• English Site
• >Business
• >

  A Sea Change at Mercedes: Daimler Fights for its Future

A Sea Change at Mercedes Daimler Fights for its Future

By Dietmar Hawranek

Part 3: Daimler's Middle-Term Problem

Mikulic talks about engines as if they were people. Engines have their own characters, in his view. A Mercedes-Benz engine, he says, is characterized by its supremacy and its inconspicuousness. For decades, it took as many cylinders as possible and a large cylinder capacity to achieve these characteristics. But now smaller, significantly more fuel-efficient motors are capable of doing the same thing.

"This doesn't mean that we have to develop smaller cars," says Mikulic, who notes that reduced emissions and greater fuel efficiency are also possible with big cars, and that Mercedes is often a leader in these developments. In 2006, for example, Mercedes was the first car company to introduce a fuel-efficient gasoline direct injection system.

Mercedes-Benz as a pioneer in fuel efficiency? That would be something new. But why does BMW currently offer fuel-saving technology in all of its model series, while Mercedes-Benz offers it in only one model?

Mikulic doesn't answer. People in the industry know why. Three years ago, BMW decided to use its progressive fuel-saving technology in all of its vehicles. But Daimler executives did not believe in the importance of fuel efficiency at the time. Mercedes engineers even developed a start-stop technology ahead of the Munich-based competition, but executives decided not to use it, arguing that it wouldn't be worthwhile, because customers would refuse to pay a premium for the technology.

Three Faces in Two Decades

It is now becoming clear that the managers who ran the Daimler Group for almost two decades found their fulfillment in concocting grand visions. From 1987 to 1995, the then Daimler CEO Edzard Reuter tried to establish an integrated technology group that would produce not only automobiles, but also locomotives, aircraft and space probes. His successor, Schrempp, dismantled this entity and, from 1995 to 2005, built his global company, with the acquisitions of Chrysler, Mitsubishi and Hyundai.

Meanwhile, competitors like BMW, Audi and Toyota focused on their core business. For Schrempp, the automobile was a vehicle designed to produce profits, profits and more profits. There is no evidence that Schrempp was interested in the character of an engine.

Mikulic, the engineer, is a reserved person and would never discuss this. But he does smile to himself when asked whether he is held in higher esteem in the company now that Zetsche is in charge. He also mentions that he and Zetsche test-drove a new hybrid car only a few days ago.

An engine, the OM 651, is set up in front of Mikulic's office. The sculpture-like machine is the pride of the company's engine developers: a four-cylinder diesel engine with the torque of an eight-cylinder gasoline engine. It consumes less than five liters of fuel (76 mpg in fuel efficiency) in the C Class.

This high-tech engine apparently symbolizes what Mercedes developers call "green luxury." For them, it represents environmental sustainability without the need to dispense with luxury. The OM 651 symbolizes a sea change.

Banking on Greener Technologies

CEO Zetsche is banking on fuel-efficient engines, battery operation and fuel cells. Reducing emissions is not a fad, says Zetsche. "Whoever sets the tone here may not be at the head of the pack economically in 2009 and 2010, but will be viable in 2015 and beyond -- while others will not."

The question is: How can Daimler survive in the interim period, while it invests billions in alternative engines that will not produce any profits initially?

One of Zetsche's answers to the problem is that the company will have to cut costs even further. This will spark growing conflicts between the executive board and the works council. For instance, the board is sticking to its plan to build a new plant in Hungary, but works council chairman Klemm wants to see this decision reexamined. Why build a new factory, he wonders, when existing plants are not even operating at full capacity?

Zetsche's counterargument is that the company's plant in Rastatt, in southwestern Germany, can only survive if there is another plant in a low-wage country like Hungary. Only mixed calculation, says Zetsche, will make it possible to continue building the A and B Class in Germany.

Based on this logic, it would make the most sense economically to eventually produce compact cars exclusively in Hungary, and Mercedes would be forced to close a plant in Germany.

No, no, Zetsche says defensively. The company has invested billions in Rastatt. Closing the plant makes no sense, for economic reasons. "We aren't nomads, who can set up their tents here one day and someplace else the next."

Nevertheless, the company will employ fewer and fewer people in its German plants. Productivity is going up while car sales are going down. Even if sales increase again to pre-crisis levels in three years, it will not be enough to secure jobs. This is Zetsche's dilemma.

The Rejected Suitor

There is another area where the Daimler CEO is making no progress. Zetsche and BMW CEO Norbert Reithofer have met many times to examine the possibility of close cooperation. The two companies are a natural fit for each other. But BMW has more or less rebuffed Zetsche, agreeing only to an arrangement in which it would join forces with Mercedes-Benz to purchase parts.

BMW feels strong enough to survive the crisis on its own. This could be a fallacy, however, because BMW faces essentially the same problems as Daimler. Meanwhile, Zetsche finds himself in the unfortunate position of the rejected suitor -- not exactly the sort of role the head of Daimler wants to be in. He isn't complaining, though, but instead is talking to other manufacturers about joint ventures and possible stakes in those companies. Many options seem possible. Zetsche cannot yet paint the big picture showing what the company will look like in a few years. Daimler plans to survive this major crisis, and the only question is: In what form?

The Daimler CEO doesn't see this uncertainty as a flaw. The company, says Zetsche, has "allowed itself to be guided by dreams for too long, while neglecting the hard work." But success, he adds, is based on "one percent inspiration and 99 percent perspiration."

Perhaps the company headquarters next door will be renovated after all, when things begin to turn around. To make sure that the building doesn't seem too gloomy until then, the company is keeping one engine running, so that the Mercedes-Benz star on the roof will keep on rotating.