Putting the Brakes on DaimlerChrysler's Skid

By TERRIL YUE JONES

Dec. 3, 2000 12 AM PT

TIMES STAFF WRITER

DETROIT —

It’s been a tough launch for DaimlerChrysler. The two years since Daimler-Benz and Chrysler Corp. merged have seen a revolving door of departing executives, the first quarterly red ink since the early 1990s, plant closings and probable layoffs, a stock price that has gone off a cliff and morale that has plunged deeper than market share in a depression.

And now, a slew of lawsuits by American shareholders claiming two top executives lied when they called the union of two industrial giants a “merger of equals.”

At the time of the merger there was much-heralded optimism about a “marriage of equals” with synergies in cost cutting, purchasing and technology sharing--the creation of a gigantic car company competitive in all sectors and poised to withstand any industry shakeouts.

But it became increasingly clear that if it was a wedding, it was the shotgun type--and Daimler-Benz had all the firepower. Now, Chairman Juergen Schrempp has ousted the latest Chrysler president and replaced him with a German loyalist, Dieter Zetsche. The Daimler takeover is complete.

The Chrysler Group, as the Chrysler, Dodge and Jeep brands are known, has been withering on the vine for months. The talent pool that made Chrysler the daring, innovative car company that made more profit per vehicle than anybody else continues to drain away--virtually all of its top executives have been ousted or have retired.

Its minivans, a category Chrysler created and dominated for years, now carry heavy discounts to boost sales. Sales of the profitable Dodge Ram full-size pickup truck fell 10.6% in the first 10 months of the year despite incentives, and the Dodge Durango sport-utility vehicle dropped off 8.4%.

Even Jeep sales have sunk 9.6%--though the rugged yet elegant brand may well be one of the keys to turning around Chrysler’s struggling operations.

Analysts say what Chrysler needs to help bring it back into the black is to get spiraling incentive costs under control and play up the strengths of its respective divisions: luxury and commercial cars with Mercedes, pickup trucks with Dodge, minivans with Chrysler, SUVs with Jeep and fuel-efficient passenger cars with Mitsubishi.

Chrysler’s woes stem from its American leadership failing to plan well for the fiercely competitive American auto market. A number of products are long in the tooth, such as the Ram pickup and Jeep Cherokee. The newly redesigned minivans didn’t look much different from their predecessors, and hot new competitors have sucked away market share.

“It appears that the deterioration at Chrysler is accelerating,” said Merrill Lynch auto industry analyst Stephen Reitman. “The problem lies in the fact that Chrysler has badly misread the market.”

Chrysler has invested heavily in adding more gadgets to its vehicles, such as power-operated side doors and rear lift gates in its minivans in an effort to differentiate them from competitors, but then found that the market wouldn’t let it charge extra for them.

“The problem is that the fierce incentive battles in the U.S. mean that Chrysler cannot get the pricing it was targeting on these products to recover these extra costs,” Reitman said. “Rather, it is having to cut prices with new incentive programs that are destroying the bottom line.”

Honda and GM minivans with foldaway third-row seats ate into Chrysler’s market share, and Toyota’s Tundra is giving the Ram pickup a run for its money. “They underestimated key competitors for their core product,” said James Hall, vice president for industry analysis for consultant AutoPacific in Southfield, a Detroit suburb.

Inventory ballooned, forcing the idling of seven plants this fall, three more in late November and probably more in December. Incentives have run up to $4,000 on minivans and $5,300 on Grand Cherokees. “You put those kinds of incentives on a vehicle and it’s going to kill your profit,” said Greg Salchow, automotive analyst with investment bank Raymond James & Associates in Detroit.

James Holden, president for less than a year, was the fall guy, so now employees are trying to get used to a German running the gleaming umber-colored Chrysler headquarters in Auburn Hills, just north of Detroit.

Zetsche, an engineer with a friendly grin topped by an impossibly bushy mustache, is making every effort to move in smoothly without ruffling feathers.

“He’s in the cafeteria every day, eating with employees, making himself available,” said a senior manager at headquarters. “He passes right by the executive dining room, and that’s appreciated.”

Trying to get a feel for his new job, Zetsche is immersed in meeting after meeting. “The key message is, he can’t do this alone, but he does have a back bench,” the manager said, referring to key Chrysler veterans who still have their jobs, such as Gary Henson, executive vice president for manufacturing, and Richard Schaum, executive vice president for product development.

And despite the brain drain, Chrysler has picked up a number of top hires itself in recent months, including Thomas Lasorda, senior vice president for powertrain manufacturing, from GM; Elizabeth Wade, senior vice president for investor relations, from Barclay’s Bank; Larry Lyons, vice president of small cars, from GM; Michael Evans, vice president for advanced vehicle engineering, from Ford; Donald Dees, vice president of quality, from Toyota; Cynthia Henderson, director of manufacturing quality, from auto supplier Lear Corp.; Karenann Terrell, director of Business Connect, from GM; Ken Levy, vice president for communications, formerly with GM Europe.

There seems no resentment among American employees against Zetsche; rather, Schrempp has become the lightning rod for ill will, the manager said. And despite Zetsche’s close ties to Schrempp, he is not being vilified by association, he said.

“Is there concern that this affects Zetsche and his ability to go through with the restructuring? Obviously there is concern, but I’ve seen nothing that brushes them with the same brush stroke,” the manager said. “I think people are able to separate them, and what they are doing.”

Now, only 25 months since the merged company debuted on the New York Stock Exchange, the stock is just above its all-time low of $37.90 a share, two-thirds off its all-time high in January 1999, two months after the acquisition of Chrysler closed. In all, some $62 billion has been erased from DaimlerChrysler’s market value--well more than the $37 billion Daimler paid for Chrysler in the first place.

So what does Daimler have left? What it has is a North American dealership network, a domestic passenger car business, and traditionally profitable minivan, pickup truck and SUV models.

Chrysler is, in effect, a division of Daimler--and Schrempp shocked the Chrysler side by saying as much in an interview with the Financial Times in October.

“The structure we have now with Chrysler was always the structure I wanted,” Schrempp said. “We had to go a roundabout way but it had to be done for psychological reasons. If I had gone and said Chrysler would be a division, everybody on their side would have said, ‘There’s no way we’ll do a deal.’ But it’s precisely what I wanted to do.”

In early November he said in an interview published in Barron’s: “We said in spirit it was a merger of equals, but in our minds we knew how we wanted to structure the company, and today I have it. I have Daimler, and I have divisions.”

Chrysler employees were stunned, and privately express outrage that Schrempp would go public with such sentiments.

Billionaire investor Kirk Kerkorian, DaimlerChrysler’s third-largest shareholder, had enough and filed suit last week seeking $9 billion in damages, accusing Schrempp of defrauding Chrysler shareholders by lying about his intentions for the company.

The suit by Kerkorian, who has lost an estimated $1.4 billion in his Chrysler investment, was followed by at least three other class-action lawsuits in the U.S., and others are threatened in Germany.

But then there is Jeep, a largely untapped treasure remaining in the Chrysler vault. A division brimming with brand equity and global promise, it claims to be the world’s fourth best-known brand after Coca-Cola, Levi’s and McDonald’s. Now Jeep is about to launch the Liberty, its fourth SUV, and is setting its sights on becoming a volume brand internationally. “Jeep is the crown jewel,” said Raymond James’ Salchow.

Coming off a record year in the U.S. in 1999 with 554,000 units sold, Jeep is in a bit of a rut. Sales of each model are down this year: Wrangler by 4%, Cherokee by 14.7% and Grand Cherokee by 8.4%. Viewing itself as a premier brand, it didn’t want to get caught up in the discounting that other brands were offering this year, and sales suffered.

It has an aging lineup in which the entry level needs considerable freshening up. “Cherokee has a lot of character, but it’s as crude as can be--lots of plastic, very stiff leaf springs,” said Salchow, himself a Cherokee owner.

But Chrysler says Jeep is one of the two most popular brands of cars for Americans younger than 35, and it is the one division that Chrysler can make into a global brand. Indeed, Chrysler bought American Motors from France’s Renault in 1987 not for the Renault Alliance model or the now-defunct Eagle division, but to get its hands on Jeep.

“If Schrempp thought he could turn Chrysler passenger cars into a profitable global brand, he was deluded,” said AutoPacific’s Hall. “But if Daimler bought Chrysler to get Jeep, that’s not necessarily bad.”

Jeeps are made in factories in China, Austria, Venezuela, Argentina, Thailand and Egypt, and command high cachet--and prices--in Europe, Asia and Latin America.

Only about 70,000 were sold overseas last year, still only a fraction of U.S. 1999 sales, leaving plenty of room for growth.

So how can Chrysler unlock the potential of Jeep? By increasing capacity at home and abroad, for one. The lack of additional assembly facilities abroad is all that’s holding back solid growth overseas, the company believes. Jeep is exploring additional overseas capacity, said Michael Kane, director of Jeep global marketing strategy.

But most of all, Jeep needs new product. And that’s exactly what’s coming next spring. The all-new Jeep Liberty is designed to be less truck-like, to compete with smaller SUVs such as the Toyota RAV4, Honda CR-V, Subaru Forester and Ford Escape, and will be priced somewhere between the Wrangler and the Cherokee.

The Liberty was originally planned as the replacement for the 17-year-old Cherokee, but Chrysler “saw a market for today’s Cherokee, continuing as a classic Jeep,” said Craig Love, vice president for Jeep platform engineering. So the auto maker is building an addition to its Toledo Jeep plant with a capacity of 200,000 Jeep Libertys a year, while Cherokees will continue for at least a couple of years at around 80,000 units annually.

With Jeep the premium SUV maker under the Chrysler umbrella and the Chrysler and Dodge divisions the main profit centers for pickup trucks and minivans, Chrysler could ultimately develop into primarily a light-truck division, said Michael Flynn, director of the Office for the Study of Automotive Transportation at the University of Michigan.

“It would be sensible for Daimler to say, we’re going to have three divisions: a Mitsubishi division, which is going to do primarily small, more fuel-efficient cars; Chrysler--and it’s primarily going to do light trucks; and Daimler, which is primarily going to do large luxury vehicles,” said Flynn, referring to DaimlerChrysler’s recent controlling stake in Japan’s Mitsubishi Motors.

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Auf Wiedersehen

Top Chrysler executives who have been ousted or left the company since the merger of Chrysler Corp. and Daimler-Benz was announced in May 1998:

* Robert Lutz, vice chairman; July 1998

* Dennis Pawley, executive vice president, manufacturing; January 1999

* Rex Franson, president, Chrysler Financial; January 1999

* Steven Harris, senior vice president, public relations; February 1999

* Chris Theodore, senior vice president, engineering; March 1999

* Shamel Rushwin, senior vice president, manufacturing; March 1999

* Thomas Stallkamp, president; December 1999

* Robert Eaton, co-chairman; March 2000

* James Holden, president and chief executive, Chrysler Group; November 2000