Panic in Detroit

DaimlerChrysler's Jim Holden pays the price for Stuttgart's jitters You know you're having a bad day when the best part is being grilled by journalists about why your stock is tanking, why you continue to lose money in a hot market, and news reports that your boss deliberately lied to the whole company.

Yet that's how James P. Holden, 49, describes his interview with Ward's AutoWorld editors on a sunny Nov. 1 afternoon. It turns out to be his last media interview as president and CEO of DaimlerChrysler Corp. "This has been the high point of my day," he says, seriously. "The rest of it was cost-cutting budget meetings."

He tells us that it feels good to explain that one bad quarter doesn't a bad year, or company, make. He notes the issue of quality never came up in our discussion, when a few years ago, "every paragraph started with `quality beleaguered' unless it started with `financially beleaguered' and ended with `quality beleaguered.'"

Today's problems are, by comparison, easy to fix, Mr. Holden says. "I need to occasionally give myself that pep talk because you can get focused on all the stuff that isn't right. But the truth is, we have more going for us than we do going against us."

With that, he smiles, shakes hands, and runs to another cost-cutting meeting.

Eleven days later, on Sunday Nov. 12, he boards a transatlantic flight at 6 a.m. to Stuttgart, Germany, to present his three-year business plan to his colleagues at DaimlerChrysler AG. Instead he is fired by Chairman Juergen Schrempp.

On Monday the news reverberates back across the ocean. It is made official at a supervisory board meeting Nov. 17, the two-year anniversary of the "merger of equals" between Chrylser Corp. and Daimler-Benz AG.

Dieter Zetsche, head of Daimler-Chrysler's Commercial Vehicle unit, is the new head of DaimlerChrysler Corp., the carmaker's North American division. After two years and three presidents, a Daimler-Benz man is in the corner office.

And that means panic in Detroit: At DaimlerChrysler headquarters where they fear staff cuts and unpaid furloughs, at DC's Technical Center where lights reportedly are being turned off to save money, and at the plants, where they're worried about new investments being postponed and entire car plants being shut down.

At U.S. headquarters in Auburn Hills, MI, employees are still smarting from Mr. Schrempp's public admission that it was his plan, all along, to take over the former Chrysler Corp. and reduce it to a business unit. The famous "merger of equals" moniker was a deliberate deception, he says flatly. "If I had gone and said Chrysler would be a division, everybody on their side would have said there is no way we'll do a deal. But it's precisely what I wanted to do," Mr. Schrempp says in an interview with the Financial Times.

During our Nov. 1 interview, Mr. Holden is reluctant to react. Mr. Schrempp is still his boss. Plus, he knows he's on shaky ground in Germany after a $512 million loss in third-quarter earnings, outrage over the need to idle seven plants for a week to adjust inventory, and a growing sense that he's not cutting and fixing fast enough.

But Mr. Holden couldn't hide the demoralizing effect Mr. Schrempp's merger comments have had on DC's 128,000 employees in North America.

"Nobody here is happy with that article or that comment," he said, choosing his words carefully. "The reaction is poor. Nobody wanted to read that here, and the reaction has not been great inside this building. Beyond that, my message to my folks was: Get over it, and get to work because we have plenty of problems of our own device, and we need to go fix the stuff that is controllable, and that's what we're going to do."

He still spoke like a man in charge. Like someone who has had 15 promotions in 20 years at the company. "Either you're running the show, or you're not. And we are," Mr. Holden stressed. "There's not an adversarial relationship (with Germany) that's been set up as a result of Chrysler having a problem, therefore we're the bad kid on the block. That's not the way it's being handled."

"I know I have Mr. Schrempp's support and the board's support.

"If you walk the hallways and find someone speaking German or with a German accent, you just found a visitor ... Not because we're trying to keep them out. That's just the way we're running the place," Mr. Holden said.

What's more, he added that he was not concerned he was one of only three Americans on the Board of Management. Counting noses is not important on a functional consensus board. "The acknowledged head of the Chrysler unit on the board is me, and whether we had five people on the board or one person on the board, at the end of the day, I'm the Chrysler guy on the board."

Mr. Holden said he welcomed the attitude of "Your problem, you fix it," within the context of the parent company's safety net. "The attitude is also that it's our problem as a company, and let's not hide from the fact that some of it is market-imposed and some of it is management-imposed."

"Now let's get at the piece that's management-imposed," said Mr. Holden, unwittingly writing the script for his own pink slip.

In the end, it appears Mr. Schrempp's patience ran out. A bad quarter and fears of more to come may have been coupled with a lack of understanding of a North American market where record demand and sales co-exist with incentives.

The panic in Detroit is fed by analysts who criticize DC for ambitious plans to replace 80% of its lineup by 2004, yet in the next breath denounce it for its aging fleet. Add to that falling sales, market share and profit margins in saturated segments (minivan, sport/utility vehicle) the feisty carmaker used to dominate.

The fear-mongering is further fueled by restructuring teams looking to excise $3 billion - or $1,000 a vehicle - through any means possible.

White collar employees worry that Stuttgart finally will declare many functions in Auburn Hills redundant, especially when it is spending $5 million to renovate several floors of the Chrysler Building in New York for board meetings. Newly dimmed lights at DC's giant Technical Center (also in Auburn Hills) is taken as a sign by many employees that the corporation is desperate to save money. There is talk of unpaid leaves in December, entire departments being wiped out and executive cuts to make room for Mr. Zetsche's new management team.

On the plant floor, workers churn out rumors faster than product, knowing the restructuring "teams" are looking to consolidate components and plants. Under Mr. Holden's cost-cutting plan - presumed to be less draconian than what Mr. Zetsche's team will develop - the product planning budget for the next five years has shrunk to about $35 billion from $49 billion. Mr Holden tells us that the $49 billion figure is unrealistic for a company with $70 billion in revenue. There also is talk DC is considering shutting down Chrysler passenger cars altogether, reducing it to a light-truck division.

Workers at the Pillette Road van/wagon plant in Windsor, Ont. (Mr. Holden's birthplace), are convinced their plant will be closed or reduced to a single shift until the fall of 2001 when they start making the next-generation Ram fullsize pickup. Even then, they fear job loss with the decision to drop a fullsize SUV from the platform.

Incentives on the new '01 minivan, almost immediately after launch, have workers at the neighboring plant in Windsor fearing the loss of their third shift in the new year.

There are signs of panic at the highest levels at DC headquarters in Stuttgart, too.

Mr. Schrempp is said to be feeling the strain of Wall Street and of his Asian expansion gone awry. New "partner" Mitsubishi Motors Corp. reported a record net loss of $702.5 million for the six months ending Sept. 30 and has doubled its projected year-end loss to $1.3 billion. DC already had used the clout of its 34% stake in Mitsubishi to ensure the ouster of President Katsuhiko Kawasoe on the heels of a vehicle-defect coverup scandal. Daimler executive Rolf Ekrodt takes over as Mitsubishi Motors' chief operating officer in January, and DC has the option of outright control in three years.

Perhaps it shouldn't have come as a surprise that the reaction to a 92% drop in Chrysler Group profits is to remove the man in charge and put a trusted Daimler man in place.

Justified or not, Mr. Holden takes the fall, the last of a "dream team" that once made Chrysler one of the most innovative and profitable automakers in the world.

It's not that Mr. Holden was naive. He rose to the presidency in October 1999 at the expense of Thomas T. Stallkamp, who was forced out after less than a year on the job. He knew there were sharks in the pool and they were circling. He sent a Halloween memo to his council warning that his credibility with the board was on the line and that the Chrysler Group could not afford any missteps.

What must have made him feel blindsided, though, is that he clearly felt like he was getting his arms around the problem. After accruing $2.4 billion in operating profit in the first six months, DCC lost $512 million in the third quarter. Some of it was attributable to costly mistakes in leasing and incentive programs.

"We know what went wrong in the third quarter," he said. But he anticipated recovery in the fourth, ending the fiscal year on par with 1999. "We've only lost $511 million in the third quarter. We're sure not going to lose $1.5 billion in the fourth. We had a bad quarter. I don't know why everybody's digging the hole.

"We are putting a lot of energy into the fourth quarter because there are a lot of things in that quarter that look like the third quarter: launch expense, incentives."

He had a plan to smooth the curves. He was working on a cost structure for a world where the consumer won't pay more for a new model, and that means a return to the lean practices of old. "We were, in our not-too-distant past, the low-cost producer, so it's not like we don't know the formula.

"We're not as lean as we could or should be, and we're certainly not as lean as the new world is going to require," said Mr. Holden. "I think we'll be in a market next year that won't be any more willing than the market was this year to reward us, or anyone else. Even if you don't end up with an economy that appears to be collapsing, it's going to be a tough year."

Mr. Zetsche will have to contend with these same factors. The minivan and sedan/coupe/convertible launches are behind him, but Jeep and Dodge Ram pickup launches are coming.

On the bright side, Mr. Holden believed the Chrysler Group still has quality and products people love. "The piece that's left is the tough market and a higher cost base than we'd like."

If the Chrysler Group can regain cost leadership, "that's a hell of a lot easier job than the one we faced in 1990, 1991, 1992 which was: `Fix your designs, fix your quality, fix your financials, fix your loyalty rights, fix your dealers.' The list of things we have to fix this time is relatively smaller."

Despite the troubles, Mr. Holden and Mr. Schrempp publicly dismissed persistent rumors the Chrysler Group is being prepped to be spun off.

"That would be the ultimate in stupidity," Mr. Schrempp said in one published report.

"It makes no sense," says Mr. Holden. As a unit of DaimlerChrysler, the Chrysler Group has access to large cash reserves and a capital plan to help it weather the tough business climate. Spun off, it depletes its cash flow trying to fund a product plan in tough times with a lower credit rating. The cost of capital goes up, borrowing costs go up, incentives go up, and the company is forced to dial down its capital plan. Analysts take notice of a company mortgaging its future, and the credit rating goes down another notch. The undervalued company is now ripe for hostile takeover.

In Mr. Holden's mind, it still points to the wisdom of the merger and its ability to blunt regional cyclicality with a strong cash balance, global portfolio and overall profitability.

"Chrysler, within DaimlerChrysler, is less exposed in a competitive and incentive-laden North American market," Mr. Holden summed up. "That was one of the primary rationales for us getting into this. I don't know what our stock value would be if we were independent at the moment, as Chrysler, but I can tell you that we wouldn't be happy with that stock value. Not that we're happy with the DCX value, but this points to our rationale for the merger, as far as I'm concerned, and that all the histrionics around it don't do any good."

As for an evaluation of his own performance: "The first half of my tenure was better than the second," he said.

They were the poster boys of the merger: James P. Holden from Chrysler Corp. and Dieter Zetsche from Daimler-Benz AG.

During the honeymoon stage, they were sales and marketing counterparts. Always side-by-side and smiling, they embodied synergy and integration and appeared to genuinely enjoy being colleagues.

A year into the merger and still in their 40s, the duo became the youngest executives on a restructured management board. Mr. Holden, Canadian-born, was promoted to president of DaimlerChrysler Corp. and Mr. Zetsche, Turkish-born, was promoted to head the commercial vehicle division.

The talk was they were being groomed for the chairmanship, apprentices to co-chairmen Juergen Schrempp and Robert J. Eaton.

While Mr. Holden came up the sales side of the business, Mr. Zetsche's career path began as a research engineer for Daimler-Benz in 1976 and then dipped into heavy trucks - in 1991 he moved to the U.S. as president of Freightliner Corp. He has had postings in Brazil and Argentina before returning to Germany to oversee passenger car development.

Since his ascension to the management board, Mr. Zetsche has been responsible for Asian and South American operations, as well as commercial vehicles. Moves bearing his stamp include the purchase of Canada's Western Star Truck Holdings Inc. and Detroit Diesel Corp., as well as expansion in Asia that included a 34% stake in Mitsubishi Motors Corp. and 10% share in Hyundai Motor Co. Ltd.

In many respects, his career path mirrors that of Mr. Schrempp.

Recognizable by his handle-bar mustache, the 47-year-old is notable for being good at what he does, a troubleshooter, but not a workaholic or consumed by his career.

The immediate reaction by those who know Mr. Zetsche is that he is the unanimous first choice if Mr. Holden's successor has to be an outsider.

Time will tell if his personality and abilities can win over a division brimming with mistrust of anyone from the Mercedes side of the equation.

It won't be easy if he must oversee the radical cost-cutting and product overhaul that Mr. Holden failed to achieve. And he will be judged on how many members of his team he brings in with him.

He also faces a hard sell with the United Auto Workers union, which feels he had a role in thwarting organizing efforts at Freightliner and Sterling Truck.