In 2005, Europe’s auto industry featured more drama than a tawdry soap opera.

Against a backdrop of intense competition, crippling exchange rates and milestone labor agreements, an eclectic cast of familiar faces and rising stars hogged the spotlight. And when the reviews were in, the headlines were more appropriate for Hollywood tabloids than the business pages.

In Stuttgart and Wolfsburg, in particular, stories about ambition, ego, greed and lust were front and center.

Arguably, the lead character in this tragi-comedy was DaimlerChrysler AG Management Board Chairman Juergen Schrempp, who announced in July that he was stepping down. Known for his headstrong leadership style, he was reviled as much as he was revered.

News of Schrempp’s pending exit boosted the auto maker’s stock 10%. And in a cruel twist of fate, the price hike almost immediately triggered a pair of insider-trading probes.

One, launched by local authorities in Stuttgart, was dropped without prejudice before year’s end. The other, led by the German Federal Financial Supervisory Authority, was ongoing.

During his 10-year run atop Germany’s biggest company, Schrempp demonstrated “exceptional business leadership,” said Supervisory Board Chairman Hilmar Kopper.

“He is an outstanding example of ability to implement changes, dedication to duty and responsibility to customers, employees and shareholders,” Kopper added.

But Schrempp had a tenuous relationship with many of those shareholders, stemming from his integral role in structuring the 1998 deal that united Detroit’s struggling Chrysler Corp. with venerable Daimler-Benz AG. While creating a company with dynamic potential, critics in Germany had claimed it devalued their holdings by an estimated €34 billion ($40 billion).

Schrempp also had his detractors in the U.S. where uber-investor Kirk Kerkorian claimed the “merger of equals” didn’t pan out the way the German executive promised. Schrempp was accused of misrepresenting the deal that spawned DC, and Kerkorian put a $1 billion pricetag on the alleged deception.

An April U.S. court decision exonerated Schrempp. But Kerkorian appealed.

One-time supporting player Dieter Zetsche was named to replace Schrempp, effective Jan. 1, 2006. This left Schrempp’s longtime understudy and ally, Eckhard Cordes, waiting in the wings.

Top DC Management Shuffled

Cordes, then chief of DC’s Mercedes-Benz division, staged a quick exit.

A team player with little patience for boardroom politics, Zetsche assumed the Mercedes job immediately. And critics swooned.

“He seems intent on forcing through the principles he developed at Chrysler – of doing more with less,” Merrill Lynch analyst Stephen Reitman wrote in a research note. “Shareholders should be the beneficiaries.”

But Zetsche, regarded as a hero for reversing the fortunes of DC’s Chrysler Group, took on the villainous task of reducing the headcount at problem-plagued Mercedes. Zetsche, who orchestrated a similar strategy as Chrysler CEO, approved a plan to chop 8,500 positions.

Meanwhile, half a country away in the Wolfsburg headquarters of Volkswagen AG, former Chrysler Group product guru Wolfgang Bernhard – jilted by Schrempp the previous year in favor of Cordes – emerged as CEO of the auto maker’s core VW brand.

The ascension of Bernhard, whose matinee idol exterior belied his shrewd business acumen, came a year earlier than planned. And none too soon.

Not only was the auto maker in dire need of restructuring, a scandal was lurking. Peter Hartz and Klaus Volkert, respective leaders of VW’s personnel department and its works council, resigned after allegations of bribery, fraud and prostitution were raised.

An investigation revealed VW executives had solicited bribes, funneled money to fake firms and used company funds to arrange trysts with prostitutes.

But Bernhard showed his mettle, shifting the spotlight back onto the business.

“If we cannot survive here at Volkswagen, then industrial Europe is going to die,” he warned in his first meeting with auto analysts.

Bernhard followed this admonition by negotiating a groundbreaking agreement with the powerful German workers’ union, IG Metall. The deal restructured the pay scales of Wolfsburg workers, enabling VW to build its planned Golf-based Marrakesh CUV for €850 ($1,000) less than the plant’s going wage rate.

Without the agreement, production likely would have been shifted from Wolfsburg to a lower-cost site in Portugal. In the end, Bernhard and the union helped secure 1,000 jobs in VW’s backyard.

Similar deals were struck at VW’s plant in Emden, Germany and in Martorell, Spain, home to a plant builing three models for Volkswagen AG’s SEAT brand.

Discord in VW Management

While IG Metall may have taken a step backward at the bargaining table in 2005, it gained ground in VW’s boardroom in the person of Horst Neumann. An IG Metall official from 1978 to 1994, he was named VW’s new personnel director – reportedly at the behest of Ferdinand Piech, chairman of the auto maker’s supervisory board and former CEO.

News stories said this rankled Bernhard and hard-bitten Volkswagen AG CEO Bernd Pischetsrieder, but the executives denied any rift between them and Piech, who continued to wield extraordinary influence over the company.

Piech, the grandson of Ferdinand Porsche, designer of the original VW Beetle, also was part owner and a supervisory board member of Porsche Holding, distributor of VW and Porsche cars in Eastern Europe.

When rumors swirled that VW was ripe for a takeover, Piech rode to the rescue by engineering a 20% voting stake purchase by Porsche AG. For VW, the move virtually guaranteed protection from a takeover by outside investors.

Still, there were plenty of headlines left for auto makers outside of Germany.

Ford of Europe bid an unexpectedly early farewell to its top executive, Mark Fields, who also led the auto maker’s London-based Premier Automotive Group. Fields was parachuted in to manage Ford’s beleaguered North American operations.

Fields’ fellow Ford Europe alum Martin Leach, who bolted to Italy’s Fiat Auto SpA where he was tapped to lead Maserati, also left his new job. Indeed, Fiat pulled off the most memorable deal of the year under the guidance of Fiat SpA CEO Sergio Marchionne, who went on to replace former Magna Steyr executive Herbert Demel as Fiat Auto SpA’s CEO.

Fiat Auto and General Motors Corp. had an agreement that called for the latter to purchase a 90% stake in Fiat Auto. Neither side stood to gain much if the deal went through, nor could they retreat.

Both auto makers were struggling – Fiat with Italy’s sagging economy and an influx of competition from Asia; GM with the mounting cost of employee and retiree benefits.

But if Fiat held GM to its end of the bargain, it threatened to spell the end of an Italian institution. Similarly, the last thing GM needed was to assume responsibility for a money-losing organization.

In the end, Marchionne held his ground and walked away with $2 billion from GM’s coffers. His brinkmanship “solved a major problem,” said Fiat Chairman Luca Di Montezemolo.

Marchionne’s star rose significantly, evidenced by his election as president of the European Automotive Manufacturers Assn. (ACEA), succeeding Pischetsrieder.

As Marchionne, Bernhard and Zetsche enjoyed top billing among Europe’s most celebrated auto industry executives, one veteran performer seemed to fade into the background.

Turnaround Strategy at Renault

Carlos Ghosn, who led a resurgence at Japan-based Nissan Motor Co. Ltd., assumed the top job at Renault SA in May. Six months later, the famed French brand saw its stock tumble nearly 8%.

Ghosn promised to unveil a 3-year turnaround strategy in first-quarter, 2006. And as happened with Zetsche at DC, critics applauded.

While expecting an “elegant” solution, investor faith would be “seriously tested,” warned a research note by Morgan Stanley. But the bank’s analysts suggested one thing was certain: the dynamic Ghosn was the right man for the job.

“When the going gets tough, the tough get Ghosn,” the report said.

But not even the politics of business, dramatic as they were in 2005, could push the products out of the limelight. Mercedes made waves with the debut of its ninth-generation S-Class, a technological tour de force with features ranging from an advanced night vision system to 14-way adjustable, heated and cooled seats that massaged driver and front passenger.

Meanwhile, Zetsche endorsed grand plans for two quintessential American brands within the DC stable. Chrysler Group’s Dodge marque would export the new Caliber small car to Europe, while Jeep dropped hints about a pair of entry-level vehicles – Compass and Patriot – powered by 4-cyl. engines.

And Zetsche strongly suggested that the future of flagging Micro Compact Car Smart GmbH would be revisited in mid-2006.

The year also saw VW and Fiat roll out long-awaited redesigns of their respective high-volume vehicles. Volkswagen’s Jetta and Passat had immediate impact, boosting the brand’s sales significantly.

The Fiat brand enjoyed a similar bounce, thanks to the debut of its new Punto.

PSA Peugeot Citroen’s Citroen marque made its strategy clear with the unveiling of the C6, an upscale executive sedan entry that was scheduled to go on sale in 2006. Its sister brand, Peugeot, also challenged the luxury market with the 407 sports coupe, a car the auto maker hoped would win hearts based on its dramatic styling and powerful stance.

“Coupe buyers have no loyalty to the marque, or even to the coupe,” explained Frederic Saint-Geours, general manager of the Peugeot brand. “It’s a question of love at first sight. They want the coupe, or they want something else.”

But the 2005 Frankfurt auto show might well be remembered as a landmark event in the history of Europe’s auto industry. Gasoline-electric hybrid powertrains were the talk of the town, despite the European market’s lasting love affair with fuel-efficient diesel engines.

Governments stoked the fire. Germany’s environment minister called on auto makers to reduce the C02 emissions of their vehicles while France hiked its tax incentive for hybrid vehicle buyers.

Volkswagen’s Audi brand used the show to announce it had teamed with Porsche to develop a hybrid powertrain for their respective CUVs, the Q7 and Cayenne.

But Honda Motor Europe Ltd., arguably, made the biggest splash by choosing Frankfurt to unveil its new Civic Hybrid. Like a seasoned actor using pause for effect, Honda’s unspoken message spoke loudest.

Asian auto makers made significant inroads in Europe in 2005. South Korea’s Hyundai and Kia brands saw their share of the market increase 3.3% compared with 2002 – and that was just half-way through the year.

“Our friends from the East have taught us a number of things,” Marchionne told Ward's. “I think we need to be respectful of the direction they’re taking. And I think it’s incumbent on all of us to catch up.”

Solemnly, he added: “We need to compete.”

In Eastern Europe, however, Asian auto makers appeared ready to stage a long-term engagement. Countries such as Poland and Romania used their low-wage structures to attract investment.

Hyundai was readying plans to build an assembly plant in the Czech Republic with production expected to begin by 2008. And Kia had a spade in the ground in Slovakia.

Not surprisingly, suppliers were close on their heels.

“From a wage and benefit standpoint, it’s a lot more competitive on a global basis,” said Mark Hogan, president of Magna International Inc. “So it’s logical that the OEMs migrate there. We follow them.”

Magna already had plants in Romania and Poland where it produced components such as stampings, body trim and suspension systems. One of the world’s largest and most diversified automotive suppliers, Magna was expected to announce construction of a second plant in Slovakia.

Although later evidence showed the gap had closed slightly, labor costs in Eastern Europe were 75% cheaper than Western Europe, according to a comprehensive study by global consulting firm, Mercer Human Resources.

“The enlargement of the European Union in May 2004 and the introduction of the euro as a common currency in a large part of Western Europe have significantly increased the momentum towards a more integrated European economy,” according to the Mercer survey. “These factors, in conjunction with growing economic globalization and increasing international competitiveness, have led to an increased focus on employment costs across the member states.”

Ironically, low wages also portended a troublesome bottleneck for Eastern Europe, which needed logistics talent to foster manufacturing growth.

“Attracting logistics talent from the West will also be a challenge for the former Eastern Bloc nations,” said a study highlighted by consulting agency, GlobalAutoIndustry.com. “Wages are as much as 10 times lower, so some companies establishing Eastern European logistics operations are sending in Western talent to develop and train a local workforce. The labor cost advantage will gradually disappear as living standards improve in the East, but it should remain an advantage for about the next 10 years.”

Fields was wary of such optimism. He saw it in Japan when he led Mazda Motor Corp.

“It’s been like the speeches I used to hear in Japan every year I was there, which was: ‘Six months from now, things will start getting better,’” he told Ward's before he assumed his post in North America. “And it was like a rolling speech every six months. That’s the same speech I’ve heard in Germany.”

German politics were front and center in a sideshow that threatened significant impact. Industry insiders predicted labor reform would come more quickly in the wake of conservative Angela Merkel’s narrow election victory over Gerhard Schroeder.

German laws severely restricted employee termination practices, fostering a climate that ballooned workforces and compromised productivity, critics charged.

The most logical solution was to play both sides against the middle, suggested GM CEO Rick Wagoner.

“What we’ve learned here, over the years, is clearly you have to really run full capacity utilization to have a chance to get any kind of profitability,” Wagoner told Ward's. “And that’s what we’re driving to do. Over time, we’ll see the importance of having a balanced capacity footprint between the traditional markets and maybe some of the newer, lower-cost markets in the East.”

He tempered any overt optimism for growth in the European market by the reality that its population would soon be dominated by young buyers who have, inherently, less buying power.

“Basically, the growth rate is less than the decay rate, to put it in morbid terms,” Wagoner said.

The CIA World Factbook estimated the European birthrate was 10 per population of 1,000. But its death rate was 10.1 per 1,000.

“You just don’t have the vibrancy,” Wagoner said. “Over time, the market growth is going to be slowed because of that.”

Other regulations affected the industry in 2005, most notably Europe’s pedestrian safety measure that required auto makers to build in safety features such as additional crush zones to mitigate the forces of a collision.

Jaguar’s XK sports coupe, also unveiled in Frankfurt, showed a slightly bulbous bonnet that designer Ian Callum said was necessary to meet with regulatory approval.

But every good drama needs some comic relief, which again was easy to find in Germany.

Several German lawmakers called on the government to ban motorists from smoking while driving. They claimed smoking caused a distraction that could prove dangerous.

Rainer Hillgaertner, spokesman for Germany’s ADAC motoring club, dismissed the notion, saying: “Eating chocolate bars, bananas or fish sandwiches while driving is also dangerous.”

emayne@wardsauto.com