DaimlerChrysler's Zetsche Tests US Managing Style at Mercedes...

Oct. 25 (Bloomberg) -- Hristos Tzelepis, 48, a Munich taxi driver who has put about 600,000 kilometers (372,823 miles) on his Mercedes E-Class sedan since he bought it new in 1997, says he's considering buying an Asian replacement, perhaps a less expensive and more dependable Mazda or Toyota. It's a switch that hundreds of German taxi drivers are making these days: Mercedes, which once supplied almost all of the nation's beige-colored cabs, now accounts for less than 70 percent of the market.

The taxi drivers' defections are symptomatic of the woes faced by Mercedes and its parent company, Stuttgart, Germany-based DaimlerChrysler AG. Since 1999, as Chief Executive Officer Juergen Schrempp attempted to merge the divergent cultures of Chrysler Corp. and Daimler-Benz AG, the automaker has ceded its lead in the global luxury car market to rival Bayerische Motoren Werke AG, lost half of its market value and stumbled through an unsuccessful bid at an Asian alliance.

On Oct. 26, DaimlerChrysler will probably say third-quarter net income fell 19 percent to 766 million euros ($917 million), according to 11 analysts surveyed by Bloomberg News. The carmaker paid more in taxes than during the same period a year earlier, when it took a charge to pay for recalls at Mitsubishi Fuso. Mercedes Car Group, Chrysler and the commercial vehicles division are all expected to report higher operating profit, the analysts said.

After five years of putting on cowboy hats to sell Dodges and cavorting onstage with showgirls to sell minivans, Zetsche has come home to run the Mercedes division and will take over as CEO at DaimlerChrysler, the world's fifth-largest automaker, in January after Schrempp, 61, retires.

Zetsche has a chance to become a hero of a Germany Inc. struggling with job cuts and falling profits. German employees have the least faith in their bosses among workers in the eight largest euro-area countries, according to StepStone, an Oslo-based Internet job site.

U.S.-style management is getting a full airing in Germany as Wolfgang Bernhard, a former cost-slashing protege of Zetsche, takes over at Volkswagen AG's namesake division and Siemens AG turns to Klaus-Christian Kleinfeld, who brought the electronics company's U.S. divisions back to profit in 2004 from a $550 million loss in 2001.

Investors have so far saluted Zetsche's ascension; on July 28, the day the decision was announced that he would succeed Schrempp, DaimlerChrysler shares rose 8.7 percent. They have risen 16 percent this year, trading at 40.84 euros on Oct. 24.

Even so, Zetsche faces an uphill battle because global capacity of 81 million cars and light trucks will exceed sales of 61 million this year, according to PricewaterhouseCoopers LLP. The resulting oversupply means Zetsche will have to keep searching for additional savings to offset price cuts and increased costs for metal and petroleum products.

In an echo of the job losses that marked Zetsche's arrival at Chrysler in November 2000, his first major action at Mercedes was the Sept. 28 announcement of an agreement with the German unions to cut 8,500 jobs, or about 9 percent of the workforce.

The cuts, which the company says will cost about 950 million euros, will come through voluntary buyouts.

Zetsche has to make progress before the image of the German brands is permanently damaged, says Reinhard Binder, a member of the executive management committee at Interbrand Zintzmeyer & Lux, a Zurich-based consulting firm.

Mercedes gave up its position as the largest maker of luxury cars to BMW in the first quarter and recalled 1.3 million cars in March.

Zetsche must ensure that Mercedes, which posted its first quarterly loss in more than a decade this year, regains its position as the top luxury carmaker, says Peter Brandle, a fund manager at Swisscanto Asset Management AG, which oversees about $42 billion in assets including DaimlerChrysler shares.

Even if Zetsche rallies Mercedes, a unit already shellshocked by three management changes within a year, he'll confront further wrenching decisions -- including deciding which strategies of Schrempp's conglomerate will survive.

The biggest gamble was the $36 billion 1998 takeover of Chrysler to form DaimlerChrysler. He also added stakes in Hyundai Motor Co. and Mitsubishi Motors Corp. to expand in Asia.

Schrempp predicted in 2000 that DaimlerChrysler would leapfrog Ford Motor Co. to become the world's second-largest auto manufacturer and the most profitable. Profit peaked at $6 billion in 1999.

Zetsche's first clear break with Schrempp's vision was demonstrated in 2004 when he voted, along with all but two management board members, against Schrempp to scrap a $6.4 billion bailout of affiliate Mitsubishi, Japan's only unprofitable carmaker.

``Zetsche's certainly as much of a strategist as Schrempp, but he's not the kind of manager to chase a dream over profitability,'' Tonn says.

DaimlerChrysler's stake in Mitsubishi Motors has since declined to about 13 percent from more than a third following two capital increases by its parent, Mitsubishi Group, and Tokyo-based investment company Phoenix Capital Co.

In August 2004, DaimlerChrysler also sold its 10 percent stake in Hyundai, all but ending Schrempp's original vision for an Asian empire that relied on Hyundai and Mitsubishi for small cars and manufacturing capacity.

Zetsche says he aims to add 4 billion euros to Mercedes's operating profit and increase the profit margin to 7 percent by 2007 by reducing costs through job cuts and more sharing of parts among models.

Taxis or no taxis, Germany remains Mercedes's largest market. Dependence on its home country, where new-car sales are expected to be about 3.3 million units this year, down from a peak of 4 million in 1990, has hurt Mercedes.

As the market has stagnated, Mercedes sales have, too. Mercedes sold 387,000 cars, including its Smart small car, last year in Germany. That's about 50 percent more than the company sold in the U.S. and a 1 percent decline from 2003.

In the U.S., Mercedes's second-largest market, sales have grown more slowly than at BMW and Toyota Motor Corp.'s Lexus division because those units were quicker to introduce luxury sport utility vehicles. Mercedes, the top U.S. luxury carmaker in 1999, was fifth through the first eight months of this year, behind Lexus, BMW, General Motors Corp.'s Cadillac and Honda Motor Co.'s Acura.

Zetsche's challenge is even greater because demand for mid- size luxury sedans is shrinking at a time when more and more carmakers are adding models to expand in the niche.

The E-Class has been hurt by sinking quality grades up until this year, says Ferdinand Dudenhoefer, a professor at the University of Gelsenkirchen.

Mercedes jumped five spots to sixth in the J.D. Power & Associates quality survey released in May, reversing a decline that led to a first-quarter loss on costs to fix reliability problems. BMW moved to third place from 11th last year. Toyota's Lexus retained the top ranking.

Fortunately for Zetsche and DaimlerChrysler shareholders, the Mercedes brand is still among the most valuable in the world.

Mercedes was the second-most-valuable brand in the car industry in a survey by Interbrand in May, trailing Toyota, the world's second-largest maker of cars.

This year and next, a new five-seat S-Class sedan, the brand's flagship model, will help boost sales, Zetsche says. ``Being able to present a new S-Class after only 12 days in my new position is more than one can hope for,'' Zetsche told the crowd gathered at the Mercedes stand to see the new S-Class at the Frankfurt Auto Show in September.

The S-Class, first introduced in 1951, has often led the way in introducing new technology such as air bags, three-point seat belts and anti-lock braking systems. Zetsche can't afford to have production glitches with the flagship model, says Adam Jonas, an analyst at Morgan Stanley in London.

``While the S-Class may not be critical in terms of the division's overall volume, it remains the most important profit contributor to the division,'' Jonas says.

The car, along with the SL model, a sports car, contributed 8 percent of the brand's unit sales last year.

Fortunately for Zetsche, much of the work to bring about an improvement in Mercedes vehicle sales, quality and profit is already started. New versions of the S-Class, M-Class and A-Class, as well as the all-new R-Class, a crossover based on the M-Class SUV, and the B-Class, a compact car, have already been rolled out.

Among the other decisions Zetsche will face in 2006 is what to do with DaimlerChrysler's 30 percent stake in European Aeronautic, Defence & Space Co., or EADS, the Paris- and Munich- based parent company of Airbus SAS.

DaimlerChrysler cannot sell its stake in EADS until the end of 2006 or it risks paying a capital gains tax in the Netherlands, where EADS is domiciled. In addition, political interests may hinder a sale unless both main shareholders, DaimlerChrysler and the French government, sell their stakes, Halter says.

Zetsche may also face increasing pressure from shareholders to shutter the Smart division, which posted an undisclosed loss in the first half. The company doesn't break down losses by division. The maker of the two-seater car that fits on a Ping-Pong table has never made a profit since it began selling cars in 1998.

DaimlerChrysler is spending as much as 1.2 billion euros this year to revamp Smart, including eliminating a third of the unit's workforce, or 700 jobs, mainly at the factory in Hambach, France.

Zetsche, more than any other top manager at the company, illustrates the blending of American style and German planning, says Paul Halata, who heads up the Mercedes division in the U.S.

Zetsche's background prepared him for foreign experience. Born in Istanbul to German parents, Zetsche attended high school in Frankfurt and studied electrical engineering at the University of Karlsruhe, graduating in 1976.

He completed a doctorate in engineering in 1982 at the University of Paderborn.

He also spent two years at DaimlerChrysler in Brazil, where he mastered Portuguese. He still gives interviews occasionally in that language.

The company's -- and Zetsche's -- multinational focus is evident on factory floors around the world.

Germany's Wilhelm Karmann GmbH, for example, assembles Crossfire sports cars for Chrysler in Germany using Mercedes-Benz parts. Chrysler is building Raider pickups for Mitsubishi in Warren, Michigan, and is in discussions to make minivans in North America for Volkswagen.

There it will assemble full chassis for future models to be mated with bodies assembled at a body shop owned and operated by Germany's Kuka Group and painted in a paint shop built and supervised by U.S. supplier Haden International Group.

Another example is a plant in Graz, Austria, run by Magna Steyr, a division of Aurora, Ontario-based Magna International Inc. and a supplier of DaimlerChrysler.

There, Franz Werczinsky and the 9,000 workers at the century- old Austrian industrial complex will build about 80,000 Chrysler and Jeep models this year.

About 69 percent of the cars and trucks are sold within a 400-mile drive from the plant; the rest are bound for Asia, the Middle East, Africa and Latin America, according to Manfred Hartmann, who heads up procurement for DaimlerChrysler at the facility. Early next year, Magna Steyr will add a Jeep Commander SUV to the lineup.

Werczinsky, 54, is responsible for a dozen different jobs on Chrysler Voyager minivans, Chrysler 300 sedans and Jeep Grand Cherokee SUVs built at the Magna Steyr factory, saving Chrysler the cost of having a European plant.

In 2002, Zetsche sold Chrysler's only European plant to Magna Steyr, the Graz-based company that also assembles vehicles for BMW.

In buildings nearby, other workers are assembling four-wheel- drive Mercedes C-Class sedans and G-Class SUVs, Saab convertibles for GM and X3 SUVs for BMW.

The innovations, among other changes, helped cut Chrysler's costs to develop new cars and trucks to $6 billion this year from $8.4 billion in 2000, even as Zetsche doubled the number of new products.

Until Schrempp announced his decision to leave the company at the end of 2005, the 10-member management board had one non-German in a full voting role. Now, there are three: Thomas LaSorda, the Canadian CEO of Chrysler; Eric Ridenour, Chrysler's American chief operating officer; and American Thomas Sidlik, head of global purchasing.

With the ascension of North American lieutenants, Zetsche will have a clearer mandate to make changes on the management board, says Juergen Graesslin, who heads the DaimlerChrysler Critical Shareholder Association.

Zetsche will balance engineering needs with market realities to make smarter product choices, says James Schroer, who was executive vice president for sales and marketing at Chrysler until May 2003.

Zetsche is also likely to display some of the traits he picked up in five years of running the show in the U.S. and eating with employees in the cafeteria at Chrysler's sprawling complex in Auburn Hills. Employees were encouraged to bring their hot rods to work, and on his last day as Chrysler chief, he refereed footraces in the parking lot to raise money for local charities.

Competing teams wore colorful T-shirts, and Zetsche appeared in an open-necked polo shirt.

In contrast, at DaimlerChrysler's headquarters in Moehringen, a suburb of Stuttgart, white-collar staff members enter the concrete buildings, crowned by a giant Mercedes three-pointed star, in suits and ties.

Colleagues address one another using the formal pronoun Sie and remember to include titles such as Doktor and Professor when talking to their bosses.

Zetsche admits he'll have to make some accommodations to his native land. And he didn't really change all that much in America, says Joe Eberhardt, 42, Zetsche's sales chief at Chrysler and a former top sales executive for Mercedes in Spain and the U.K. In fact, Eberhardt says, Zetsche's easygoing manner was compatible with American mores in the first place.

Mercedes is looking for leadership in the same way Chrysler employees were looking for leadership in 2001, and Zetsche will set a sense of urgency, establish priorities and get people to rally around those ideas, Eberhardt says.

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