Purging Chrysler

By FRANK GIBNEY JR.

Cigar in hand, Jurgen Schrempp last spring was maintaining what had become a ritual on his regular visits to New York City--holding court at the St. Regis Hotel's King Cole Bar with a cluster of DaimlerChrysler's top executives. When an old business acquaintance wandered over to wish him well, Schrempp responded expansively with introductions to "my management board." The acquaintance shook all hands and then said with a chuckle, "But Jurgen, where are the Americans?"

Then they were out of sight. Now they are out of jobs. Although the deal that brought Daimler Benz and Chrysler together two years ago was presented as a grand "merger of equals," Schrempp never had any intention of letting Americans run Daimler. This month the DaimlerChrysler chairman decided they couldn't run Chrysler either. Schrempp fired Chrysler president James Holden and brought in a Mercedes veteran, Dieter Zetsche, after it was announced that the U.S. automaker had lost $512 million in the third quarter, its first loss since 1991--and, by all accounts, the first of several to come. Zetsche arrived with his own German chief operating officer in tow and, on his first day at work last Monday, promptly canned three more Chrysler execs. That brought to more than a dozen the number of top managers who have retired, quit or been fired since the merger. "We used to be the best show in town," bemoans a longtime Chrysler hand who still has his job.

The troubled merger is a story of miscalculation--by Schrempp, who realized too late that he had bought a company that had already peaked, and by Chrysler's executives, who failed to adjust to the sea changes of an increasingly competitive American auto market. It also points to the troubles that accompany big transnational mergers--and Schrempp has a number of them going at the moment.

Having faced bankruptcy roughly once a decade for the past half-century, Chrysler is no stranger to market adversity. But this time around, the merger really threw the team off its game. As the entire auto industry braces for a slowdown (General Motors and Ford are warning of sales declines beginning this month and into next year), Schrempp and his new Chrysler team are struggling to come up with a rescue plan.

Chrysler's woes are extensive. After owning the minivan market and a good chunk of the ever popular sport-utility business for a decade, the automaker has watched its market share get sucked away in the past year by competition. Instead of offering fresh new product, Chrysler rolled out an "all new" minivan that looks a lot like the old one, with expensive frills like power doors. Overproduction has forced the company to offer incentives of up to $4,000, tempting a loss on every sale. Chrysler even bungled its hottest product. There wasn't enough production capacity to meet demand for the wildly successful PT Cruiser, a hybrid retro minivan/station wagon. So even as auto-industry sales surged to a historic high last summer, Chrysler was beginning to hemorrhage red ink.

Remarkably, Schrempp knew little of this. A man who constantly uses chess as a metaphor for his business drive, Schrempp craves information. Much of his comes through the executive "war room" near his office, where nuggets of intelligence about DaimlerChrysler's vast empire are constantly ingested and analyzed. But Holden had demanded and received complete autonomy when he took over Chrysler, and he used it to wall himself off from the Daimler side in Stuttgart.

So when Holden was forced to idle 20,000 workers at seven plants, Schrempp was blindsided--and then enraged. He got the news from auto analysts after the fact. The extent of the losses too had been belied by Holden's rosy forecasts. A Stuttgart insider acknowledges, "Our tools are excellent, but they are only as good as the information we were receiving."

In fact, Chrysler was never the company Schrempp thought he was buying, a curious miscalculation for a man who wants you to have no doubt that he knows everything there is to know about business. From near failure in 1991, the Detroit automaker had staged a sensational turnaround to become a market leader with its minivans, Jeeps and Dodge Ram trucks. More important, it had become the lowest-cost auto producer in the world.

But by the time the deal was in motion, discord and age had sent several top members of Chrysler's dream team--vice chairman Bob Lutz, chief engineer Francois Castaing and manufacturing whiz Dennis Pawley--into the Detroit sunset. The demands of the merger made things worse. Meetings, transatlantic travel and continued distrust over Schrempp's intentions distracted executives in Chrysler's Auburn Hills, Mich., headquarters. Chairman Bob Eaton, who had pushed for the Daimler merger, became increasingly detached from the company's operations--but not so much that he couldn't fire Chrysler president Tom Stallkamp last year. Schrempp may not have agreed with that move, but he didn't stop it either. Schrempp let Eaton choose Holden as Stallkamp's successor. "This was an American management team with a real track record, who we thought knew what they were doing," says a Schrempp lieutenant in Stuttgart.

Daimler management regarded Holden as a bona fide member of Chrysler's dream team, one reason it granted him so much autonomy. In fact, Holden, a former vice president of sales and marketing, was viewed within and without Chrysler as a junior functionary in the automaker's success in the 1990s. Schrempp did not know it, but Holden's appointment had engendered tremendous resentment at Chrysler headquarters.

Sales began declining in April. As the year wore on and Stuttgart put increasing pressure on Chrysler to deliver more savings, the decision-making process in Auburn Hills began to falter. Product programs, critical to Chrysler's past success, were held up. Per-vehicle costs began to rise, in some cases as much as $2,000.

In the meantime, management actually reduced the retail price of the PT Cruiser $1,000, to $16,000, before it even hit the market. By last summer, when the Cruiser had become one of the year's automotive success stories, not only was Chrysler getting less per car, but management was still struggling with a concrete plan for cost-effectively increasing production.

Chrysler's overarching problem is that top management has failed to recognize the remarkable transformation that has reshaped the auto industry in the past three years. Mergers will do that. Intense competition in sport utes and light trucks has produced new niches of hybrid vehicles--part trucks, part cars--rendering passenger cars a loss-leading business. Dealers are not so loyal to a single brand, and the popularity of leases has made opportunists of what used to be loyal customers. Of course, the Internet has completely changed the way automakers do business--with one another, their suppliers and customers. Says a former Chrysler manager: "They missed the changes in the market, and they're being pushed by what's happening instead of trying to read it."

Schrempp's empire building has taken its toll as well. He bought a 34% stake in Japan's Mitsubishi Motors, the debt-burdened automaker that this year admitted to concealing product faults in more than 60,000 cars since 1977. (Mitsubishi just posted a $700 million loss for the first half of fiscal 2001.) DaimlerChrysler also bought control over Detroit Diesel, a local enginemaker, and Western Star, a Canadian truck concern. Oh, and there's also a 10% stake (it could go to 15%) in Korea's Hyundai.

Back in Auburn Hills, Holden was under tremendous pressure from Stuttgart to cut costs, but insiders say he had neither the leadership nor the experience to respond. Underlings ridiculed a proposal that managers shed excess cell phones and pagers. In April, citing record industry sales, Holden made the mistake of ending all sales incentives. Neither Ford nor General Motors followed his lead, so Chrysler customers deserted in droves. Then he reversed himself, which compounded the company's financial woes.

Now it is up to Zetsche to turn Chrysler around, and as he pointed out in an internal memo last week, there isn't much time. Analysts predict that Chrysler could lose up to $2 billion next year, given the decline in auto sales, its surplus inventory and thinning margins. This week will bring three more temporary plant shutdowns. There is widespread talk of layoffs, and discussions have begun with the United Auto Workers to change the generous contract Chrysler negotiated last year. Some product-development programs will be shaved. And there is new pressure on Chrysler's suppliers; they have been asked to cut prices as much as 5%.

Ironically, there is almost unanimous relief that Zetsche has been charged to turn the company around. A seasoned engineer with management experience in the U.S., he turned around Daimler's Freightliner truck business in the early '90s and was instrumental in reviving the Benz "A" class in Europe. He also transformed Mercedes from a company whose engineers shoveled product at customers to one that first listened to what customers said they wanted to buy. Zetsche is not without resources at Chrysler. Despite its current woes, the company is launching several new products early next year, including a convertible and the Jeep Liberty, a sport utility that has received high marks. One thing is certain: with Zetsche in charge, there will be no more misunderstandings between Detroit and Stuttgart.

Not that there will be fewer sightings of Schrempp at the St. Regis. Although he is being criticized in Germany for Chrysler's woes and his risky Mitsubishi investment, he is undaunted. "I am not going to let the right strategy get derailed by faulty execution," he told TIME last week. But he is learning, as they say in Detroit, to walk the talk. For example, just days after he heard about the October plant closings and the $512 million loss, the chairman made the mistake of telling the Financial Times that the notion of a merger of equals had always been a fiction anyway: "If I had gone and said Chrysler would be a division, everybody on their side would have said, 'There is no way we'll do this deal.'" That comment alone drew so much resentment at Chrysler that he had to apologize. Schrempp, a man who so values reliable information, at least now knows it needs to go both ways.

--With reporting by Joseph R. Szczesny/Detroit

With reporting by Joseph R. Szczesny/Detroit