DC Changed History in 2005

The turbulent reign of Juergen Schrempp ended and Chrysler Group officially withdrew from the Big Three.

Two celebrated eras that helped define DaimlerChrysler AG, ended in 2005.

One, the sloppy succession of Management Board Chairman Juergen Schrempp, marked a significant turning point in the auto maker’s turbulent history; the other closed a glorious chapter in the history of the entire industry – the demise of the venerable Big Three.

Cause of death: separation anxiety. DC’s Chrysler Group feared bad karma from fellow Big Three members if it did not extricate itself.

While Ford Motor Co. and General Motors Corp. were steadily losing share in the U.S., DC’s Chrysler Group was reporting monthly sales hikes and corresponding share increases to its Stuttgart-based brass. However, bold, front-page headlines regularly trumpeted doom-and-gloom such as “Big Three on Bumpy Road to Uncertainty.”

So DC launched an aggressive back-door campaign to distance itself from the Big Three, which was mildly amusing since the corporate triumvirate existed only as a notion. Never a formal alliance, the Big Three simply came into being because the member companies had roots in Detroit, from which they dominated the richest market on the planet.

But the waters were muddied in 1998 when Schrempp, as chief of Germany’s Daimler-Benz AG, engineered a virtual takeover of Chrysler Corp. And with the relentless ascent of Japan-based juggernaut Toyota Motor Corp., was the Big Three still relevant in 2005?

Enter Jason Vines, Chrysler Group vice president-communications, who made it his mission to coax and cajole pundits into rethinking the way they portrayed the industry’s players.

Yes, the Big Three was losing its grip on the lucrative U.S. market. But on its own in 2005, Chrysler Group improved its position by 0.5% to 18.2% on the truck side, and by 0.6% to 6.9% on the car side – its second consecutive annual increase.

“Let’s try this one more time,” an exasperated Vines told journalists. “There is no Big Three. The Chrysler Group is a unit of a company based in Germany. That leaves two auto companies with headquarters in the U.S., and none of them is us.”

DC executives also were eager for Chrysler Group to be judged on its own merits.

“You don’t read much good stuff about GM and Ford – it is hurting us,” said Dieter Zetsche, who began 2005 as Chrysler Group chief, but started 2006 as Schrempp’s successor.

What should have been an orderly transition turned into a messy power struggle that only served to highlight DC’s disappointing 2005 financials.

Total revenues rose 5% to €149.8 billion ($177.4 billion based on the Dec. 30 exchange rate) while net income climbed 15% to €2.8 billion ($3.3 billion). But operating profit plummeted 10% to €5.2 billion ($6.2 billion), a result partially attributable to a €505 million ($598 million) loss by the flagship Mercedes Car Group.

That loss represented a swing of more than €2 billion ($2.5 billion), compared with a €1.7 billion ($2 billion) profit turned in by Mercedes the year before.

In the lucrative U.S. market, the tri-star brand continued to lag behind Toyota’s Lexus division, continuing a 14-year trend. Eclipsed by arch-rival BMW AG for the second straight year, Mercedes also was reeling from its largest-ever recall – as many as 1.3 million vehicles implicated in a campaign to investigate voltage regulators on 6-cyl. and 8-cyl. engines.

And then there was Smart. The mini-car brand for frugal motorists was likened to a “running sore” by Merrill Lynch analyst Stephen Reitman.

Micro Compact Car Smart GmbH lost €400 million ($515 million) in 2005, slightly less than it did in 2004, but it was a major drain on DC’s resources. Sagging interest in the breakthrough brand caused the auto maker to end production of its roadster and abandon plans for a utility vehicle, while cutting 700 jobs and taking a €1.1 billion ($1.3 billion) charge to cover restructuring.

Schrempp, confident to a fault, proclaimed he would turn the business around. But instead of winning support, he became a lightning rod for criticism – a sadly familiar role for the one-time apprentice mechanic who marked his 61st birthday in 2005.

Schrempp never had it easy during his tenure at the top. When Mercedes was strong in 2000, Chrysler was failing.

In 2005, the situation was reversed as Chrysler Group posted an operating profit of €1.5 billion ($1.78 billion) – a 7.1% hike over 2004.

Shareholders claimed losses of €34 billion ($40 billion) stemming from Schrempp’s “merger of equals” that spawned DC. Financier Kirk Kerkorian filed suit, claiming he was owed $1 billion.

In April, a U.S. court ruled against Kerkorian. But almost immediately, the real estate magnate filed an appeal.

That same month, during DC’s annual meeting, anger boiled over. The auto maker’s failure was “a tragedy of mismanagement,” said one shareholder.

“It’s not a question of cars and technology but of personnel. The only strategy that will work is decapitation, getting rid of the company's leadership.”

Three months later, the shareholder got his wish. But not even Schrempp’s resignation went smoothly.

The announcement fueled a 10% surge in DC’s stock price and sparked a pair of insider-trading probes. One concluded before year’s end, exonerating DC of any wrongdoing; the other was ongoing.

Some had speculated that Eckhard Cordes, a longtime Schrempp backer who had succeeded retiring Juergen Hubbert as Mercedes chief in April, would assume leadership of DC. But when Zetsche was named to head the auto maker, Cordes bolted – leaving a leadership vacuum at the troubled tri-star brand.

Zetsche, however, stepped in to fill the void, saying he would wear both hats indefinitely. But this left Chrysler in the lurch, so DC accelerated the timetable of Zetsche’s successor – Thomas W. LaSorda.

The former GM manufacturing guru took charge of Chrysler Sept. 1.

Despite boardroom upheaval, Zetsche immediately turned his attention to restructuring Mercedes. Reprising a rationalization strategy he rolled out at Chrysler five years earlier, he approved a 3-year plan to reduce the business unit’s head count by 8,500.

At the same time, he set a group goal to generate €9 billion ($11.6 billion) in operating profit by 2008.

DC also made significant portfolio changes in 2005, while launching or announcing several key capital investment programs. Most significantly, DC pulled the plug on its partnership with embattled Mitsubishi Motors Corp.

As the year drew to a close, DC sold its 12.42% stake in Mitsubishi for €970 million ($1.2 billion).

Also in the second half of 2005, DC generated more than €2 billion ($2.6 billion) in revenue from the sale of its off-highway business unit, while also transferring its ownership of American LaFrance – America’s 5th largest manufacturer of emergency vehicles – to New York investment firm Patriarch Partners LLC.

On the light-vehicle side, DC announced it would, in 2007, end production of Mercedes-Benz E-Class at Graz, Austria, home to contract assembler Magna Steyr Fahrzeugtechnik AG & Co KG. Those vehicles were to be built at the Mercedes plant in Sindelfingen, Germany.

And after much speculation, the auto maker announced it would spend up to $400 million to upgrade its assembly capability in South Carolina, site of Dodge Sprinter production. Assembled from knocked-down kits exported from Dusseldorf, Germany, the Class 2 and Class 3 cargo vans featured a boxy, European design and a 2.7L I-5 diesel engine.

Through the first 10 months of 2005, DC sold 22,800 units – 15% more than it did during all of 2004.

“Sprinter has been a huge success for us, exceeding our expectations,” says Joe Eberhardt, Chrysler Group executive vice president-global sales and marketing.

The auto maker also launched production of a new family of engines at its Global Engine Manufacturing Alliance (GEMA) site in Dundee, MI. The 4-cyl. mills, initially available in displacements of 1.8L, 2.0L and 2.4L, were designed to power new generations of C- and D-segment vehicles, including the Dodge Caliber small car and Jeep Compass cross/utility vehicle.

GEMA is a joint venture between Chrysler, Hyundai Motor Co. Ltd. and Mitsubishi Motors Corp.

LaSorda, who had been Chrysler’s chief operating officer, threw down a gauntlet in 2005. He declared that, by the end of 2008, more than 60% of his group’s assembly plants would feature advanced flexible manufacturing technology. This enabled auto makers to build multiple models off varied platforms on the same assembly line.

To kick things off, Chrysler announced it would spend:

  • Up to $1 billion over four years on a new body shop and assembly line upgrades at its plant in St. Louis.
  • C$768 million ($640 million) on a new paint shop in Windsor, Ont., Canada – in time for a 2007 production start.
  • $419 million and $506 million, respectively, to install flexible tooling in Belvidere, IL, and Sterling Heights, MI.

Key product launches in 2005 included the redesigned Mercedes S-Class sedan and M-Class cross/utility vehicle, plus the all-new R-Class CUV and B-Class small car.

“Building on the success of these new products, the Mercedes-Benz brand’s business revived significantly in the second half of the year,” the auto maker said, noting unit sales by the Mercedes Car Group grew 2% to just under 1.1 million.

Chrysler Group saw its unit sales jump 1% to 2.8 million on the continued strength of its LX-platform products – the Chrysler 300/300C sedan and Dodge Magnum CUV – as well as its minivans that featured Stow ’N’ Go seating. The innovation, which debuted on ’05 models, allowed users to fold second- and third-row seats into the vehicle’s floor.

Chrysler’s minivan expertise was also the source of considerable buzz in late 2005 when it was revealed the auto maker was in talks with Volkswagen AG.

If the Big Three picture weren’t muddled enough, DC signed an agreement in January 2006 that would see Chrysler build minivans for VW at its plant in St. Louis.

As the New Year dawned, LaSorda said he had the perfect way to cut Chrysler’s ties with the outdated institution. “I’d like to distance myself from everyone,” he told Ward’s.

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