Daimler-Benz AG

After just 21 months on the job, Mr. Jürgen E. Schrempp was being hailed as the leader of Germany's hottest company. Since taking the position of Chief Executive Officer in May 1995, he sold off unprofitable operations, introduced a new culture of responsibility and entrepreneurism and was committed to eliminate layers of top managers. Schrempp did not fit the profile of the typical CEO. Schrempp was highly analytical, but relied on his gut for his decision making as much as on his brain. He was charming but also confrontational, exuded confidence but was not afraid to admit a mistake. During the morning of January 23, 1997 he had to take another crucial decision which would influence Daimler-Benz's future direction.

Daimler-Benz was formed in 1926 by the merger of two pioneering German automobile companies, one founded by Carl Benz, the other by Gottlieb Daimler. Both Benz and Daimler claimed to have invented the gasoline-powered auto engine. Benz built his first automobile, which was powered by a one-cylinder gasoline engine, in 1885 and started selling cars in 1887. Daimler designed a series of gasoline-powered engines in 1883, and received a German patent on a three-wheeled-gasoline-powered vehicle in 1886.

In 1890 Daimler formed the firm of Daimler-Motoren-Gesellschaft to manufacture his rapidly growing line of Daimler autos. The first Daimler-produced luxury car was sold to the sultan of Morocco in 1889. In 1901 Daimler sold the first Mercedes with the three-pointed star on the hood, which was equipped with a four-cylinder engine. A Daimler motor was fitted to a balloon as early as 1888, and Daimler supplied the engines for Graf Zeppelin's first dirigible airships a decade later.

The Benz company produced trucks as well as autos. Benz began producing trucks with fuel-saving diesel engines, which sprayed fuel oil into the combustion chamber under high pressure, before World War I.

After the merger of the two rival companies in 1926, their engineering staffs worked together to design the classic "S" series Mercedes. Daimler-Benz was the first company to use diesel engines in cars; the diesel-equipped Mercedes-Benz became available in 1936. During World War II the Daimler-Benz factories were almost totally destroyed by Allied bombing, but they were eventually rebuilt. The company based in Untertuerkheim on the outskirts of Stuttgart rebuilt the image of solidity, quality, reliability and luxury. By the early 1980s high demand for the Mercedes both in Germany and abroad made Daimler-Benz Germany's largest company with sales reaching $41 billion in 1988 with 340,000 employees. During the mid 1980s, sales of Mercedes-Benz trucks and cars provided Daimler with over 95% of its revenues.

In the summer of 1987 Werner Breitschwerdt was ousted from his position as CEO when key shareholders and unions doubted his capacity to lead the firm into new business areas. Edzard Reuter became chairman of Daimler-Benz' board of management in September 1987.

He was born in Berlin, where his father was a legendary mayor of West Berlin and one of the most highly respected figures in the complicated politics of post-war years. Edzard Reuter joined Daimler-Benz after receiving his degree in mathematics, physics and law, and was respected as a man of broad vision. A close aide explained, "with Reuter we have a corporate chief who knows the signs of time and how to deal with them - a time when courage is needed in decision-making." His goal was to make Daimler-Benz "an integrated technology concern on a European scale." He wanted to built a diversified company capable of challenging American leadership fields like factory automation, electronic weaponry and aerospace, this way Reuter hoped to dilute Daimlers dependence on vehicles. Reuter felt that Europe's luxury carmakers would experience increased problems as the dollar weakened and as Japanese companies introduced upscale brands, "I want to avoid the pitfalls of overspecialization." From 1985 onwards, Daimler purchased controlling stakes in several businesses:

• "Allgemeine Elektrizitäts Gesellschaft" (AEG) was founded in 1883 and was a large but struggling electronics company, best known for household appliances, like steam irons, toasters, dishwashers and vacuum cleaners. AEG also manufactured turbine engines, radio and radar systems. Reuter wanted the company to specialize in more technically sophisticated businesses, like factory automation. The company purchased two U.S. plant automation companies for $300 million, Modcomp and Modicon. AEG also built up a rail systems unit.
• Aircraft engine maker "Motoren & Turbinen Union" (MTU) and turbo-prop airplane manufacturer "Dornier", two aerospace companies set the grounds for the creation of Deutsche Aerospace.

In 1989 Reuter continued the diversification strategy with the acquisition of 51% of "Messerschmitt-Bolkow-Blohm" (MBB), an aerospace company that held Germany's stake of 37.9% of the European Airbus Industrie consortium, which was competing with Boeing Co. and McDonnell Douglas Corp. With MBB, Daimler strengthened its position in defense and aerospace, raising about 10% of global sales, supplying the German government with 50% of its military purchases. MBB was working on the European Fighter Aircraft (Eurofighter), which would eventually yield $18 billion over the next 10 years. Reuter consolidated MBB with Daimler-Benz' other aerospace assets into Deutsche Aerospace.

In addition Daimler purchased 5% of French defense contractor Matra S.A. Aerospatiale and pooled the MBB helicopter line with the helicopter division of Aerospatiale of France under the name of Eurocopter. Eurocopter accounted for about 30% of the world market.

Jürgen E. Schrempp, the head of DASA at that time, pushed for a $466 million purchase of Fokker, one of the world's oldest airplane manufacturers. He called the Dutch firm his "love baby" and invested $2 billion to turn the loss making company around. Daimler hoped to get a foothold in the already crowded regional airplane market. Within the Aircraft sector, Airbus accounted for 37.5% of sales, Fokker for 31.8%, regional aircraft (Dornier) for 11.4%, military aircraft for 8.3% and Eurocopter for 11% in 1995.

In March of 1990 Daimler created a fourth corporate group called Daimler-Benz InterServices, to incorporate the fast growing financial-services and computer operations. In 1991 Daimler purchased a 34% stake in France's Sogeti, the parent company of leading European software and services group Cap Gemini Sogeti (CGS), for about $1 billion. With information technology in its operations Daimler intended to compete in the market of commercial software application packages and standard software.

The diversification strategy was criticized strongly among shareholders and trade unions. Shareholders feared the company had over-stretched and exposed itself to the dangers of post-takeover indigestion. Trade unions expressed concern that "thousands of jobs" would be lost through rationalization resulting from the MBB takeover. Reuter reassured that by taking over MBB Daimler was "under no circumstances letting itself in for unpredictable adventures." Reuter felt that "the car of the future will be equipped with new, revolutionary technology if it is to compete, a car has 5% electronics today, in 10 years time this figure will rise to between 20% and 25%. Air, space and defense are ideal areas for the creation of increasingly sophisticated spin-offs for the motor company. We will be able to maintain our role as pacemaker and a pioneer despite fiercer competition." Hans-Juergen Wischof, transport policy director at Mercedes-Benz, pointed out that "air and space technology can be brought to the car and the factory, we have already profited". A "synergy committee" was created that identified more than 100 synergy projects from which the company could benefit.

In 1993 Daimler-Benz shares were introduced at the New York Stock Exchange. Daimler was the first German company to list shares in the U.S. Reuter explained the strategic rationale behind the listing, "We will become industrial citizens in most countries, and therefore we cannot continue with just a German shareholding in our company." The New York exchange required Daimler to disclose financial results under U.S.-GAAP. Under conventional German accounting, the company reported a net profit of $102 million. German companies were permitted to dip into reserves, which was not allowed under U.S. accounting rules. The company announced a $579 million first-half loss under U.S.- GAAP and said it would eliminate 40,000 jobs in an effort to cut costs by $4.9 billion by 1997.

The net loss amounted to $1.05 billion (DM1.839 billion) for the fiscal year, Daimler's first loss in 103 years of business. "Financially, Daimler will reach its absolute low point in results," commented chief financial officer Gerhard Liener.

Mercedes-Benz had to struggle in the recession-hit auto industry. German automakers' sales had fallen 18% in 1993. BMW, the strongest competitor in the luxury car market, was outselling Mercedes-Benz for the first time. DASA sales were 10% lower than in 1992, as the post cold war governments cut back their defense budgets and Airbus continued to price airplanes below the break-even point.

Although Daimler posted a profit of $895 million (DM1.05 billion) in 1994 the "empire," as critics called the concern, continued to be in disorder. Daimler's market value decreased during Reuter's leadership from over $30 billion to $25 billion. A 10% drop in the dollar value and high labor costs damaged the competitiveness of German exports. Daimler's supervisory board failed to control the CEO, while he was continuing to acquire new businesses. This board consisted of representatives of major stockholders as well as unions representatives. As largest shareholder of Daimler-Benz Deutsche-Bank, the largest banking group of Germany, approved the acquisitions through this board. The acquisitions shifted management's attention away from the core business. Nevertheless, Fokker continued to post losses. The investment of Cap Gemini Sogeti lost half of its value and the management was faced with decreasing market share. AEG's restructuring plan did not show any results, although Daimler pumped more money into the company. Investors called for a "clear strategy." Reuters promised a boost in profits for 1995.

On May 24, 1995 Mr. Jürgen E. Schrempp became Chief Executive Officer of Daimler-Benz, he surprisingly beat his rival Helmut Werner, head of the Mercedes-Benz division. Days after Reuter retired Schrempp reversed Reuter's forecast and warned investors of "severe losses" in 1995. Schrempp also declared the "integrated technology concern" for dead.

Schrempp was part of the first post-war generation of top business managers. He started as a motor mechanic at a Mercedes garage. He went back to university, and later returned to Daimler-Benz. In the 1970s he worked for Mercedes in South Africa, then the went to Cleveland, Ohio, where he worked for a truck subsidiary in the early 1980s, and later returned to South Africa as the top manager. In the late 1980s he became chairman of the start-up DASA.

Schrempp said he admired Jack Welch, chairman of General Electric, who pursued a very aggressive and successful portfolio type operation. Schrempp believed that companies should "serve their clients, their employees, and their shareholders in roughly equal proportions." He said that Daimler focused too much on serving its employees and neglected its shareholders.

Schrempp promised change on an unprecedented scale. "We have to change the way the company operates, change the company's structures, and most importantly change the way the company thinks about itself."

For Schrempp, Daimler-Benz's mission was "in all aspects of mobility: producing cars, trains and aircraft." He said that those businesses that, after adjusting for risk, failed to earn pre-tax return of 12% on capital employed (ROCE) would be dumped. Capital employed is defined as the sum of fixed assets and net working capital. ROCE was not only a basis for external communication but was also used as an internal management variable for controlling purposes. Schrempp planned to group all 23 business-units into four business segments (passenger cars, commercial vehicles, aerospace, services). Each of the 23 business units had to achieve the target from its own resources, cross-subsidies were ruled out.

• As a result Daimler sold off 12 unprofitable units altogether.
• AEG was dismantled. The rail business was bundled into a joint venture called Adtranz with Swiss-Swedish engineering group Asea Brown Boveri. The household appliance unit was sold to Sweden's AB Electrolux.
• Deutsche Aerospace was renamed to Daimler-Benz Aerospace. At DASA he set up a program code-named "Dolores" short for "REScuing the company from the LOw DOllar". It included pay freeze, longer workweek, and shifting of production and parts purchasing into weak currency countries.
• Dornier remained unprofitable and joined Fairchild Aerospace, a regional aircraft manufacturer, under the new name Fairchild Dornier.
• Fokker was liquidated, causing a political crisis between Germany and the Netherlands. 5,700 jobs were lost at Fokker and although an estimated 70% of Daimler's employees were members of labor unions, Schrempp managed to lay-off 8,800 workers at DASA. "I want the shareholders to feel good again with Daimler" Schrempp said repeatedly.

After total losses of $5,7 billion in 1995, mainly due to write-offs caused by the divestiture from the 12 units, Daimler came close to Schrempps goal in 1996, with a return on capital employed of 5-6%. Mercedes-Benz already exceeded the benchmark of 12% in 1996. The only profitable division besides Mercedes-Benz was Debis, most of its earnings were from financing and leasing cars, at the same time the services division was becoming a global supplier of information technology and telecommunication solutions.

DASA was about to turn profitable for the first time in six years. DASA sales, adjusted for the changes in consolidation, increased by 18%. The division could get a further boost from the final approval of the Eurofighter by the European governments. Airbus turned healthy with increased demand and new airplanes, but faced strong competition from the newly merged Boeing-McDonnell Douglas. The Airbus consortium planed to change its corporate structure and legal form and approved the go-ahead for 3 new airplane models. Currency factors were becoming less significant. Daimler-Benz Aerospace would still be profitable even at a Dollar/DM rate of DM 1.35.

Schrempp increasingly focused on building a mechanism that combined the improvements of the independent units. Schrempp liked to say that only profitable companies could be socially responsible. He shifted his attention to this area. "I have a social responsibility. I would have no hesitation in sacrificing part of our profitability to solve a particularly acute social problem." Daimler trained more apprentices than it could offer jobs to. He tried to create an atmosphere of entrepreneurism and responsibility. At the annual general meeting in 1996, the stockholders of the company approved a resolution authorizing the "Daimler-Benz Stock Option Plan". Under this plan, rights to subscribe convertible bonds were granted to the members of the Board of Management and members of the boards of management of the divisions. As a result the public and the investors saw Daimler as progressive and fast moving.

Schrempp wanted to shift the power from subsidiaries such as Mercedes to the parent company. "The Daimler board will determine strategy, budgets and investment for each business." He argued that it would be impossible to manage Daimler without managing Mercedes. He said that many senior management functions in the group were duplicated and that there were too many layers of management bureaucracy. The chief of the Mercedes' American trucks unit, for example, reported to Mercedes' commercial vehicles chief, who was member of the management board of Mercedes. The commercial vehicle chief reported to Helmut Werner, the Mercedes-Benz CEO, who was also member of the Daimler-Benz board.

Under Schrempp's plan, Mercedes-Benz would be absorbed into the parent company, while the other main units remained independent. Three top Mercedes executives would be assigned to the Daimler board of management. Mercedes-Benz produced 70% of Daimler's $69.1 billion in revenues in 1996 and nearly all of its profit. Mercedes-Benz was Europe's most profitable carmaker. Due to a series of model events, car production Mercedes estimated an increase in units sold 1.2 million by the year 2000 versus 645,000 in 1996. Commercial vehicles were also set to expand in terms of volumes and earnings. The success was mainly attributed to Mr. Werner, who had become very powerful as CEO of Mercedes-Benz. Schrempp thought about offering him several alternative positions in the new organizational structure; chief controller, deputy chairman, or chairman of the supervisory board.

Schrempp contemplated about how to explain his plan to the board and how to approach Mr. Werner, as he waited for the extraordinary meeting of Daimler's supervisory board to begin. ²

Associated Press (Jan. 28, 1996, July 31, 1995)

BHF Bank (Jan. 28, 1997)

Bloomberg (1997)

Business Week (Feb. 10, 1997, Aug. 21, 1995, Feb. 12, 1990)

Chicago Tribune (Sept. 18, 1993)

Computerworld (Aug. 5, 1991)

Daimler-Benz Annual Report (1996)

Dow Jones News Service (May 28, 1997, Dec. 14, 1995)

Dresdner Kleinwort Benson (May 27, 1997)

Economist, The (Nov. 18, 1995)

Encyclopaedia Britannica (1997)

Financial Times (March 10 1997, Oct. 21, 1996, Aug. 30, 1996, Nov. 7, 1995)

Forbes (Dec. 16, 1996, Dec. 6, 1993, March 20, 1989)

Fortune Magazine (Nov. 1997)

International Management (Dec. 1989)

Time Magazine (Feb. 5, 1996)

Wall Street Journal, The (Jan. 17, 1997, April 13, 1994, March 9, 1990)

Daimler-Benz operates in four divisions; a description of the products and services from which each segment derives its revenues follows:

Automotive - design, manufacture, assembly and sale of passenger cars and commercial vehicles principally under the trade mark Mercedes-Benz as well as related parts and accessories.

Aerospace - development, production and sale of commercial and military aircraft and helicopters, of satellites and related space

transportation systems, defense related products, including radar and radio systems, and propulsion systems.

Services - services related to information technology, financial services, insurance

brokerage, trading, telecommunication and media and real estate management.

Directly managed businesses (DMB) - In 1996 represents 50% interest in Adtranz and microelectronics and automation processing products and diesel engines. In 1995 represented the AEG-DBI corporate unit, which included each of the foregoing business activities plus other businesses including products for the transmission and distribution of electricity.

Sales and revenues related to transactions between segments are generally recorded at values that approximate commercial selling prices.

1996/DM million