Putting a New Spin on DaimlerChrysler Corp.

What will a profitable DaimlerChrysler Corp. look like two years from now? Will it still be an integral part of DaimlerChrysler AG? Will its products retain styling edge and regain segment domination?

Will the historic merger be deemed successful?

The architects of the megadeal and their successors insist the economic reasons that prompted the merger continue to hold true.

But talk of spinning off all, or part, of the Chrysler Group refuses to go away. And every move to prune costs makes it a more attractive takeover target, so much so that DC retained Deutsche Bank (a 12% shareholder) and investment firm J.P. Morgan & Co. to develop a strategy to drive share prices up from a four-year low and watchguard against hostile takeover attempts.

“It seems to me that there is a rising possibility that we could see DaimlerChrysler ridding itself of Chrysler,” says analyst Saul Rubin of UBS Warburg of New York. “There is that chance.”

It still is considered unlikely. But every new initiative under the restructuring plan to return DaimlerChrysler Corp. to profitability sparks more, instead of less, talk of unloading the financial albatross.

“Four months ago (October) the idea was crazy, and today it is possible, not only in theory, but in practice,” says Mr. Rubin.

“It won't happen while (DC Chairman Juergen) Schrempp is in control. It's his baby, the landmark of his career. He would be admitting failure, and it would be Juergen Schrempp's failure, says Mr. Rubin.

“But his shareholders are getting restless,” he says. “Twelve months from now, if the share price is not higher, he will be under pressure to step out, and if Mr. Schrempp goes, his replacement will likely get rid of Chrysler if it was the source of Mr. Schrempp's downfall.”

If DCC were to be dismantled, there are several possibilities, says Mr. Rubin. The most reasonable would be to sell the Chrysler Group as a whole. A venture capital company could try to turn it around, or former management might step back in, the likes of Bob Lutz, Lee Iacocca or shareholder Kirk Kerkorian. This scenario could play out if DC management felt the turnaround had become unmanageable or was taking too long.

The other option is to split up the Chrysler Group. “You could sell Jeep and make some money and give the remainder away,” says Mr. Rubin.

Former DCC President James P. Holden denounced the idea of spinning off Chrysler Corp., or parts of it, as financially flawed. He tells WAW, in his last interview before he was fired in November 2000, that the group would be even more vulnerable without a rich parent to draw from.

His successor, DCC President Dieter Zetsche, says, “It allows us, in difficult times, to concentrate on restructuring because we don't have to go bank to bank to bank to find a credit line.”

The company line is that the merger remains sound in principal, and that the Chrysler Group will return to profitability under the restructuring plan that cuts production and material costs by 15% each.

The cuts will be coupled with savings realized through synergies with Mercedes-Benz as well as Mitsubishi Motors Corp., disposal of assets such as the North American parts operation, and cancellation of projects such as renovating the Chrysler Building in New York. The company has set specific goals to meet over the next three years and expects to break even by mid-2002.

Details of the restructuring of partner Mitsubishi had not been formally announced at press time. They were being released Feb. 26 as part of DaimlerChrysler AG's year-end financial results. The report was expected to show the Chrysler Group posting a fourth-quarter loss as high as $1.4 billion and a charge against earnings of about $2.74 billion for the first quarter of 2001.

The 2000 financial year ended with an 11% drop in net profit to $9.1 billion. That figure falls to $4.8 billion — a 49% drop — when you exclude one-time gains. Net sales rose 37% to $7.4 billion.

DCC has unveiled its turnaround plan in stages, starting with the demand that suppliers cut their costs by 15% over two years, with the first 5% effective Jan. 1. It is not yielding the savings envisioned. Some large suppliers are balking and have refused to ship parts. Some have successfully negotiated more favorable terms.

The other main component is the downsizing of manufacturing capacity and the workforce over three years. One in five jobs will cease to exist, 26,000 in total. Gone are 6,800 salaried jobs, of which 1,800 are on contract and 2,000 are eligible for incentives. Early retirement packages went out Feb. 6, with three weeks to decide before layoff notices are issued. Retirees had a separation date of Feb. 28; layoffs take effect March 31. Those who remain will have their 2000 bonuses deferred to 2002. The bonuses will double if turnaround targets are met. By contrast, German workers received an increase in their 2000 profit-sharing checks.

Annual pay increases for salaried workers will be delayed from April until July, and executives were required, in the fourth quarter of 2000, to turn in corporate-leased vehicles for new ones.

A 15% reduction in manufacturing capacity equates to a loss of 19,000 hourly workers. Six plants will close over the next two years with a seventh, the Pillette Road large van/wagon plant in Windsor, Ont., slated to close in 2003 unless a new product is found. Five plants eliminate a shift and two will slow line speeds. Component, stamping and powertrain facilities will be downsized as needed.

“It allows us, in difficult times, to concentrate on restructuring because we don't have to go bank to bank to bank to find a credit line.”
— Dieter Zetsche

Even with many eligible to retire early, those with less than five years' seniority are likely to be let go.

The plan is to have achieved 75% of the reduction by year end.

The markets did not react positively to the Jan. 29 announcement, with share prices ending that week at $45.99, down $1.46. Wall Street grumbled the cuts weren't deep enough for a quick turnaround.

“More needs to be done,” says Mr. Rubin, criticizing the plan for not tackling the carmaker's high engineering and capital costs or the fact its products don't dominate their segments the way they used to.

Wolfgang Bernhard, DCC's chief operating officer, says, “We are doing more than we originally anticipated.”

Mr. Zetsche insists the plan marks “our turning point” while protecting future product by only cutting 10% of its engineering staff.

But the company already is planning to delay by six months the launch of a crossover utility vehicle (CUV) codenamed CS. The ’03 model was to be built alongside minivans in Windsor in mid 2002. Space had been cleared at the Windsor plant and preliminary work was done during a December shutdown.

Indications are the project will proceed when the company can afford it. Analyst Joseph Phillippi of PaineWebber Inc. of New York, describes the delay as a “huge mistake” given the popularity of CUVs such as Lexus RX300, Acura MDX and BMW X5.

The future of DCC's engine joint venture with BMW in Brazil also is under review.

For many, it is still shocking and inconceivable that a company with strong products in a hot market could founder to the point where such dramatic steps would be necessary.

In hindsight, say observers, executives in Auburn Hills made some costly errors. Experimentation with incentives cost sales and required greater incentives to make up lost ground.

The launch of the new minivan turned a crowning achievement into a fiasco. The company launched with 25,000 vehicles in 25 days, a benchmark. But it meant dealers were swamped with new minivans before they had a chance to clear out the old ones they had stockpiled to be safe.

Critics say Stuttgart shoulders some of the blame. It can be argued that if it wanted to share — or assume — control of the Chrysler Group, it should have paid attention to the growing problems before they reached critical mass. The perception was that Mr. Schrempp was too busy with his Asian partners.

The one culprit both sides agree on is the U.S. economy. It turned sour just as DCC was wrapping up a new product and capital shopping spree that was to be paid for out of volume sales at higher sticker prices.

The high-paid executives didn't see it coming until it was too late. Some feel they bought into the growing belief that the peaks and valleys that traditionally marked the industry had been replaced by longer and gentler hills. In the absence of evidence to the contrary, it was easy to believe the industry had changed forever and any landings would be soft.

DCC landed hard, but Mr. Zetsche says the harsh restructuring decisions are a “one-time action” and a “step for upward development for years to come.”

About 26,000 awaiting recall will hold him to that.