he decides to slash jobs, for example, or revamp costly German labor agreements, he may find himself going head to head with Gerhard Schroder, Germany's left-leaning new Chancellor. That could set a potent precedent for other German executives longing to break from the country's often strangling business regulations.
If there's a European executive whose style resembles that of a no-nonsense American CEO, though, it's Schrempp. He rattled Corporate Germany by nakedly pursuing profits when he took over Daimler Benz in 1995. That year the company posted a $3.45 billion operating loss, the worst in German postwar history. Schrempp restructured the industrial giant and axed businesses that couldn't meet tough new standards, turning a profit again in 1996. In three years he has metamorphosed from one of German business's most vilified men to one of its most imitated.
Now, at DaimlerChrysler, some 98 integration teams are ready to hammer out details on topics from software to production. An 18-member management board is charting strategy. Where one company is clearly more advanced, decisions are easy: For instance, Daimler will handle fuel-cell and diesel technology, and Chrysler will keep its electric-vehicle project.
Other decisions are tougher. Chrysler invented the minivan, but Daimler is far along in developing its own. So the two are hotly debating whether to ditch Daimler's version or offer a separate luxury model. One senior Chrysler manager observing the process says that the way this decision is handled--rather than the outcome--will determine whether he chooses to stay with the company.
Another test will involve jobs. The new board is analyzing the next two management layers to decide between Daimler and Chrysler employees for each slot. ''I suspect we'll lose some people,'' Eaton says. So far, though, decisions have been even-handed. On Nov. 3, the companies announced that Chrysler executives will run procurement and legal affairs, while Daimler execs will head finance and information technology.
NO REDUNDANCIES. Schrempp is playing his cards close to his Italian-cut vest, but industry experts who know him predict that by 2001 he will abandon the unwieldy new management board. Schrempp admits he can visualize a time when ''you also have somebody in charge globally for production.'' He won't say more. But one likely option would be a lean corporate center for human resources, finance, and planning. Individual board members would be responsible for trucks, Chrysler cars, and Mercedes cars, as well as for purchasing, research and development, and production--with no redundancies. Sales and marketing units could be one level below the board.
Such a shakeup would not surprise employees from the Daimler side. Schrempp's focus on goals has earned him a reputation as cold-hearted. It started in 1989, when Daimler Benz Chairman Edzard Reuter put the young truck executive in charge of forming a new aerospace unit, now called Dasa. First, Schrempp pulled together four aerospace companies that Daimler controlled, and managed them as a holding company. Buffeted by defense cuts and a rising dollar, he needed more drastic steps. So he cut out the management and controlled each unit directly.
Then, in June, 1994, Reuter appointed Schrempp heir apparent to take over Daimler Benz in May, 1995. All that year, Schrempp prepared his strategy, and once in power, he executed it with exacting swiftness. The goal: to reverse his former mentor's grand scheme of building an integrated technology company. First, he streamlined head-office hierarchy, cutting staff by more than 75%. ''You have to sweep the stairs from the top down,'' he says. Then he examined each business unit, grilling frightened managers nearly to tears and setting a 12% return-on-capital target for each unit. When the dust had settled, Daimler was down to 23 units from 35 and carried 63,000 fewer people on the payroll.
Meanwhile, Schrempp weathered two public humiliations. First, in July, 1995, word leaked out that Schrempp and two aides, one of them carrying a bottle of wine, were stopped by Italian police on the Spanish Steps of Rome for trying to walk through a blocked-off area late at night. After getting into an argument when the police demanded their passports, they were detained overnight. The German press had a field day. And as head of Dasa, he had bought Fokker, a loss-generating Dutch aircraft builder, in 1993. But in January, 1996, he cut Fokker loose, candidly admitting he had made a $1.4 billion mistake. But Schrempp's success at turning Daimler around outweighed the negative press on both incidents.
He did make one severe miscalculation. In 1996, the German government decided to cut sick pay to 80% of wages from 100%, and Mercedes was the first company to implement the policy. Works-council chief Karl Feuerstein immediately instructed workers across Germany to stage illegal work stoppages. Schrempp stood fast for three weeks. But when he realized he couldn't win, he called Feuerstein at home and gave in.
All along, Schrempp was thinking about seeking a partner for Daimler. By 1996, he had decided that a carmaker can't compete without a full range of products, and he couldn't stretch the Mercedes brand any further downmarket. But first he had to get Daimler in shape for a merger. Mercedes-Benz was a separate operating company with its own board, run by Helmut Werner, who was a hero in Germany for reviving the Mercedes lineup. Schrempp wanted to give Daimler direct operating control of Mercedes. ''We had steps and steps, and layers and layers,'' Schrempp explains, moving Marlboros around the table to illustrate. ''It took months to make a decision.''
In 1995 and early 1996, talks between Eaton and Werner about a joint venture for all their international businesses outside Europe and North America had bogged down because of this structure. That failure helped spur Schrempp's reorganization. Although Werner fought to keep Mercedes independent, Schrempp prevailed with the supervisory board. By January, 1997, Mercedes was folded into Daimler, Werner was out, and Schrempp was running a car business.
SKI BUM. Schrempp wasn't always so ambitious. He was raised in Freiburg, a university town in southwest Germany. But he had too much fun skiing and dancing to finish his high-school-level studies. His father, a clerk at the university, persuaded him to learn a trade, so Schrempp joined Daimler as a 15-year-old apprentice mechanic. ''I learned to do the most with as little effort as possible--I still do,'' he says, grinning.
He met his wife, Renate, when he was 18 and she 19, and for 25 cents they would listen to records in the jazz cellars of Freiburg. Schrempp then borrowed $25 from his dad to buy a trumpet and taught himself to play jazz without reading music. The trumpet, which Schrempp still plays for fun, sits in his office. Eventually, Schrempp earned an engineering degree. He reentered Daimler in 1967.
But despite being a 31-year Daimler veteran, he escaped the stifling Stuttgart culture early on. After a decade mostly in sales, he lived in South Africa from 1974 to 1982. Responsible for customer service, he hosted lively parties that helped sell fleets of trucks. He left for a two-year stint in Cleveland, where he got rid of troubled truck unit Euclid. Then he returned to South Africa for two more years as vice-president and then president, lecturing against apartheid to the elite even as he sold them their cars. Indeed, Nelson Mandela has made him an honorary consul to South Africa. Schrempp still has a house in Capetown and owns a game reserve with two friends near Kruger National Park.
Returning to Stuttgart in 1987 as No. 2 in the truck division was a bit of a shock. ''He displayed contempt for tribal wars and the small German mind-set,'' says an adviser who first met him then. So Schrempp has cultivated a circle of friends unrelated to Daimler's world. His modern, art-filled home near the woods outside Stuttgart is warm and welcoming. Schrempp dispenses drinks and cigars from behind the bar to pals including famed photographers and painters.
He turned to this circle for help during the crisis over his new A-Class model last October. When a Swedish auto journalist tipped over the new hatchback in a test maneuver, Schrempp took personal charge of containing the potential public-relations disaster after three weeks of bad press. One Sunday evening he invited eight friends to his home, and over Italian sausages, bread, and wine he listened to their advice. By the time he met with public-relations specialists the next day, he had decided to stop shipping the car for two months until the problem was fixed. Mercedes installed an electronic stabilizing system that cost $182 million in 1997 and 1998 but has rescued the A-Class's reputation. Unit sales are expected to hit 200,000 next year.
Schrempp is a man of seemingly boundless stamina. He can socialize into the wee hours and still get up early to work out in his home gym. He is also a passionate mountain climber. ''It's the only time in my life I do what others tell me to,'' he says. Indeed, he is accustomed to getting his way. Last August, the new management board gathered at a resort in West Virginia. One night after dinner, Schrempp asked Eaton if DaimlerChrysler's stock certificate could include a photo of Karl Benz, in addition to Gottlieb Daimler and Walter Chrysler as planned. Eaton said that wouldn't be fair. But Schrempp was getting heat from his home region, where Benz was founded. He cajoled Eaton for at least an hour, finally offering to donate his replica of the first Benz three-wheeler to the Chrysler museum. Eaton relented. ''No one knows what a stock certificate looks like anyway,'' says Eaton.
There will be many more such sessions over the coming months as Daimler and Chrysler nail down the details of their merger. And if an economic downturn slams auto sales, there could be some tight moments. Chrysler execs, like Schrempp's climbing partners, may find that's when Schrempp is at his best. Last July, in the Italian Alps, a fierce storm forced Schrempp's climbing group to ditch all metal and take cover. As lightning ricocheted across the rocks, Schrempp remained serene. ''He has no fear,'' says climbing partner Hubert Burda, a Munich publisher. Given the challenges this huge merger will face, Schrempp may be exactly what is called for: a tough man in a storm.
By Karen Lowry Miller In Stuttgart, with Joann Muller in Auburn Hills
Updated Nov. 5, 1998 by bwwebmaster
Copyright 1998, Bloomberg L.P.