Schrempp runs out of road

Jul 28th 2005
From The Economist Global Agenda

Jürgen Schrempp, who tried to create a global carmaker through the merger of Daimler-Benz and Chrysler in 1998, has announced he is quitting as the firm’s boss, amid shareholder anger at the giant firm’s continued poor performance. Vast losses in its American operations have been turned to profit but now Mercedes is in trouble, among other problems

JÜRGEN SCHREMPP, the chief executive of DaimlerChrysler, is a keen mountaineer. Like all good climbers he is well aware that when conditions deteriorate beyond a certain point, it is time to get off the mountain. On Thursday July 28th, he announced that he would step down as boss of the world’s fifth-largest carmaker at the end of the year, despite a contract that runs until 2008.

Mr Schrempp will be remembered, for good or ill, as the driving force behind the huge deal in 1998 that brought together Germany’s Daimler-Benz and Chrysler, the third of America’s big three carmakers. Vast costs were incurred in the struggle to turn Chrysler around but last year it returned to profit. However, another hazard for even seasoned mountaineers is the false summit. And, just as the worst has seemed over in Daimler’s American operations, problems have arisen at its German carmaking business, Mercedes.

He may have decided to quit while he was marginally ahead (DaimlerChrysler has just produced some respectable second-quarter results) or he may have succumbed to pressure from shareholders, who have become increasingly dismayed with his leadership of the firm. Certainly, the news of Mr Schrempp’s departure was greeted with a 10% jump in the company’s share price. Ulrich Hocker, the head of a shareholder activist group, welcomed his departure, saying: “Mr Schrempp’s dream of a world-spanning company, the Welt AG, was shattered long ago and shareholders have been paying the bill.” He has a point. Investors have seen the value of their holdings halve since the takeover of Chrysler.

Mr Schrempp’s plans to create a global car giant appeared to be based on impeccable business logic. Daimler-Benz’s Mercedes division was the world’s leading luxury carmaker; whereas Chrysler, though not Detroit’s leading carmaker, at the time enjoyed the biggest profit margins of the big three. Bring the two together and economies of scale, coupled with technology fed in from a tie-up with Japan’s Mitusbishi, would ensure success. But as with BMW’s ill-fated takeover of Britain’s Rover in 1994 and General Motors’ association with Italy’s Fiat, which collapsed earlier this year, the pursuit of global reach is fraught with difficulty.

Chrysler, which had teetered on the brink of bankruptcy in the mid-1990s, came with a reputation for not always firing on all cylinders. Not long after the merger it plunged into loss. America’s economy weakened, hitting car sales, while buyers turned their noses up at the firm’s new models. However, by 2004 the American arm of the firm was looking a lot healthier. Hefty cost cutting, an emphasis on quality control inspired by Mercedes and a range of desirable new models, such as the powerful, Teutonic-styled 300C, restored Chrysler to profit. It even won market share in its home market at a time when its two American rivals, GM and Ford, were losing out. Chrysler turned big losses in 2003 into an operating profit of $1.9 billion in 2004. And profits for the first half of 2005 are only a little down on the same period the year before. Not bad given that Chrysler was obliged to offer a hefty incentive scheme to match similar discounts from Ford and GM.

Smarting from Smart

Just as Mr Schrempp seemed to be on top of the problems at DaimlerChrysler’s American operations, troubles mounted back in Germany. A much-promised turnaround in the losses at Smart, a division making small “city” cars, has not materialised. Analysts reckon Smart has lost €2.6 billion ($3.1 billion at current rates) since production began. A restructuring plan announced by Mr Schrempp in April is set to cost 700 jobs and a further €1.2 billion.

Far more worrying are the problems besetting Mercedes, the group’s German luxury-car division. The marque was the best-selling luxury brand in America in 2000 but was shortly overtaken by Toyota’s Lexus and now languishes in fourth place. And in worldwide terms it has slipped to second behind BMW in the first two quarters of 2005.

Mercedes tried to reverse its decline in America by cramming ever more features into its cars at the expense of their reliability and quality—virtues for which its name had become a byword. As its reputation suffered so did sales. In 2003 Mr Schrempp assured investors that matters would be put right but in January this year Mercedes postponed delivery of some 30,000 cars because of faulty fuel pumps. And in March, 1.3m cars were recalled to correct problems with their brakes. Operating profits at Mercedes in the second quarter fell by 98% compared with the same quarter in 2004, to a mere €12m.

Mr Schrempp has trodden a difficult path at DaimlerChrysler between running a multinational company and placating a German workforce which is heavily represented, occupying half the seats on the supervisory board, in accordance with German law. Despite labour agreements forced through last year, which cut perks and lengthened working hours, Mr Schrempp was still regarded by some investors and analysts as too soft on the firm’s German workers.

DaimlerChrysler’s expansion plans in Japan also hit a barrier in 2004. A joint-venture with Mitsubishi was supposedly a vital part of Mr Schrempp’s global strategy. But last year DaimlerChrysler decided not to pump any new cash into the loss-making Japanese carmaker and may yet sell its 37% stake. Unlike Renault, which dispatched its best managers to pull Nissan into shape, DaimlerChrysler failed to get to grips with Mitsubishi.

Mr Schrempp’s drive to build a Welt AG has backfired. But until his decision to quit he had been reluctant to acknowledge the destruction of shareholder value he has overseen—or face its consequences. At the firm’s annual meeting in April there were strident but unsuccessful calls from shareholders for votes of no confidence in Mr Schrempp. Investors must now hope that Dieter Zetsche, Mr Schrempp’s successor, can spread the success he has had running Chrysler across the company as a whole.

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