Auto Reverse
Slide in Mercedes's Performance
Dents Chrysler's Recent Revival

DaimlerChrysler Fixes a Unit, While Another Stumbles; Fuel for Merger Critics Snoop Dogg Gets a 300C
By STEPHEN POWER in Frankfurt and NEAL E. BOUDETTE in Detroit
Staff Reporters of THE WALL STREET JOURNAL
February 9, 2005; Page A1

Nearly seven years after the megamerger that created DaimlerChrysler AG, the German and American halves of the auto giant are undergoing a striking role reversal.

Chrysler, for years a burden on the merged company, is on an upswing. Its profits and market share are growing because of improvements in quality and design, drastic cost-cutting and the launch of a hot car coveted by customers from executives to rap stars.

Meanwhile, Mercedes-Benz, DaimlerChrysler's fabled luxury brand, is looking a bit like the old Chrysler. Profits are falling due to quality problems at Mercedes and losses from Smart, a maker of small cars that comes under the unit's umbrella. In the late 1990s, Mercedes sold more luxury cars in the U.S. than anyone else. It now ranks fourth and may not hold that spot for long.

The reversal of fortune, which will be on display when DaimlerChrysler announces its 2004 results later this week, illustrates what has become a pattern at the world's fifth-biggest auto maker: Each time one part of its empire turns a corner, another part stumbles. The merger that built the company was based on the belief that vast size would bring huge economies of scale. Because DaimlerChrysler has struggled to get all its cylinders firing at the same time, that promise hasn't been fulfilled.



This see-sawing performance raises questions not only about the global vision of DaimlerChrysler Chief Executive Jürgen Schrempp but also the other big auto-industry tie-ups he inspired. In the wake of the merger, General Motors Corp. bought a stake in Fiat SpA's auto unit and Ford Motor Co. acquired Land Rover and Volvo. But results have been mixed. The most successful car makers in recent years have focused not on bulking up but on more specific goals. For Toyota Motor Corp., the answer has been a focus on quality. With BMW AG, it's premium cars.

Inside DaimlerChrysler, the shift at Chrysler and Mercedes could influence the looming question of who will succeed Mr. Schrempp, 60 years old. The CEO's contract expires in 2008 and some people close to Mr. Schrempp expect him to retire at that point. Mr. Schrempp himself has refused to discuss the topic publicly.

One probable contender, Dieter Zetsche, 51, is an engineer who led Chrysler's revival by slashing costs and focusing attention on a few key brands rather than expanding its size. People at the company currently think Mr. Zetsche's main challenger is Eckhard Cordes, 54. A boardroom ally and friend of Mr. Schrempp, Mr. Cordes is now charged with righting Mercedes. In a company of engineers, he is known as a cost-cutter. Giving him the nod would indicate that DaimlerChrysler still believes in the benefits of being huge.

DaimlerChrysler officials say the slide in Mercedes's profits, which pale in comparison to Chrysler's recent losses, doesn't undercut the wisdom of the company's strategy. The company expects to post higher 2004 operating profits thanks to Chrysler and a commercial-vehicles unit. "We have challenges and problems at Mercedes, but we know what to do and we know how to come back," a spokesman says. The company declined to make Mr. Schrempp available for an interview.

Chrysler has a history of lurching from boom to bust. Its recent success has been built partly on the popularity of one model, the 300C sedan, a powerful car with a big, bold grille and narrow windows. This year, it will have just four new models to pump up sales, compared with nine in 2004.



But there's little doubt about Mercedes's slide. "Mercedes has long been known for building cars that are the benchmark of engineering performance," says Gottfried Schillinger, a former DaimlerChrysler marketing executive. Its drive to be first with the latest innovations has backfired when the devices malfunction or don't work as easily as customers expect, he says.

Back in 1998, the merger of Daimler-Benz AG and Chrysler Corp. looked like a promising match. Mercedes was the world's No. 1 luxury brand. Chrysler was making more profit per vehicle than Ford or GM. Mr. Schrempp boasted the combination would soon become the most profitable car maker in the world.

But a year later, Chrysler crashed. It had spent billions developing cars such as the Stratus and Sebring that flopped once they hit the road because of their unimaginative looks and poor handling. Plants were left underused and inventory piled up. In the fourth quarter of 2000, in large part due to hefty discounts, Chrysler lost $1.5 billion.

Shareholders publicly lambasted Mr. Schrempp as DaimlerChrysler's market value plunged. In Stuttgart, Germany, resentment mounted among Mercedes engineers who complained about propping up their American partners. A DaimlerChrysler spokesman says Mercedes's current problems are not caused by favoring Chrysler.

Indeed, trouble was brewing in both divisions. Toyota's luxury Lexus division passed Mercedes as the best-selling U.S. luxury brand in 2000. In response, Mercedes decided to pack more features and technology into its cars without raising prices, leading it to skimp on quality. In quality studies conducted by auto-ratings agency J.D. Power and others, Mercedes used to consistently rank No. 1. In 2002, its scores began to fall. In at least one case, it fell below the industry average.

Ken Pollock saw that firsthand. In 2000, the 57-year-old insurance agent from Coral Gables, Fla., bought his first Mercedes, a $49,000 E340 sedan. Within a few months, his wife noticed a bulge in the dashboard caused by an airbag. To fix it, the dealer replaced the entire instrument panel.

Several months later a rear window slipped down inside the door. After it was fixed, the other rear window broke, followed by a passenger window and, for a second time, one of the rear windows. The headlights turned yellow and the color wore off the leather seats. The cost of the repairs came out of Mercedes's profits since they were covered by a warranty.

"Individually, they aren't big, but put them together and you say, 'This is a piece of junk,' " Mr. Pollock says. "Next time, I'll look at Lexus."

Mercedes tried to keep the problems quiet. In the U.S., it replaced some bug-ridden vehicles for customers who signed agreements promising to keep quiet about the settlement. A Mercedes spokeswoman says such agreements are "standard industry practice." Because "each case is different," Mercedes doesn't want one settlement to be interpreted as an offer available to all customers, she says.

At the 2003 Frankfurt car show, Mr. Schrempp made a rare appearance with reporters and addressed the quality problems. He said the company had embarked on a program to improve quality with the goal of winning back the top spot in the J.D. Power rankings.

Back in Detroit, Chrysler wasn't yet improving. In the middle of 2003, it was again stuck with thousands of slow-selling models such as the Pacifica, a cross between a minivan and sport-utility vehicle that the company had priced too high.

But toward the end of the year, cars that Mr. Zetsche and his team had shepherded through development were nearing launch. Late in 2003, Chrysler invited more than 20 dealers to Palm Springs, Calif., for a preview of a new model. The group gathered in a room cut off by a curtain and the mood was grim, recalls Alan Helfman, a Chrysler and Jeep dealer in Houston. "I wasn't feeling too good about myself. We hadn't had any good product in a while."

After a few words from a Chrysler sales chief, the curtain was pulled back to reveal the 300C. It was not only distinctive but dramatically cheaper than equivalent competitive models. A nicely equipped version costs about $36,000. A similarly powered BMW, for example, could cost close to $60,000.

"We all just took one look at this thing and we were high-fiving and saying, 'Get me this car now!' " Mr. Helfman says. He recalls one week in the fall of 2004 when he kept calling a rail yard in Houston to check on a shipment of 11 300Cs. The cars were delivered to Mr. Helfman's showroom on a Saturday and were gone by the end of the day -- every one of them at the sticker price.

Excitement about the car pulled new consumers into Chrysler dealerships. Last summer, a salesperson in Chrysler's Los Angeles office received a voice mail from rap star Snoop Dogg. "Yo, what up? This is big Snoop Dogg, trying to put these new legs down for this new 300C," the message said, according to a transcript provided by the company. "What I gotta' do to get that brand new 300 up outta' you? Get back in contact with my nephew so you can make it happen, then it's official like a referee's whistle. If you want this car to blow, give it to me. This is Snoop Dogg. Preach!"

Chrysler gave a car to Snoop Dogg, whose real name is Calvin Broadus, in return for a promise he'd include the model in a music video called "Groupie Luv." Later in the summer, Mr. Zetsche took his son and daughter to a Snoop Dogg concert in Michigan where they met the rapper.

With the 300C pulling crowds into dealerships, Chrysler's 2004 market share inched up to 13% from 12.7% a year earlier, a small but meaningful shift in an industry that obsesses about such changes. Ford and General Motors are headed in the other direction. Chrysler was also able to reduce its use of cash rebates and other profit-eating incentives, raising expectations it will report a rise in profits tomorrow to well over $1 billion, compared with just one moderately profitable year in the last three.

Mr. Zetsche says Chrysler's turnaround stems from a complete transformation of its cost base, product line and quality levels. "It's not just one hit car that's doing this," he says.

Even as Chrysler was getting back on track by paring operations, Mr. Schrempp continued to stand by his growth strategy. In April 2004, he pushed for more time to explore options for rescuing DaimlerChrysler's ailing Japanese partner Mitsubishi. During a board meeting, Mr. Shrempp's ally Mr. Cordes was one of only two top managers who agreed, according to people familiar with the matter. Eight others opposed the CEO, including Mr. Zetsche and his deputy at Chrysler, Wolfgang Bernhard, who had been tapped to lead Mercedes.


Within 24 hours, DaimlerChrysler's supervisory board -- the German equivalent of a board of directors -- rescinded Mr. Bernhard's promotion. People who worked closely with Mr. Bernhard say his forceful opposition against the CEO's plan for Mitsubishi cost him the job. Company officials close to Mr. Schrempp say instead that Mr. Bernhard alienated Mercedes managers and German labor representatives by talking bluntly of slashing jobs before even taking the job. Through his new employer, Volkswagen AG, Mr. Bernhard declined to be interviewed for this article.



Instead, Mr. Cordes was tapped to revitalize Mercedes. In 2004, while sales boomed for BMW, Cadillac and Japan's premium automakers, global sales of Mercedes-Benz vehicles fell 3%. In the U.S. last year, Mercedes sales rose 1.3% while sales for Lexus increased 11%. Even Acura, the upscale brand of Honda Motor Co. and once an also-ran in this market, is now threatening to pass Mercedes in U.S. unit sales.

In the third quarter of 2004, the division's operating profit plunged 62% because of the cost of remedying quality lapses and mounting losses at Smart.

Mr. Cordes is presiding over plans to launch four new Mercedes models this year, a record for the company. But he also is under pressure to stop the bleeding. On Monday, DaimlerChrysler said it would delay the U.S. launch of its B-Class sport wagon amid concerns that the weak dollar would cut too deeply into profits. Mr. Cordes has put on hold other projects, including the planned 2006 U.S. launch of a sport-utility vehicle from Smart and the development of an upscale sports car to compete against Ferrari and Lamborghini.

His priority remains fixing the quality problems tarnishing the luxury brand's image. In an interview, Mr. Cordes says Mercedes is devoting management attention and resources "to make sure those cars launched this year and in 2006 and beyond will not be suffering from initial quality issues."

One particular effort, known as the "Zero Defect Initiative," involves, among other things, removing hundreds of electronic gadgets that delighted the company's engineers but annoyed customers. One gizmo on the way out: keys programmed to adjust the seats and mirrors for a particular driver, which work fine until a husband grabs his wife's keys.

A key test of whether Mercedes has conquered its quality problems will come in April, when the new version of its M-Class sport-utility vehicle hits the market. The previous version was a frequent source of complaints from customers unhappy with the quality of its interior and other problems. Mercedes retooled the Alabama plant that produces the M-Class and made design changes to increase its appeal to American customers. The company is also spending additional time and money -- how much, it won't say -- to catch problems by increasing testing of new vehicles and checking electronics more extensively.