Will Daimler Shed itself of Chrysler?

SPIEGAL | By Dietmar Hawranek | GERMANY - - Eigght years after being taken over by Daimler-Benz, Chrysler remains a company in need of restructuring. So much so, in fact, that executives at the German company are increasingly in favor of unloading the American subsidiary.

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When Daimler and Chrysler merged in 1998, then CEO Jürgen Schrempp praised it as a "match made in heaven."

Dieter Zetsche's stint as an advertising spokesman for Chrysler was a failure. Featured prominently in a Chrysler ad campaign, Zetsche, the CEO of DaimlerChrysler, was trying to convey a message. The ads, which were a blend of humor and irony, were meant to emphasize that Chrysler is not a purely American car company like General Motors or Ford. A Chrysler, according to Zetsche in his role as pitchman for the US automaker, also contains plenty of advanced German engineering, thanks to its relationship with sister company Mercedes Benz. The logic behind the ad campaign was that it would convince customers to pay a little more for a Chrysler instead of switching to a Ford or a GM just because the competition might be offering a few hundred dollars more in rebates.

But instead of selling more cars, Chrysler's sales have in fact gone down since the campaign was launched. The ads featuring Zetsche were discontinued. And at a board meeting last Wednesday, the DaimlerChrysler CEO faced questions over whether he may have failed in his efforts to reorganize Chrysler.

As head of the US subsidiary from 2000 to 2005, Zetsche shut down plants, cut jobs and had his engineers develop new models. He made Chrysler profitable, and his successes were part of the reason he was ultimately promoted to CEO of parent company DaimlerChysler.

But now the US brand has plunged deeply into the red once again, showing a loss of just under €1 billion for the first three quarters of 2006. DaimlerChysler's board of directors was caught completely off guard once again by this development. In a repeat of two previous crises at Chrysler, its German parent has now put together restructuring teams.

Exit strategies

The seven teams, which include managers from Chrysler and Mercedes-Benz, will be analyzing everything from models to plants to sales. Their task is to present proposals, which will then be discussed so that a restructuring plan can be presented next year, Chief Financial Officer Bodo Uebber told analysts in a teleconference. "Do I understand you correctly when you say the plan will not be presented until 2007?" a bank representative asked incredulously. "Next year," Uebber responded.

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Graphic: Downswing at Chrysler

It is a tragedy indeed. The DaimlerChrysler board is reacting to the crisis as if Chrysler had only been part of the group for the past few weeks, and as if the Germans were still largely unfamiliar with the new company. In reality, eight years have passed since the takeover, and yet Chrysler still poses a risk for the entire group. More and more senior executives are advocating that the company part ways with Chrysler. They cite BMW, which accepted billions in losses to unload its Rover subsidiary, as an example of how things could be done at DaimlerChrysler.

"It would be irresponsible of us not to prepare exit scenarios," says one member of the DaimlerChrysler board. And CFO Uebber triggered speculation when he told the analysts: "I am not ruling anything out." Nevertheless, the company's official position is that it has "no plans" to sell Chrysler. If a plan had already been completed, strict stock market rules would require that it be disclosed immediately.

Little left to reorganize

Another reason that the outlook for Chrysler is so bad is that former CEO Zetsche did such a good job that there is little left to restructure. Chrysler produced about the same number of cars in 2005 as it did in 2000, but with about 38,000 fewer employees. Its plants are now highly efficient, and the quality of its cars has risen. All these factors limit the possibilities for further cost reductions running into the billions.

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Despite reducing investments at Chrysler, Zetsche managed to introduce many new models into the marketplace. Last year Chrysler spent only 3.4 percent of its sales on R&D, a spending level analysts say is one of the lowest in the industry. Chrysler simply cannot reduce its investments even further.

But, more importantly, Chrysler is powerless to eliminate the causes of the current crisis in the foreseeable future. These causes include the company's disproportionately high dependence on the North American market, where it sells just under 90 percent of its cars, and Chrysler's sales of light commercial vehicles, which include SUVs, pickups and vans. These gas-guzzlers make up about 70 percent of Chrysler's model line, but Americans have been buying them less and less as gas prices have climbed.

DaimlerChrysler's attempt to produce an inexpensive entry-level Dodge in a joint venture with a Chinese automobile manufacturer seems almost desperate. The company plans to import an automobile made by Chinese carmaker Chery, a little-known brand outside of China, into the United States and sell it under the Dodge name. But it is doubtful whether Chinese quality will do much to boost Dodge's image, nor will Dodge score any glamour points by sticking its emblem onto a Chinese hood.

In a meeting of the DaimlerChrysler Supervisory Board, board member Mark Wösser asked ironically whether the group now sees itself as a car dealer rather than a car-maker.

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DaimlerChrysler CEO Dieter Zetsche: No long-term strategy in sight

But Chrysler will have difficulty developing fuel-efficient passenger cars without support from another automotive group. Former joint venture partner Mitsubishi will hardly be willing to supply Chrysler with platforms for the next passenger car models, and Mercedes-Benz technology is generally too expensive for the American subsidiary. As an alternative, Zetsche is now negotiating with Volkswagen, in hopes that the Wolfsburg-based company could supply the platforms for new Chrysler models.

These are all little more than secondary projects designed to help stem losses at Chrysler, and there are no signs that a broader strategy is emerging. And to this day, Chrysler remains an almost purely US brand, just as it was in 1998, when Zetsche's predecessor, Jürgen Schrempp, praised the merger as a "match made in heaven." Chrysler occupies only a marginal position in the European and Asian automobile markets, and even increasing its sales there could not offset its plunging North American sales. This makes the company a poorly predictable risk for DaimlerChrysler.

A highly susceptible business model

Chrysler's business model, like that of both General Motors and Ford, is especially susceptible to sudden declines. The three US manufacturers do not wait for customer orders before producing most of their cars. Instead, they assemble the vehicles, ship them to dealers and then try to sell them. Chrysler currently has 534,000 cars sitting on US dealers' lots. If it is forced to increase its rebate by $1,000 for each vehicle, the company will suddenly be faced with a half-billion-dollar decline in revenues.

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For this reason, DaimlerChrysler could be surprised, once again, by high losses at Chrysler at any time. Still, splitting from Chrysler won't be easy. In one scenario, the group would spin off Chrysler and create a separate, publicly traded company. Another manufacturer, possible the VW Group, could invest in Chrysler and have its own models assembled in the company's under-utilized US plants. This would help VW reduce its dependency on the US dollar exchange rate.

But as long as Chrysler is still showing billions in losses, the company will be hard-pressed to attract the interest of any other automaker. This means that DaimlerChrysler must first make its US subsidiary profitable again before it can even consider selling off even part of the company.

If that happened, shareholders would be grateful to CEO Zetsche. The combined estimated value of Mercedes-Benz, the truck division, the financial services division and the group's holding in the European Aeronautic Defense and Space company (EADS) is currently about €54 billion. But the group's stock is worth only €44 billion. In other words, Chrysler is dragging down the group's value to the tune of €10 billion.

Few at DaimlerChrysler headquarters in Stuttgart believe that Zetsche would shy away from getting rid of Chrysler. If Chrysler has to be spun off, Zetsche will be the one to do it.

The perfect images for that corporate divorce have already been produced. In one TV ad, Zetsche drives a Dodge into a wall and the airbags open as required. Zetsche gets out of the car, clearly uninjured, and says: "Auf Wiedersehen."

Translated from the German by Christopher Sultan