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What's ahead for Mercedes?

From detnews| April 09,2007

Without Chrysler, some say DCX's luxury unit may not be big enough to compete globally.

 If DaimlerChrysler AG sells Chrysler, the German company will look much as it did 20 years ago when it was a small, proud, provincial luxury automaker with a heavy-truck business.

Most DaimlerChrysler investors are jubilant at the prospect of turning the clock back to a time when the company was smaller but more profitable.

For years, German executives have grumbled that the grand expansion strategies of the company's past two chief executives have taken a heavy toll on Mercedes-Benz, DaimlerChrysler's most valuable subsidiary.

Former CEO Juergen Schrempp built a global automotive giant by surrounding Mercedes with mass-market brands such as Chrysler, Dodge, Mitsubishi and Kia. His predecessor, Edzard Reuter, paired Mercedes with aerospace and electrical appliances businesses that lost huge sums of money.

DaimlerChrysler has closed or sold nearly all those businesses, and its stock has surged 30 percent to an eight-year high since CEO Dieter Zetsche signaled in February that a sale of Chrysler was possible.

Yet amid the euphoria, a few voices question whether dismantling the 1998 merger of the former Daimler-Benz and Chrysler is such good news for the German side of the company.

"We are not in favor of a sale of Chrysler," Mark Warnsman, a New York-based analyst for Prudential Equity Group, wrote in a report this week.

Without Chrysler, the rest of the company may not be large enough to compete with huge and efficient global automakers such as Toyota Motor Corp. "Even at the luxury end of the business, scale matters," he said. "In our view, the original merger strategy remains sound, and it is the execution that has lagged."

Mercedes sold 1.25 million vehicles last year, barely more than half of Chrysler's volume and far fewer than the 4 million-unit threshold many industry experts consider the minimum needed to cover the rising costs of environmental and other technologies.

Mercedes' heavy-truck business is the world's largest, but fewer than 600,000 are sold annually. And Mercedes has been far less successful with its Smart small car than rival BMW with its fast-growing Mini brand.

Just as DaimlerChrysler is scaling down, Stuttgart's other carmaker, Porsche, has become a major player by acquiring a controlling stake in Volkswagen AG, Europe's largest carmaker.

"Porsche has installed itself in the driving seat of an automotive empire that includes sports and volume brands, light and heavy commercial vehicles with direct links with leading European truck makers," said European analyst Thomas Ryard at consulting firm Global Insight.

By now, however, most DaimlerChrysler investors don't want to find ways to make the tie-up with Chrysler work. "People want just one option -- the sale of Chrysler," said Frankfurt-based analyst Juergen Pieper of Metzler Bank.

Is company too German?

In the mid-1990s, Daimler-Benz concluded it needed a partner to fend off takeover threats and to expand into new, faster-growing markets.

That logic is still valid, says Gerald Meyers, former chairman of American Motors Corp. who now teaches at the University of Michigan. "It's what we teach in business school -- get a footprint that covers the three main regions of the world," he said. "Schrempp had a great strategic idea, but the culture didn't accept it."

A former Mercedes manager said the resistance in the luxury carmaker's ranks developed when Mercedes was integrated into the Daimler-Benz holding company in the late 1990s and lost its autonomy.

"From that time, people who had no idea how to produce cars were drafting budgets, setting cost targets and prices for parts," he said. Mercedes managers partly blame the steep deterioration in vehicle quality in subsequent years to mismanagement by Daimler-Benz.

While Most German investors and auto experts believe Mercedes will be better off without Chrysler, some express a sense of failure. At the German Institute for Economic Research in Berlin, forecasting chief Alfred Steinherr said Daimler may not have been up to the task of managing a global auto company. "Whenever they've tried to extend to other areas and products that don't have anything in common with the ones they usually produce, it's a flop," Steinherr said.

He questions whether Daimler is simply "too German" to be a truly global company and wonders how DaimlerChrysler might have evolved if the company had taken up Schrempp's idea to move its headquarters to New York.

Going back to roots

Zetsche moved DaimlerChrysler headquarters back across town to Untertürkheim, where Mercedes is based, from a modern complex in Möhringen, in a transfer that held huge significance for Mercedes' workers, engineers and managers. After two difficult years and a painful restructuring, Mercedes earned $3.2 billion last year on sales of $72 billion.

"We've also made big strides in quality," Zetsche told shareholders. The number of errors per vehicle is down by a fourth; warranty costs are down dramatically.

Mercedes managers say the culture has changed profoundly since the late 1980s, when "we were a little arrogant," one said. "We understand that the competitive environment has changed."

BMW has overtaken Mercedes in worldwide sales, and Toyota's Lexus is the No. 1 luxury brand in the United States, the world's most lucrative car market. VW's Audi is rapidly closing the gap with BMW and Mercedes, and General Motors Corp. has revitalized Cadillac.

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