Daimler Fights for Its Future

The Mercedes-Benz parent is harder hit than some automakers because it lost years to underinvestment and the Chrysler debacle

By Dietmar Hawranek

A high-rise building says a lot about the condition of the Daimler Group, the parent company of Mercedes-Benz. More than 18,000 people work at the main Mercedes plant in Untertürkheim outside Stuttgart, but there is complete silence—and not a person in sight—in the company's 13-story concrete headquarters building.

Daimler (DAI) CEO Dieter Zetsche is next door, in the former Mercedes-Benz Museum, where a large room has been subdivided into offices. There are model cars on some of the shelves, while others are still empty. The building was meant to serve as temporary office space while the headquarters building was being renovated. But now drastic cost-cutting measures have brought the renovations to a halt. The old headquarters building will not be torn down, though. "That, too, would cost money," says Zetsche. Instead, the company has simply closed the building and locked the main doors.

Some might call this pragmatism refreshing, especially after the grand ambitions of Zetsche's predecessor, Jürgen Schrempp, who planned to build nothing less than a major global corporation. Nevertheless, it is a little irritating to hear Zetsche deprecatingly describe his current work area: "My office has four walls. It's 100 degrees Celsius (38 degrees Fahrenheit) in the summer and 10 degrees (-12 degrees Fahrenheit) in the winter. What else could you want?"

Daimler could be characterized as the pride of German industry. For many people, the Mercedes star is a symbol of the country's economic strength. But now sales are plunging, by 27 percent for cars and almost 40 percent for trucks. Two figures illustrate how difficult the situation is. The first figure is the €2 billion ($2.8 billion) in fresh capital brought in by Abu Dhabi, the company's new co-owner. The second figure is €1.3 billion ($1.8 billion)—the amount of money Daimler lost in the first three months of this year.

Daimler is seeking a partner, and for years it has been talking to BMW (BMWG.DE), Toyota (TM), Peugeot (PEUP.PA) and now Porsche (PSHG_P.DE). The sports car marker, which bit off more than it could chew in its takeover of Volkswagen (VOWG.DE), is seeking an investor. Perhaps Daimler could invest in Porsche, also headquartered in Stuttgart, instead of the Emirate of Qatar. Zetsche is examining every current possibility. Everyone is in talks with everyone else. But Daimler doesn't have much capital to invest.

Of its workforce, 47,000 are now on short-time working schedules, while the remainder have seen hours and wages reduced. Because of these measures, layoffs have been ruled out, but only until the summer of 2010. No one knows what will happen after that.

Will Daimler be the next Opel?

The question sounds heretical. But two years of heavy losses could quickly eat up Daimler's equity capital, at which point the group will need fresh capital, either from its new co-owner Abu Dhabi, another investor or the government. If and when that happens, layoffs will be all but unavoidable.

This is the grimmest scenario—the one Zetsche prefers not to talk about. He believes that sales in the automobile industry will likely return to pre-financial crisis levels in three years. But even then the situation would be difficult for Daimler. In the interim, the company will have to save billions, while at the same time increasing investments in the development of alternative power trains—a virtually impossible contradiction.

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