Special Report

logo2006 Year in Review

Product is to an auto maker’s success what location is to the real estate industry.

Unfortunately, for the second year in a row, product took a back seat to management as the top story at DaimlerChrysler AG.

And like most compelling stories, it was fueled by elements of greed and ambition as Chrysler Group, hoping against hope, allowed its inventory to skyrocket despite warning signs of a softening market.

Chrysler launched a company-record 10 new products during 2006. They included the Chrysler Sebring midsize sedan and a wildly popular redesigned Jeep Wrangler lineup that featured the 4-door Wrangler Unlimited with optional modular roof.

But the auto maker’s desperate approach to production – described as “over-optimistic” by DaimlerChrysler Chairman Dieter Zetsche – led to Chrysler’s full-year loss of $1.4 billion.

Meanwhile, on the strength of key product introductions such as the redesigned Mercedes E-Class sedan and the R-Class cross/utility vehicle – which brought incremental sales that boosted the brand’s U.S. light-truck totals by nearly 68% – the Mercedes Car Group was $1.3 billion ($1.7 billion) in the black.

Overall, DC posted a full-year operating profit of €5.5 billion ($7.2 billion), up 6.6% from 2005.

And in a move that heralded the prospect of future success, DC opened a plant in Beijing where it planned to build E-Class, C-Class and Chrysler 300C sedans in cooperation with Beijing Automotive Industry Holding Company (BAIC).

Exhibiting the confidence that comes with renewal, Zetsche took the reins of leadership from Juergen Schrempp on Jan. 1 and promptly put his own stamp on the auto maker’s organization chart. Barely three weeks into his tenure, Zetsche introduced a new management model that consolidated and integrated the auto maker’s administrative operations, eliminating the need for separate operations to support various functions such as finance and human resources.

It also afforded more direct reporting channels and eliminated 6,000 jobs in Germany.

Zetsche followed this up two months later by splintering the Commercial Vehicles Division into the Truck Group, composed of the dominant truck business unit and another dubbed “Van, Bus and Other.”

Similarly, product development responsibility was consolidated with the Mercedes Car Group to form “Group Research and Mercedes Car Group Development,” from which all units within DC would derive benefits.

“We are convinced that the New Management Model will help us to become better and faster at transforming DaimlerChrysler’s potential into compelling products,” Zetsche said.

In addition, corporate headquarters were shifted to Stuttgart-Unterturkheim from Stuttgart-Mohringen.

The auto maker expected the restructuring effort, in its entirety, would reduce its expenses by €1.5 billion ($2 billion) annually.

Showing still more prudence in March, DC announced that its Smart minicar brand would discontinue production of the 4-passenger Forfour. Instead, Smart would focus its efforts on developing the market for its next-generation 2-passenger Fortwo, due out in 2007.

The move – part of a €1 billion ($1.25 billion) restructuring initiative aimed at jump-starting the brand – marked a significant turning point in its 8-year money-losing history. A distribution deal also was struck with Roger Penske’s UnitedAuto Group Inc. that would realize, in 2008, the long-awaited U.S. arrival of Smart.

However, in contrast to the European and Canadian markets, where Smart achieved moderate and huge success, respectively, diesel-powered Smarts would not be immediately available in the U.S.

Meanwhile, at the Paris auto show, Smart unveiled plans to market a test fleet of 200 electric cars.

“We have deliberately decided not just to pursue a single technology,” said Smart President Ulrich Walker. “Smart is working on developments in many directions – from hybrid and micro-hybrid drives to gas or electric drives.”

And while Smart expanded west, Chrysler’s volume brand – Dodge – moved east with an aggressive foray into the European market. Dodge sold nearly 18,000 units of its Caliber C-car, which accounted for nearly 9% of Chrysler’s total sales outside North America.

Only the Jeep Grand Cherokee and Chrysler’s minivans, with 39,208 and 35,716, respectively, recorded more sales.

The Caliber didn’t fare too badly within the North American market, either. Chrysler sold more than 92,000 units of its Neon replacement model.

And with launches of its Jeep platform-mates, the Compass in May and Patriot in December, production at the auto maker’s assembly plant in Belvidere, IL, saw its schedule grow to three shifts from one, while its payroll swelled to more than 3,600 from 1,500.

These vehicles also generated buzz as the first to benefit from the auto maker’s new 4-cyl. World Engine, developed in conjunction with Hyundai Motor Co. and Mitsubishi Motors Corp. In addition, the Compass and Patriot were the first Jeeps based on a front-wheel-drive platform, although top trim levels were available all-wheel-drive systems.

And thanks to modifications such as a heavy-duty cooling system and high-mounted rear-differential vent, Patriot could be had with the brand’s rugged Trail-Rated badge.

As Chrysler ramped up production at Belvidere, it maintained steady assembly at its plants in Warren, MI, and Newark, DE – home to the Dodge Ram pickup and fullsize Durango SUV. Occasionally, the auto maker even scheduled overtime shifts.

The same was true at its Jefferson Avenue plant in Detroit, site of Jeep Grand Cherokee and Commander production.

Meanwhile, gasoline prices were on the rise. The national average price-per-gallon of regular-grade gas inched toward $3.

By June, Chrysler was flinching as it launched marketing campaigns that stressed fuel-saving technologies such as its multi-displacement system, which turned its trademark Hemi V-8 into a fuel-stingy 4-cyl. mill during optimum conditions – such as highway cruising.

But its fleet of C-cars and their genuine 4-cyl. engines were not in showrooms, and customers turned away in search of fuel economy.

Chrysler responded with a renewed marketing push, touting its technology by casting Zetsche as “Dr. Z.” – a fatherly, German answer-man – in TV commercials and Internet ads.

“The use of Dieter Zetsche personifies there is a little bit of Dr. Z in every DaimlerChrysler vehicle,” said Joe Eberhardt, Chrysler Group executive vice president-global sales, marketing and service.

Instead, Eberhardt became a lightning rod for dealers’ ire as the auto maker continued to keep its plants busy, cramming showrooms with inventory – so much that it spilled over into the countryside.

Airport terminals and shopping mall lots became repositories for a stash of vehicles kept secret by Chrysler until uncovered by Ward’s in October. This so-called “sales bank” consisted of unsold vehicles that were being held in anticipation of dealer orders.

At its peak, the total reached 100,000 units.

This bleak situation contributed to a sudden third-quarter production cut of 90,000 vehicles and a 135,000-unit reduction for the entire second half of the year. A contrite Zetsche vowed greater vigilance over Chrysler’s operations, but CEO Tom LaSorda seemed to override his boss.

“I’m responsible for what’s going on at the Chrysler Group,” LaSorda said. “I take full responsibility.”

Fallout from the miscue led DC CFO Bodo Uebber to say this when asked by a journalist whether Chrysler might be sold: “We don’t exclude anything here. We will do our analysis. Second, we will talk about measures. And third, we will draw our conclusions.”

Frantic to squelch the resulting uproar, DC issued this statement in response to “speculation” about a potential sale of Chrysler: “DaimlerChrysler reaffirms its previous statements made to the media that there are no plans to sell Chrysler Group. During today’s third-quarter earnings analyst/media conference call, the company appropriately chose not to add to the speculation regarding this topic. However, the resulting coverage and comments made it clear that this ‘not-for-sale’ statement needed to be reaffirmed.”

Through December, there was no more buzz about the topic. But there were still anxious moments.

Because of Durango sales were lagging and gas prices loomed over its Chrysler platform-mate, the Aspen, speculation swirled about the future of Chrysler’s Newark plant. And Eberhardt was ousted, with LaSorda assuming personal responsibility for dealer relations.

The CEO embarked on a frenetic cross-country blitz to repair relationships, all the while promising Chrysler’s shadow inventory would fade away. And by late December, it had dwindled to fewer than 10,000 vehicles.

Against this backdrop, Mercedes again provided the bright spots for DC by looking forward, and back.

In acknowledgement of its past, DC cut the ribbon on the Mercedes-Benz Museum, located beside the auto maker’s parent plant in Stuttgart-Unterturkheim, in the shadow of the site where Gottlieb Daimler and Wilhelm Maybach developed their high-speed gasoline engine –birthplace of the world’s auto industry.

At opening, the museum featured more than 1,450 exhibits, which included 150 vehicles.

And the tri-star brand also looked ahead in 2006 with the unveiling of its Bluetec aftertreatment technology for diesel engines. Launched in the fall, the ’07 Mercedes-Benz E320 Bluetec featured a 210-hp, 3.0L V-6 direct-injection turbodiesel engine that reduced carbon dioxide (CO2) emissions by combining exhaust gas recirculation with components such as an oxidizing catalytic converter and a particulate filter.

Chrysler benefited from Mercedes’ diesel advancements by announcing it would launch a diesel-powered Grand Cherokee in 2007 that featured the E320’s base engine, without the Bluetec aftertreament.

But in the one-step-forward-two-steps-back manner that seemed to dog Chrysler all year, the auto maker also pulled the plug on another diesel offering – its first – the Liberty CRD. It featured a 2.8L I-4 from Italy-based VM Motori SpA in Italy.

Chrysler also stopped production of its 500-hp Dodge Ram SRT-10, the world’s fastest production pickup and decided against building production versions of two highly regarded concept vehicles: the Chrysler Firepower supercar and Jeep Gladiator pickup.