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A Marriage Made in Hell

Daimler Ponders How to Divorce Chrysler

By Dietmar Hawranek

The issue is no longer whether DaimlerChrysler will spin off its ailing US subsidiary, but how. The Chrysler subsidiary's billions in losses pose a threat to the company's German core business -- and to CEO Dieter Zetsche.

DaimlerChrysler CEO Dieter Zetsche didn't get much sleep last Tuesday night. At 3 a.m. he and other senior managers received a call in their hotel rooms from one of the company's lawyers to inform them about news reports that the group was planning to separate itself from Chrysler. The lawyer wanted to know how to respond to the reports.

Only four hours later, at a board meeting at Chrysler headquarters in Auburn Hills, Michigan, Zetsche found himself facing tough questions from Chrysler's board members.

They wanted Zetsche to tell them what Chrysler's chances of surviving are, and how realistic the latest restructuring plan for the US subsidiary is. But the one question none of the board members asked was whether CEO Dieter Zetsche, who managed -- and supposedly cleaned up -- the Chrysler subsidiary from 2000 to 2005, should resign. After all, it was Zetsche's supposed successes at Chrysler that had once qualified him to succeed former CEO Jürgen Schrempp and assume the chairmanship of the entire company. Seen in this light, the basis for Zetsche's move up the corporate ladder at DaimlerChrysler suddenly looked a little shaky.

To stand a chance of survival, the ailing US subsidiary is being restructured once again, a move that means the loss of 13,000 jobs and the closure of a plant. And now that Zetsche has admitted that even these drastic measures will probably not be sufficient, the board is looking into the possibility of separating the two companies once again.

Chrysler's problems have been widely known since last October, when the company reported billions in losses and a board member was quoted by DER SPIEGEL as saying: "We would be completely thoughtless if we were not preparing an exit strategy." But the group denied any such plans at the time.

Last week Zetsche officially admitted that "all options are on the table," thereby eliminating any taboos about the issue. What is left of the American part of a global conglomerate patched together by Zetsche's predecessor is now officially up for grabs.

In truth, the company's board has long been preparing to divest itself of Chrysler. In secret talks, executives have already approached Renault-Nissan and PSA Peugeot Citroën to sound out if they were interested in Chrysler. The French lack a production base in the United States and could use a Chrysler plant with spare capacity to assemble their own cars. In return, Chrysler would be able to use Renault or Peugeot platforms to produce its own small cars.

But time is not on Zetsche's side, as Chrysler, with its billions in losses, becomes a threat to the entire group. DaimlerChrysler's profitable businesses -- its Mercedes-Benz cars and trucks, as well as its financial services businesses -- can no longer support the struggling US subsidiary.

The once financially sound Stuttgart-based company has been hemorrhaging money since 2000, when Chrysler experienced its first major crisis. DaimlerChrysler, which was still under Jürgen Schrempp's leadership at the time, began selling off its holdings in other companies. The official reason for the move was that DaimlerChrysler wanted to focus on its core business, but the real reason was that it urgently needed fresh capital.

The Stuttgart executives promptly spun off the wholly-owned subsidiary Adtranz, a railroad equipment manufacturer, and sold holdings in Debitel, Temic, T-Systems, MTU, Hyundai and the European aerospace company EADS. They also sold various real estate holdings, including the company's headquarters building in the Möhringen district of Stuttgart.

The sales and spin-offs have brought in more than €10 billion in the past seven years, but now DaimlerChrysler has hardly got anything left to sell. Its key challenge is to clean house in its core business -- and that may not include Chrysler for much longer. The only open question is how exactly the separation will take place. The involvement of a new partner such as Renault-Nissan is under consideration, as is spinning off the US subsidiary.

DaimlerChrysler could float Chrysler as an independent company on the stock market, but to do that the Stuttgart-based German parent would have to inject additional capital into the new company to make it at all viable.

According to analysts, the new company would need up to €10 billion in capital -- a costly end to the 1998 merger that former CEO Schrempp once called a "match made in heaven."

Schrempp and the then-Chrysler chairman, Robert Eaton, were an effective team. Schrempp made the decisions while Eaton played the diplomat. But the companies were a poor match. As car brands, Chrysler and Mercedes-Benz couldn't be more different.

The vehicles sporting the Mercedes star represent high technology and sell for premium prices. Chrysler's models, on the other hand, are considerably less prestigious and often can only be sold with rebates.

There were only two options to bring about a successful merger between these two disparate companies. One was for both companies to use cheap Chrysler parts, which would jeopardize the Mercedes-Benz image. The other was to install expensive Mercedes-Benz engines in US cars, which would have made Chryslers prohibitively expensive.

This fundamental contradiction has hurt the group from the beginning. It was a marriage between two companies that were probably incompatible to begin with, something even Zetsche couldn't change when he was sent to Auburn Hills in the fall of 2000 to restructure the US subsidiary.

He cut tens of thousands of jobs at Chrysler, sold plants and raised productivity. By 2005 Chrysler sold almost as many vehicles as it had sold in 2000, but with 38,000 fewer employees. The quality of its cars improved significantly and warranty costs declined.

These positive results of his work were clear when Zetsche was brought back to Stuttgart to serve as CEO of DaimlerChrysler. But what was not obvious at the time was the way Zetsche's much-praised strategy would affect Chrysler.

Many vehicles were not introduced onto the market until Zetsche had already returned to Stuttgart, when it became clear that he had misjudged the US market, just as his counterparts at GM and Ford had done. As head of Chrysler, Zetsche had continued to focus on family-sized minivans, SUVs and pickup trucks. The Chrysler, Dodge and Jeep brands were still achieving more than 70 percent of their sales with gas-guzzling models. But when a sharp rise in gasoline prices prompted US consumers to start thinking about gas consumption, the decision to focus on vehicles with low gas mileage proved to be disastrous.

Chrysler introduced ten new models last year, models it hoped would produce a sharp increase in sales. But it was the powerful gas-guzzlers that truly plunged the company into a crisis.

Zetsche also miscalculated when he failed to realize that hybrid technology could lead to reasonable gas mileage with Chrysler's large SUVs and pickups. DaimlerChrysler had the technology: "We were already testing a hybrid engine when the Japanese didn't even know how to spell it," Zetsche said. But then the group decided that hybrid engines would be too expensive. Toyota, the world's most profitable automobile manufacturer, decided to invest in the costly technology and is now the global leader in hybrid vehicles. Meanwhile Chrysler is now making the wrong kinds of cars.

Chrysler executives had hoped for more cooperation with Mercedes-Benz. They wanted to develop the next generation of Jeeps jointly with the Mercedes SUV, and had even leaked information about the idea to the newspaper Detroit News. But Zetsche snubbed his US colleagues when he announced his restructuring plan, in which he failed to mention any joint projects between Chrysler and Mercedes-Benz. And why should he, if he was already preparing for a separation?

If the DaimlerChrysler CEO performs the operation successfully, he won't have much to worry about when it comes to keeping his own job. If that happens, his miscalculations at Chrysler will be quickly forgotten.

The markets are already celebrating Zetsche as the man who could put an end to the US debacle. Indeed, DaimlerChrysler's stock price has risen by almost 20 percent since the first serious reports of the German parent company's possible separation from Chrysler began surfacing in the media last October.

But this development has also limited Zetsche's room for maneuver. Turning back is no longer an option. At this point anything but a separation from Chrysler would be a bitter disappointment.

Translated from the German by Christopher Sultan