On the Hot Seat at Daimler Chrysler
02-27-06, 04:38 PM
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On the Hot Seat at Daimler Chrysler
Autos
By Gail Edmondson
Can new CEO Deiter Zetsche restore the iconic carmaker's sales and quality? Investors are hopeful, but it will be a hard road back
No one understands the stakes better than DaimlerChrysler's (DCX) new Chief Executive Officer Dieter Zetsche: This year, Mercedes Benz must come roaring back. The venerable luxury brand, traditionally Daimler's profit engine, has veered dangerously off-track over the past three years as costs edged up, quality on key models slipped and tarnished the Mercedes brand, and European sales of luxury rivals BMW and Audi (AUDI) passed those of the sputtering giant.
The bill for management neglect at Mercedes finally came due in 2005 as restructuring charges plunged the German luxury automaker ignobly into the red: Mercedes Car Group, which includes the ill-fated mini car Smart, posted an operating lost of $606 million on revenues of $60 billion.
How fast can Zetsche put Mercedes back on track? Since taking over at Mercedes Car Group on Sept. 1, the 51-year-old engineer has moved quickly to start trimming the production workforce and administrative fat, calling for some 14,500 voluntary job cuts over the next three years. He's also vowed to put the Mercedes brand back at the top of the quality charts and restore operating margins to a healthy 7% by 2007. "Our earnings are not where we want them to be," says Zetsche. "We need to get to work."
SLIM MARGINS. DaimlerChrysler as a whole is doing better. The auto maker earned a net profit of $3.4 billion in 2005, up 15% over 2004, buoyed by the commercial vehicle division, Chrysler, and financial services. Revenues were up 5%, to $180 billion.
But analysts fret that Chrysler' margins, now at 2.8%, are weakening. Morgan Stanley forecasts they will shrink to 1.8% in 2006, and the truck division could be headed for a market downturn in 2007. "Going forward, DaimlerChrysler's fortunes will be driven by Mercedes Benz," says Michael Raab, auto analyst at Sal. Oppenheim Bank in Frankfurt.
Investors, anticipating a turnaround after an agonizing five years of management blunders, already have bid up DaimlerChrysler's shares some 19% since the announcement last July that Zetsche would take over as CEO on Jan. 1. Now, Zetsche has to live up to those expectations.
SALES FLOP. Pressure is mounting from institutional investors to dump the Smart mini unit, which lost an estimated $720 million in 2006. Zetsche vows to reduce the losses in 2006 and bring Smart to breakeven by 2007, but skeptics abound. Says Raab: "I believe Smart will not reach breakeven until 2009, and it will never earn good margins."
Smart is bleeding in part because of a commitment Daimler has made to production partners and suppliers to keep Smart's factories churning out around 200,000 cars through 2010. Losses ballooned as Smart's sales failed year after year to meet production expectations. In 2005, Mercedes sold just 131,000 Smart cars, including a new four-seater, which proved unpopular.
Paying off suppliers to ditch the production commitment for Smart could cost Zetsche $4 billion. But keeping it afloat hurts too: Each Smart sold cost Mercedes $4,800. In January, 2006, Smart's sales plunged 20%, casting a black cloud over Zetsche's recovery plan. "I continue to believe Zetsche will find a different solution, even if he has to give Smart away and throw money at a new owner," says Raab. "Everyone would applaud the move."
THAT SMARTS. Auto industry experts believe only an emerging-market player such as a Chinese or Korean auto maker might be interested in acquiring the brand for its toehold in the Western European market and perky, city-car styling. Goldman Sachs (GS) reportedly approached Italian motorbike maker Piaggio to solicit a bid but was rebuffed by Chief Executive Roberto Colonnino.
On the up side, Zetsche is likely to enjoy some earnings tailwinds for 2006 as new high-margin models introduced in 2005, including the new S-Class luxury sedan, the M-Class SUV, and the R-Class crossover, take off. Munich-based HVB Bank forecasts that Mercedes, which sold an estimated 58,500 S-Class sedans in 2005 during the model-change year, should see sales of 95,000 in 2006, a 63% jump. Sales of the M-Class SUV, are forecast to rise 48.5%, to 115,200.
One huge milestone for Zetsche's turnaround plan in 2006 will be the mid-cycle facelift and engineering tweaks on the all-important E-Class sedan, which has been dogged by quality problems since 2003, including the largest recalls in Mercedes history -- for electronics controlling the braking system. German taxi drivers, which once opted unfailingly for the plush E-Class, have deserted Mercedes in droves. Overall, warrantee costs to cover quality problems cost Mercedes an estimated $840 million in 2005.
QUALITY CALL. Closely watched quality rankings by J.D. Power in the U.S. will rank the E-Class this spring on initial quality and in July on three-year reliability. Zetsche insists Mercedes has changed its design, development, and production processes to improve quality, and that it has ratcheted up testing to detect bugs before cars leave the factory. "The customer must see Mercedes at the top of the quality charts," insists Zetsche. "We've not yet reached it, but we're working on it. The E-Class rankings will reflect that in the future."
The question is: How long will it take for auto industry rankings such as those by J. D. Power and the German Automotive Assn. to reflect those improvements? Quality ratings can drop like a stone -- and are much harder to hoist back up to the top of the charts. Mercedes' German rivals BMW and Audi have vowed to put their premium brands among the top three in quality, and they are making big strides.
"Everyone is aiming for the same spot. Whichever European luxury brand gets there first and stays at the top of the rankings will have an edge over the competition," says Albrecht Denninghoff, senior auto analyst at HVB Bank in Munich. He notes that Mercedes, BMW, and Audi can't all be in the top three without pushing out the Japanese -- an unlikely scenario.
BIG BETS. Zetsche's been there before, staring at a loss-making car business that has veered badly off track. The last time was his arrival as Mr. Fix-It at a near-bankrupt Chrysler Group in 2001. That overhaul took four years, and he still must make sure that the recovery sticks.
Now, to avoid ceding more ground to the fast-moving competition in premium cars, Zetsche needs to do it all over again. But this time he'll be retooling Daimler's flagship premium brand. For Zetsche and Mercedes, the stakes have never been higher.
Edmondson is a senior correspondent in BusinessWeek's Frankfurt bureau
By Gail Edmondson
Can new CEO Deiter Zetsche restore the iconic carmaker's sales and quality? Investors are hopeful, but it will be a hard road back
No one understands the stakes better than DaimlerChrysler's (DCX) new Chief Executive Officer Dieter Zetsche: This year, Mercedes Benz must come roaring back. The venerable luxury brand, traditionally Daimler's profit engine, has veered dangerously off-track over the past three years as costs edged up, quality on key models slipped and tarnished the Mercedes brand, and European sales of luxury rivals BMW and Audi (AUDI) passed those of the sputtering giant.
The bill for management neglect at Mercedes finally came due in 2005 as restructuring charges plunged the German luxury automaker ignobly into the red: Mercedes Car Group, which includes the ill-fated mini car Smart, posted an operating lost of $606 million on revenues of $60 billion.
How fast can Zetsche put Mercedes back on track? Since taking over at Mercedes Car Group on Sept. 1, the 51-year-old engineer has moved quickly to start trimming the production workforce and administrative fat, calling for some 14,500 voluntary job cuts over the next three years. He's also vowed to put the Mercedes brand back at the top of the quality charts and restore operating margins to a healthy 7% by 2007. "Our earnings are not where we want them to be," says Zetsche. "We need to get to work."
SLIM MARGINS. DaimlerChrysler as a whole is doing better. The auto maker earned a net profit of $3.4 billion in 2005, up 15% over 2004, buoyed by the commercial vehicle division, Chrysler, and financial services. Revenues were up 5%, to $180 billion.
But analysts fret that Chrysler' margins, now at 2.8%, are weakening. Morgan Stanley forecasts they will shrink to 1.8% in 2006, and the truck division could be headed for a market downturn in 2007. "Going forward, DaimlerChrysler's fortunes will be driven by Mercedes Benz," says Michael Raab, auto analyst at Sal. Oppenheim Bank in Frankfurt.
Investors, anticipating a turnaround after an agonizing five years of management blunders, already have bid up DaimlerChrysler's shares some 19% since the announcement last July that Zetsche would take over as CEO on Jan. 1. Now, Zetsche has to live up to those expectations.
SALES FLOP. Pressure is mounting from institutional investors to dump the Smart mini unit, which lost an estimated $720 million in 2006. Zetsche vows to reduce the losses in 2006 and bring Smart to breakeven by 2007, but skeptics abound. Says Raab: "I believe Smart will not reach breakeven until 2009, and it will never earn good margins."
Smart is bleeding in part because of a commitment Daimler has made to production partners and suppliers to keep Smart's factories churning out around 200,000 cars through 2010. Losses ballooned as Smart's sales failed year after year to meet production expectations. In 2005, Mercedes sold just 131,000 Smart cars, including a new four-seater, which proved unpopular.
Paying off suppliers to ditch the production commitment for Smart could cost Zetsche $4 billion. But keeping it afloat hurts too: Each Smart sold cost Mercedes $4,800. In January, 2006, Smart's sales plunged 20%, casting a black cloud over Zetsche's recovery plan. "I continue to believe Zetsche will find a different solution, even if he has to give Smart away and throw money at a new owner," says Raab. "Everyone would applaud the move."
THAT SMARTS. Auto industry experts believe only an emerging-market player such as a Chinese or Korean auto maker might be interested in acquiring the brand for its toehold in the Western European market and perky, city-car styling. Goldman Sachs (GS) reportedly approached Italian motorbike maker Piaggio to solicit a bid but was rebuffed by Chief Executive Roberto Colonnino.
On the up side, Zetsche is likely to enjoy some earnings tailwinds for 2006 as new high-margin models introduced in 2005, including the new S-Class luxury sedan, the M-Class SUV, and the R-Class crossover, take off. Munich-based HVB Bank forecasts that Mercedes, which sold an estimated 58,500 S-Class sedans in 2005 during the model-change year, should see sales of 95,000 in 2006, a 63% jump. Sales of the M-Class SUV, are forecast to rise 48.5%, to 115,200.
One huge milestone for Zetsche's turnaround plan in 2006 will be the mid-cycle facelift and engineering tweaks on the all-important E-Class sedan, which has been dogged by quality problems since 2003, including the largest recalls in Mercedes history -- for electronics controlling the braking system. German taxi drivers, which once opted unfailingly for the plush E-Class, have deserted Mercedes in droves. Overall, warrantee costs to cover quality problems cost Mercedes an estimated $840 million in 2005.
QUALITY CALL. Closely watched quality rankings by J.D. Power in the U.S. will rank the E-Class this spring on initial quality and in July on three-year reliability. Zetsche insists Mercedes has changed its design, development, and production processes to improve quality, and that it has ratcheted up testing to detect bugs before cars leave the factory. "The customer must see Mercedes at the top of the quality charts," insists Zetsche. "We've not yet reached it, but we're working on it. The E-Class rankings will reflect that in the future."
The question is: How long will it take for auto industry rankings such as those by J. D. Power and the German Automotive Assn. to reflect those improvements? Quality ratings can drop like a stone -- and are much harder to hoist back up to the top of the charts. Mercedes' German rivals BMW and Audi have vowed to put their premium brands among the top three in quality, and they are making big strides.
"Everyone is aiming for the same spot. Whichever European luxury brand gets there first and stays at the top of the rankings will have an edge over the competition," says Albrecht Denninghoff, senior auto analyst at HVB Bank in Munich. He notes that Mercedes, BMW, and Audi can't all be in the top three without pushing out the Japanese -- an unlikely scenario.
BIG BETS. Zetsche's been there before, staring at a loss-making car business that has veered badly off track. The last time was his arrival as Mr. Fix-It at a near-bankrupt Chrysler Group in 2001. That overhaul took four years, and he still must make sure that the recovery sticks.
Now, to avoid ceding more ground to the fast-moving competition in premium cars, Zetsche needs to do it all over again. But this time he'll be retooling Daimler's flagship premium brand. For Zetsche and Mercedes, the stakes have never been higher.
Edmondson is a senior correspondent in BusinessWeek's Frankfurt bureau
02-27-06, 04:54 PM
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Time will tell in concerns to quality. the good news is, they can only go up 
If they get that together, man, they will be a tough cookie. They have arguably the best looking lineup, clearly the prestige and choices galore.
They also need to make their dealers improve.
If they get that together, man, they will be a tough cookie. They have arguably the best looking lineup, clearly the prestige and choices galore.
They also need to make their dealers improve.
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