Businessweek Archives

The Shocks For Daimler's New Driver


International Business: GERMANY

THE SHOCKS FOR DAIMLER'S NEW DRIVER

It could have been the smoothest of handovers. When Jurgen E. Schrempp became chief executive of Germany's Daimler Benz on May 24, he expected to inherit a $74 billion industrial empire restored to financial health. His predecessor and mentmr, Edzard Reuter, boasted of a return to profits of $750 million in 1994, after losses of $1.3 billion in 1993. Reuter even promised another boost this year.

But less than three months later, the empire is in disarray. Hit by the soaring German mark, management disputes, and losses from Reuter's own diversification strategy, Daimler is facing another dangerous slide in profits. Brokers have stamped "sell" recommendations on the stock. In a fight to restore the company's credibility, Schrempp, 50, has reversed Reuter's forecast and warned of "severe losses" in 1995.

Schrempp must take drastic action, as early as September. A tough-minded executive who once was a Mercedes-Benz auto apprentice, he will have to cut tens of thousands of jobs and stem bleeding in units such as Daimler Benz Aerospace (DASA). He is likely to sell large chunks of Daimler Benz Industrie, which loses money on everything from trains to electronics.

In essence, then, Schrempp must preside over the reversal of his former boss's 10-year effort to diversify Daimler into a maker of jets, helicopters, and trains--even though Reuter is now a key member of Daimler's supervisory board. Says Michael Schickling, auto analyst at Frankfurt private bank Schruder Munchmeyer Hengst & Co.: "Schrempp's most important job now is to develop a clear strategy and convince financial markets [that it will work]."

Daimler's efforts to reinvent itself go to the heart of Germany Inc.'s problems. The soaring mark and sky-high labor costs have severely damaged the competitiveness of German exports. At DASA, for example, aerospace products are priced in dollars, but many costs are still in marks. With the mark at current levels of about 1.40 to the dollar, internal Daimler studies figure DASA has 16,500 workers too many. Schrempp may slash up to half the 40,000 workforce.

The lessons go deeper. Daimler's woes point up flaws in Germany's system of corporate governance. Its supervisory board, chaired by Hilmar Kopper, CEO of Deutsche Bank, which owns 25% of Daimler, failed to rein in Reuter, despite missteps. "We think Reuter made a lot of mistakes and is to blame [for Daimler's problems]," says one Frankfurt banker.

PROFITABLE CORE. So Schrempp is under enormous pressure. Big investors want him to lay out a strategy on Sept. 11, when the company announces half-year results. Analysts expect a massive restructuring at DASA and Daimler Benz Industrie that could force a $2 billion write-off in 1995--and allow a clean slate in 1996. "The more he does to restructure this year, the better the results will look next year," says Jurgen Pieper, auto analyst at Deutsche Morgan Grenfell in Frankfurt.

In the meantime, Schrempp will rely on Daimler's profitable core business--its luxury Mercedes-Benz automotive and truck division. It earned net profits of $1.3 billion last year and should do as well this year and next. If so, Daimler could turn a net profit of about $1.3 billion in 1996, after losing from $370 million to $1 billion this year, analysts say.

But Mercedes won't just provide the cash needed to fix Daimler's balance sheet: It is becoming the model for the entire company. To make Daimler competitive globally, Schrempp plans to follow the trail blazed by Mercedes-Benz CEO Helmut Werner since he took over 27 months ago. Werner has pressed his designers to watch costs and build cars at competitive market-driven prices. And he plans to invest in new plants in the U.S., France, and China.

Such efforts will now sweep across the company. DASA, for example, is aiming to slash costs by $1.4 billion under a program code-named "Dolores"--short for "REScuing [the company from the] LOw DOllar." It could include a pay freeze, longer workweek, and shifting of production and parts purchasing into weak-currency areas.

Schrempp also means to stamp Daimler with an enterprise culture. Even before the avalanche of bad news, he chopped 40% of Daimler's 500 executive jobs at Stuttgart headquarters and told those remaining not to meddle in operating units unless they produce "tangible benefits." Daimler's 1,700-strong central research and development staff has been told to lift productivity by 30% in three years or face cuts.

SPANISH MISSTEPS? But even massive restructuring is not enough. Schrempp must also reverse damage to Daimler's image from recent public management scrapes. In the most startling incident, a German business monthly, Manager Magazin, published extracts from a 76-page diatribe against Reuter's "catastrophic" diversification strategy written by former Daimler Finance Director Gerhard Liener. On July 25, Schrempp fired Liener from a lucrative Daimler consultancy contract, saying he had damaged the company.

A few days earlier, Schrempp himself had been involved in an embarrassing episode. He and two colleagues were picked up by Italian police near the Spanish Steps in Rome at 2 a.m. for an identity check. They were, according to a police report, in an "exuberant mood, carrying a bottle of wine." Germany's tabloids reported erroneously that Schrempp had been

arrested.

Answering the media barrage, Schrempp admits he was "in a good mood" in Rome. He also is publicly defending Reuter's strategy. Schrempp points out that both he and Liener attended board meetings where Reuter's diversifications were unanimously endorsed. Nonetheless, while gearing up for the CEO job, Schrempp had begun to distance himself from earlier policies. He talks of strengthening Daimler as an "integrated transportation company," rather than vaguely calling it an "integrated high-tech concern," as Reuter did.

Financial analysts hope Schrempp will soon move beyond such subtle distinctions and bring relief to shareholders. Under Reuter, Daimler's market value plunged from $30 billion to $25 billion (chart). Shareholders did even worse in relative terms. Wurzburg economics professor Ekkehard Wenger figures 100 marks invested in Daimler when Reuter arrived is worth barely 71 marks. An investment in the DAX index of 30 Frankfurt Bourse blue chips grew to 147 marks over the eight years, while Daimler's German rival BMW surpassed 151 marks in value.

The erosion continues. In the 12 months through mid-July, Daimler shares slid 5.7% in price and fell a huge 12.5% relative to the DAX. While Schrempp insists "the operating business is going very well," he knows he must hunker down for a long, difficult haul if he is to restore the market confidence in Daimler.

In the end, remaking Daimler is likely to involve a progressive hollowing-out of Germany's manufacturing base. That could lead to a major fight with militant German labor unions. If Schrempp is up to the task, it may be just the shock that Germany Inc. needs. Daimler shareholders won't be the only ones watching.

WHAT SCHREMPP MUST DO

-- Make decisive break with failed diversification strategy

-- Focus on core automotive and truck businesses, which provide most of the group's profits

-- Close the money-losing Daimler Benz Industrie unit with sell-offs and transfers of profitable operations to other divisions

-- Slim down DASA Daimler Benz Aerospace, reducing its workforce of 40,000 by up to 50%, and step up sourcing of parts from dollar and other weak-currency areas

-- Speed up globalization of manufacturing by locating big-ticket plant investments outside Germany

DATA: BUSINESS WEEKBy John Templeman in Bonn


China's Killer Profits
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus