Misfiring

Face value

Apr 7th 2005
From The Economist print edition

Jürgen Schrempp and Rick Wagoner are struggling to solve the car industry's thorniest problems

THIS has been a big week—perhaps a decisive one—in the careers of two erstwhile golden boys of the car industry as they grapple with mounting problems at the firms they run. In Berlin, the famously ebullient, super-energetic chief executive of DaimlerChrysler, Jürgen Schrempp (pictured above left), seemed unusually crumpled and flat as a succession of small shareholders—and some big ones, too—laid into him at the firm's annual general meeting in Berlin on April 6th. Since Mr Schrempp won plaudits for his audacious takeover of Chrysler seven years ago, they have seen the value of their shares halve. Meanwhile, in Detroit, Rick Wagoner (pictured above right), the boss of General Motors, saw his firm's debt downgraded to a mere notch above junk by Moody's, a rating agency. With typical self-confidence, he presided over a shake-up of the giant carmaker's top management that left him personally in charge of the firm's North American division—which the former basketball player previously ran with great success en route to the top.

The glory days are long gone for both men, though the source of their difficulties has changed significantly of late. Until recently, each man's main problem was abroad. Mr Schrempp struggled with the American acquisition that he had hoped would cement his reputation as a business superstar. Mr Wagoner's difficulties were primarily in Europe, both within GM's own malfunctioning operations and in an unwise marriage proposal to Italy's troubled Fiat car firm. Today, these particular problems have largely been solved. The Chrysler operation in Detroit is now recovering. In the past year a new head of GM Europe, Frederick “Fritz” Henderson, has got to grips with overcapacity and under-performance at Adam Opel, Vauxhall Motors and Saab, GM's European units. Instead, both bosses now face arguably more worrying problems in their respective backyards.

Mr Schrempp is under fire on two main fronts. The shareholders who gathered this week in Berlin are alarmed by the seemingly unstaunchable red ink at Smart, a division that makes little city runabout cars. Analysts say that losses there have amounted to €2.6 billion ($3.4 billion) since the Smart car was first produced in 1998. A restructuring plan announced last week will cost 700 jobs and a further €1.2 billion. But shareholders are even more unhappy about DaimlerChrysler's Mercedes division in Germany, where quality-control problems are causing one in four of some Mercedes models to be recalled in order to have defective electronics fixed. In January, Mercedes, once a byword for quality and reliability, had to postpone the delivery of 30,000 cars because of faulty diesel pumps. In March, an electronic fault in braking systems prompted the recall of 1.3m cars. Other faults have been found in the luxury cars' navigation systems, including those in Mr Schrempp's own limo. The cost of these refits is expected to be several hundred million euros.

In Detroit, meanwhile, GM has lost the plot. In the mid-1990s, when Mr Wagoner first ran the group's North American operations, GM's market share there exceeded 30%. Now it is 26.7%. Japanese brands such as Toyota, Nissan and Honda continue to advance as GM (and Ford, but no longer Chrysler) retreats. The firm has given warning that, instead of the small profit it had previously forecast, it expects to make a significant first-quarter loss in its home market.

Mr Schrempp has been cautious about blaming anyone (least of all himself) for his firm's recent woes. But he has put in charge of sorting out the mess a lieutenant who is certainly capable of success. Eckhard Cordes, Mercedes's second new boss in as many years and spoken of as a likely successor to Mr Schrempp, has already launched a “quality offensive” on car production. He has also introduced a cost-cutting and revenue-enhancing programme, CORE, to double the return on sales to 7% by 2007.

Mr Schrempp used to revel in the nickname of “Neutron Jürgen”, which he earned after he slashed 16,000 jobs in Daimler's ailing aerospace business in the early 1990s. Now his tune is quite different—more corporate social responsibility than downsizing. Last year, when Wolfgang Bernhard called Mercedes (which he was about to run) a “restructuring case”, Mr Schrempp had him fired, unhappy with talk of “blood on the floor”.

The spoke in Wagoner's wheel

Unlike Mr Schrempp, Mr Wagoner does not have to deal with workers in the boardroom. But his biggest headache, nevertheless, is dealing with labour. He may need to get in touch with his inner “Neutron Rick”. GM's problem is no longer just shopfloor resistance to the flexibility and productivity standards needed to compete with the Japanese. The cost of health care for workers and the growing population of GM pensioners weigh like millstones around the company's neck. This week Gary Cowger, the skilful negotiator displaced as president of GM North America in Mr Wagoner's shake-up, was put in charge of sorting out these costs, nearly $6 billion this year.

GM's North American problem, however, goes deeper than labour costs. Although its luxury Cadillac division has achieved a remarkable turnaround, brands such as Buick and Chevrolet are still taking a battering. GM has already had to kill off its Oldsmobile brand, which it judged to be not worth reviving. If, with Mr Wagoner in charge again, the slide in market share cannot be stopped, another brand may have to go.

The reputation of the two bosses hangs in the balance. But such is the clubbiness of German corporate governance that, whatever happens to Mr Schrempp's firm, and however loudly small shareholders protest, he can expect to see out his term to his scheduled retirement in three years. If he is lucky, his reputation may recover by then. Given America's more ruthless version of capitalism, however, Mr Wagoner probably needs to deliver results fast if he is to remain behind the wheel at GM.

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