Strategy Stalls: Daimler Struggles to Regain Its Spark

By Dietmar Hawranek

A look at Daimler's bottom line for 2011 gives the impression of a thriving company. But it recently lowered its 2012 earning forecast and is trailing BMW, its main German competitor, in almost all categories. Can the CEO's plan to put the company back in pole position really work?

Can CEO Dieter Zetsche make Daimler Germany's top luxury carmaker again? Zoom
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Can CEO Dieter Zetsche make Daimler Germany's top luxury carmaker again?

Dieter Zetsche's performance has been so dismal that there can be hardly any doubt that he will be replaced as CEO of Daimler.

Or at least that's one way a story about the head of the Stuttgart-based luxury carmaker could begin.

But there's also another possible version: Zetsche is in the process of steering Mercedes-Benz back to its leading position among Germany's premium car brands. There can be little doubt that his contract, set to expire at the end of 2013, will be extended.

There are arguments in favor of both viewpoints.

Zetsche, who holds a doctorate in engineering, has been working for Daimler for 36 years. He first headed the engineering and sales departments at Mercedes-Benz, then he took the helm of the company's truck business, and then he was tasked with rehabilitating Chrysler. Since January 2006, he has been the CEO of Daimler.

His performance record will be high on the agenda when the supervisory board meets next February to decide on the 59-year-old executive's future at the company. But the main underlying issue is the course taken by the former leading German car manufacturer and the question of why Mercedes-Benz is trailing BMW and Audi, its fellow German luxury carmakers.

Falling Behind BMW

Last Thursday, Zetsche admitted that Mercedes-Benz's profits would not reach the level attained in 2011, as had been claimed in previous announcements. Instead, profits will fall. By contrast, BMW has confirmed that its company's earnings will rise once again.

This marks the latest in a long series of setbacks for Mercedes-Benz. After Zetsche assumed leadership of the company in 2006, he proclaimed the following goals: "As many people as possible should dream of driving a Mercedes-Benz. I want investors to be well advised when they put their money in Daimler shares. And I hope that the media will write about us with respect and recognition."

It may be true that many people dream of a Mercedes -- but even more are buying BMWs. Ever since Zetsche took charge in Stuttgart, BMW has extended its lead. In 2006, the Munich-based competitor sold 115,000 more cars than Mercedes, and last year this figure rose to 287,000. BMW is also more profitable. Return on sales last year was 11.8 percent, whereas Mercedes-Benz only achieved 9 percent.

The differing development of the two competitors is reflected in their stock prices. Anyone who invested money in Daimler shares back in early 2006 has by now lost roughly 10 percent of their investment, while an investment in BMW shares over the same period has returned a profit of 59 percent.

No matter what measurement of success is used, BMW is in the lead.

Inherited Problems

When all of this is pointed out to Zetsche, he remains amazingly relaxed. The man with the signature walrus mustache receives visitors in his office, which is housed in the former Mercedes Museum in Untertürkheim. Partitions have been used to divide a large room into individual offices. The high-rise building where company executives used to have their offices is now a candidate for the wrecking ball, and no new building is planned. The Daimler boss has no problem with that, saying he cares little for status symbols.

One has to "analyze without emotion" why BMW is in the lead in many areas, Zetsche says. First, he mentions the wider range of models. Mercedes has until now only had two body styles in the compact car category (A-Class and B-Class). BMW also offers a coupé, a convertible and the X1 SUV -- with annual sales of over 120,000 units for the X1 alone. Mercedes still hasn't come up with anything to match this.

Second, he adds, this has to do with quality, design and innovation, which Zetsche says are "the core parameters for a carmaker's competitiveness." When Zetsche took the helm at Mercedes-Benz, he says the quality was lousy, the design was troubling and there were no alternative drive systems.

One might also add that Mercedes has allowed itself to develop weaknesses in the world's largest growth market, China, where it maintains two sales organizations that are more or less working against each other. And the brand has invested hundreds of millions of euros in Formula One racing over the past few years, but is still trailing behind.

Bad Investments

When searching for how things could reach this point, the company's history provides an answer. From 1987 to 1995, Edzard Reuter wanted to create an integrated technology group that, in addition to cars, manufactured locomotives, aircraft and spacecraft. His successor, Jürgen Schrempp, abandoned this structure to pursue a global automotive corporation with Chrysler, Mitsubishi and Hyundai. At the end of Schrempp's tenure in office, Daimler had to sell its stake in its Japanese and Korean partners. The current boss, Zetsche, subsequently also sold Chrysler and has taken the company back to where it started: as a manufacturer of cars and trucks with the famous Mercedes star logo.

For more than two decades now, Daimler has been taking frequent and abrupt turns. The laws of physics dictate that a car tends to skid during such maneuvers. But when an automotive company plows head-on into a crisis, it has more to do with the laws of economics.

In few other industries is business success so dependent on long-term strategy. It takes three years to engineer and develop a new car model. It then has to be sold for at least six years to make good on the initial investment of roughly €1 billion ($1.3 billion). With constantly changing decisions, a company can sink billions into a project, as was the case with the Smart. When the small two-seater was launched on the market in 1998, it was hip and modern. Young people bought it, but so did bankers who used it to commute to work. A brand that only has one model, though, can hardly be profitable. As a result, Daimler and Mitsubishi, its partner at the time, commissioned the development of four-door and SUV models.

Smart had piled up billions in losses by then, so Schrempp put a halt to both models. Smart has continued to offer only the two-seater -- and is still making losses.

Zetsche has made a new go at it. Working together with Renault, he has had a successor model developed for the Smart, along with a new four-door model. An electric Smart will be going on the market, as well.

The Key Difference

While Daimler was losing time and money with these moves, BMW was consistently expanding its Mini brand of small cars. Now it is selling nearly three times as many cars as the Smart -- and at a profit.

Based on this example, one might conclude that BMW's Norbert Reithofer is a better CEO. But things are not so simple. The conditions the two automotive CEOs work under differ decisively in one key aspect: the ownership structure.

For decades, the principle owner of BMW has been the Quandt family, which gives management sufficient time to pursue a long-term strategy. Daimler, on the other hand, has no dominating major shareholder and is under constant pressure from investors to maximize profits and increase share prices as quickly as possible.

"We have to fight a stronger headwind from the stock market," says Zetsche. He has often bowed to this pressure. When criticism from analysts and investors grew louder because Daimler shares were doing so poorly, the company bought back a large number of its own shares. In 2007 and 2008, Daimler acquired stock worth €7.6 billion. The idea was to boost the market price, but share prices have continued to drift listlessly. "For that money," says a Daimler executive, "we could have developed several new models."

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