Daimler-Benz Appears at a Crossroads

The scenes could have been taken from the recent sad annals of the aerospace industry in Southern California: A powerful corporation loses vast sums. Its share prices sink. Standard & Poor’s lowers its credit rating. Consultants prepare sweeping restructurings. Thousands of jobs are at risk.

But this time the victim is the venerable Daimler-Benz, the conglomerate that, in better times, epitomized the industrial prowess of Germany Inc. And the people now praying for their jobs are the very men and women blue-collar Americans have come to envy: Germany’s famously well-compensated, well-organized manufacturing workers.

The troubles at Daimler-Benz have been brewing for some time, but they burst into view earlier this month when the corporation--best known in America as the parent of auto maker Mercedes-Benz--announced it had posted after-tax losses of $1.1 billion for the first half of 1995.

Analysts had been expecting large losses all summer. But Daimler’s shocking announcement dwarfed even their most pessimistic projections.

Worse yet, analysts note, Daimler’s first-half results were largely based on foreign-exchange losses and did not include hundreds of millions of dollars worth of restructuring charges that Daimler-Benz is still expected to take. These will further dampen the company’s performance in the second half of 1995.

Daimler-Benz Chairman Juergen Schrempp is predicting “markedly positive results” by 1996, however, once the forthcoming restructuring costs are posted.

Nothing seems seriously amiss at Mercedes-Benz, which accounts for about two-thirds of the parent company’s business. On the contrary, the auto maker, hard-hit by recession in the early 1990s, has already begun an international competitiveness drive that includes stepped-up foreign production and purchasing and the importation of Japanese-style efficiencies to older car plants in Germany.

In the future, the Mercedes mini Swatch car is to be made in France, Mercedes minivans in Spain and a Mercedes four-wheel-drive sport-utility vehicle in Alabama. Such moves offshore are helping Mercedes-Benz to reduce manufacturing costs without damaging the solid reputation of its cars. German auto labor costs--at around $38.50 an hour, the highest in the world--are more than 40% higher than those in the United States and at least double those in France and Spain.

But Mercedes-Benz’s turning to foreign production is raising misgivings within Germany about the “de-industrialization” of the national economy. Yet Daimler-Benz may now be forced to apply the same controversial medicine to its current “problem” subsidiary, the aircraft and aerospace operation Daimler-Benz Aerospace.

Daimler-Benz Aerospace, known as Dasa, was the main source of the parent company’s first-half losses. Dasa’s main business is aircraft: It holds a 37.9% stake in the European Airbus consortium and a controlling stake in the Dutch manufacturer Fokker, and it makes smaller Dornier planes, mainly for customers in the U.S. market. It builds engines for helicopters and fighter aircraft and provides maintenance for Boeing 737 jetliners. It also is participating in international joint ventures to develop a liquid-hydrogen aircraft and--with Boeing--the plane known as the Very Large Commercial Transport Aircraft.

But Dasa also develops satellites and has extensive military operations, building parts for various missile systems and for fighter aircraft, as well as radar systems and electronic communication and reconnaissance gear.

“Anything connected with defense these days is in difficulty,” says Deutsche Bank chief economist Norbert Walker.

Compounding Dasa’s problems are the same high European production costs and other financial problems that have plagued its auto-making sister subsidiary. A single Europe-based unit, Fokker, incurred more than $400 million worth of first-half losses, notes analyst Juergen Pieper of Deutsche Morgan Grenfell, “and that is a real, operating loss, with no restructuring charges in it.”

Dasa has a third problem less familiar to its beleaguered U.S. aerospace counterparts: Because its sales of aircraft and components are almost always denominated in dollars, and its production costs are almost always paid in marks, it is intensely vulnerable to exchange-rate fluctuations.

This spring and summer, when the dollar suffered a prolonged, substantial loss of value against the mark, Dasa got hammered.

The dollar has since rebounded some. But executives at Daimler and Dasa have decided they should never again count on the American currency’s holding its own against the mark. In hopes of making Dasa overvaluation-proof, they are preparing plans for a broad cost-cutting program, code-named Dolores. (The name is taken from the first syllables of the English words dollar, low and rescue.)

Daimler-Benz says a final version of Dolores will be unveiled in October. But the work force got an illicit preview in August, when Erwin Hilbrink, president of the parent company’s powerful labor-management committee, or works council, held a surprise news conference and announced that he had found a copy of Dolores lying “on a tram” and proceeded to leak its contents.

Daimler called Hilbrink’s indiscretions premature and irresponsible, but no matter. Hilbrink said Dasa was contemplating the outright closings of three plants, plus the elimination of jobs by the thousands at the factories that would remain open. Some operations could be moved overseas, possibly to India, Russia or Indonesia.

Overall, Dolores calls for Dasa to cut about 15,000 workers, a quarter of Dasa’s current staff. And for workers lucky enough to hold onto their jobs, there might be pay freezes and a longer work week.

All this came as a particular shock to Daimler-Benz workers, who had been watching with confidence as their already huge employer expanded and diversified for the better part of a decade.

“The workers are practically paralyzed. They are asking themselves, ‘What will become of us?’ ” said Herbert Schmid, a spokesman for the works council at Motoren und Turbinen Union (MTU), a Dasa-owned aircraft engine manufacturer. “They are furious that they will have to pay, in blood, for the bad decisions of Dasa’s management,” Schmid said, citing the Fokker acquisition in particular.

Earlier this month, more than 15,000 workers demonstrated their opposition to Dolores at about 30 Dasa sites around Germany, handing out leaflets, staging press conferences, and--in the city-state of Hamburg--unrolling a 1.8-mile protest banner along the banks of the River Elbe.

The mayor of Hamburg, Henning Voscherau, came out to address the workers, promising to support them not only as a politician but as a shareholder. Hamburg holds a 6% stake in Dasa. According to the preliminary leaked version of Dolores, the Hamburg plant, where the Airbus 321 is assembled, would face more job cuts than any other Dasa factory.

Walker noted that mass layoffs are more familiar to American workers than to German ones, accustomed as they are to security in jobs that feature one of the shortest work weeks in the Western world, a minimum six weeks of paid vacation per year, a “13th month” annual bonus and other enviable benefits.

Dasa’s losses, labor unease and lingering questions are just the latest in a string of difficulties for giant Daimler-Benz. Last summer, a former top Daimler-Benz executive published in a business magazine a long, vitriolic critique of Daimler-Benz’s immediate past chairman, Edzard Reuter, the man who oversaw the conglomerate’s now-questionable expansion.

Former finance director Gerhard Liener charged that Reuter had based his acquisition decisions more on egotism than on sound business principles. Daimler-Benz promptly fired Liener from his lucrative consultancies with the corporation.

Around the same time, Schrempp, Reuter’s successor as chairman, embarrassed the company by running afoul of the Italian police while carousing in the streets of Rome at 2 a.m. with two colleagues.

The police said Schrempp had used “unfortunate” language and was “carrying a bottle of wine.” Schrempp, who was not arrested, admitted to having been “in a good mood.”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Profit Crash

Daimler-Benz’s earnings plummeted in the first half of 1995. The company’s annual income, in millions:

1995: -$1,100

Source: Standard & Poor’s Online