With that, American control of Chrysler came to a startlingly abrupt end. When Daimler-Benz and Chrysler Corp. announced their $36 billion “merger of equals” in 1998, it was hailed as a marriage made in heaven. At the time, Chrysler was the world’s most profitable and cost-efficient carmaker, while Daimler was renowned as the planet’s premier luxury carmaker. DaimlerChrysler became the new model for a global automotive powerhouse and its stock soared into triple digits, forcing rival automakers into mergers of their own. But in remarkably short order the mass-class union has hit the skids, undermined by a transatlantic culture clash and a damaging exodus of talent. Virtually the entire “dream team” of Chrysler executives that built the hot models and big profits of the 1990s has departed, leaving behind a chaotic American operation where costs are spinning out of control. In the third quarter, the Chrysler unit of DaimlerChrysler lost $512 million–its first loss in nine years–and it could lose an additional $2 billion next year. DaimlerChrysler’s stock price has plunged, leaving the combined company worth less than Daimler-Benz was on its own before the deal. Last week Las Vegas billionaire Kirk Kerkorian, DaimlerChrysler’s third largest shareholder, filed an $8 billion lawsuit against the company, while European investors are calling for Schrempp’s head. Yet Schrempp remains undaunted. “There is a division line between a good strategy and an operational problem,” he says. “What we are trying to do is implement what I think is a great strategy.” (Interview, sidebar.)
But the worst may be yet to come. With the U.S. auto market weakening, car buyers are tiring of Chrysler’s aging models. Even costly rebates aren’t drawing shoppers. NEWSWEEK has learned that DaimlerChrysler’s crucial rainy-day cash reserve has been dangerously depleted by the automaker’s troubles and could fall to as low as $2 billion by the end of the year, a 78 percent decline from two years ago. “I am just confounded that the Chrysler franchise could become as bad as they say so quickly,” says former Chrysler board member John Neff, who voted for the deal back in 1998.
Even as the deal was coming together in 1998, problems were festering at Chrysler. They began with the loss of president Bob Lutz, godfather of the squad that pulled Chrysler back from the brink of bankruptcy in the early 1990s with trendsetting designs on a tight budget. But Chrysler chairman Bob Eaton had soured on Lutz’s dominant role in the company and did not give him a position in DaimlerChrysler. Lutz left in 1998, followed by more than a dozen top executives, including stars like Tom Gale, the design chief responsible for the PT Cruiser. “The guys who were the soul of Chrysler walked out the door,” says veteran auto analyst Maryann Keller. Several have since been shown the door. Last month, in his first day on the job, Chrysler’s newly installed chief, Dieter Zetsche, fired three more top Chrysler executives who were Holden allies. The executive bloodletting has become so common that some Chrysler troops have taken to playing “the dead-executives game,” a contest to predict which Chrysler exec will be the next to go.
Without ex-Marine fighter pilot Lutz leading the charge, Chrysler’s once disciplined organization has drifted. New models became more costly to build than the ones they replaced. A redesigned minivan, stuffed with new features like a power lift gate, costs $1,300 more to build than the previous version. The new Jeep Liberty, coming next year, is said to cost $2,000 more to produce than originally planned. Chrysler’s costly improvements were aimed at giving new models a quality boost, but consumers are balking at the higher prices.
Even Chrysler’s one bona fide hit, the gangster-style PT Cruiser, is not realizing its full potential. Fearing that it would be too expensive to attract young buyers, Chrysler priced it to start at $16,000, contrary to some internal recommendations that it be $1,000 higher. Now dealers are charging well above sticker price for the hot seller. “By pricing it too low, they put $1,000 in every dealer’s pocket,” huffs one former Chrysler executive.
To fix the fender bender, Schrempp is counting on Zetsche, who previously turned around Daimler’s Freightliner truck business by cutting 20 percent of the staff. He’s moving quickly in Detroit. Last week Chrysler increased the number of factories it plans to idle to adjust for weak demand. Next year Chrysler hopes to boost sales with a new Jeep and a redesigned pickup. Zetsche plans to overhaul Chrysler’s factories to make them more efficient, and he’s expected to cut the work force. In his first e-mail to Chrysler’s 125,000 workers Zetsche warned, “Some of the actions we will need to take for Chrysler to get back on track will be painful, but necessary.”
Zetsche will have a big job just rallying Chrysler’s demoralized troops. They are still furious over Schrempp’s public boast in October that he always intended to make Chrysler a mere Daimler division, rather than giving it equal footing with Stuttgart. But long before Schrempp made his controversial comments, there were signs of cultural tension between Chrysler and Daimler executives. Indeed, former Chrysler director Neff says he felt snubbed by Schrempp when the Daimler chief declined an invitation to meet with the Chrysler board prior to the merger. “We just wanted to feel more comfortable with the merger and ask some questions,” Neff recalls. “He thought he didn’t have to do it. I saw it as an example of his arrogance.” Inside Chrysler, it didn’t take long for executives to feel as if they were being taken over by their German counterparts. Within the first year of the merger, frustrated executives began sardonically referring to Chrysler as the “23d business unit” of Daimler-Benz. The contrast in corporate cultures was never more apparent than when both sides would meet in New York for supervisory-board meetings. Each Daimler executive would arrive in a chauffeur-driven Mercedes S-class sedan, while the Chrysler brass would all ride in a single minivan they dubbed the “clown car.”
But the culture clash pales next to the escalating financial problems confronting the company. Cash from DaimlerChrysler’s reserves is being used to make up for the huge losses the U.S. unit is suffering. The cash is also being depleted to pay for Schrempp’s deals to acquire stakes in other automakers, such as Mitsubishi, and to cover Chrysler’s new-product budget. If DaimlerChrysler’s cash pile shrinks to $2 billion, as insiders acknowledge it may, it will be the poorest automaker in Detroit. GM and Ford each have cash reserves of more than $13 billion, which they consider crucial to surviving a downturn. Without a big cash cushion, Chrysler’s turnaround will be harder to engineer. Warns Morgan Stanley analyst Steve Girsky, “Schrempp is running out of room to maneuver.” Counters Schrempp, “I think we stand a good chance to succeed.”
Chrysler’s rapid reversal of fortune stuns many in Detroit. But not Francois Castaing, the former chief engineer at Chrysler, who acted as Bob Lutz’s cost enforcer. “This merger was not going to work from day one,” says Castaing, who resigned just prior to the deal. “It was very unrealistic to expect a German engineer to learn something from an American.” Now Chrysler gets a chance to learn if German engineers can get it firing on all cylinders again.
