Dieter Zetsche, Mercedes

Tuesday 29th September 2009

The architect in the revelations behind Daimler and Chrysler, Zetsche attempts the same miracles with Mercedes. But there are flaws in his strategy

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Quality short cuts, a fractious union with Chrysler and a resurgent BMW and Audi has dented the bodywork of one of the world’s most valuable car brands. In 2006 Dr Dieter Zetsche was tasked with re-building Germany’s top carmaker, Mercedes-Benz, bringing changes that would put the shine back into the iconic Mercedes star. The man behind the break-up of Daimler and Chrysler, Dieter Zetsche was the obvious candidate to drag Mercedes back from the brink. Time magazine even named him as one of the world’s most influential business leaders in 2006. Yet there are also strange gaps in Zetsche’s strategy to return pride to the marque.

Glory days
But first, roll back to Istanbul in 1953 where Zetsche was born. Zetsche’s father Herbert, a civilian engineer, brought the family to Turkey when he was hired to work on an industrial damn project. With the victorious Allies keen to rein in Germany’s industrial output, work at home was tough to find. Gradually the German economy improved and the Zetsches returned home, settling in Frankfurt. Here Dieter rapidly showed not just engineering interest but sporting ability, taking up equestrian vaulting while working a drinks delivery truck job to earn cash on the side.
By 1976 Zetsche had his electrical engineering degree from the University of Karlsruhe and had started work at Daimler-Benz, joining the research department then becoming an assistant to a development manager in Mercedes’ commercial business unit. It wasn’t too long before he was packed off to South America to head Mercedes’ engineering and product development centre in Brazil. While much of the global economy was pulling itself out of the oil crisis of the 1970s, Germany’s top car maker was powering ahead with the revolutionary compact 190 and the highly regarded W124, the so-called E-Class. For Zetsche it must have been a dizzying ride, travelling the world with an auto manufacturer operating at the top of its game. Mercedes cars – elegant, fast, beautifully built and safe – were never more highly regarded. Zetsche was also making use of his language skills (he’s fluent in English, French, Portuguese, Spanish and even Latin). But the good times weren’t to last.

Driven round the Benz
Behind the scenes, two oil tanker-sized problems were heading for Mercedes that would require all Zetsche’s organisational and leadership flair two decades later. Firstly, just-in-time production techniques pioneered by the Japanese – and later adopted by just about all the global car industry – were making car building cheaper and more profitable but not for Mercedes. Secondly, the deluxe car operator was under pressure to make their cars more sophisticated. The combination of cost cutting by hard-nosed bean counters plus the need to integrate extra electrical complexity was to lead to an ugly quality pile up.
The German brand’s glossy reputation was also quickly tarnished by the accompanying fast-eating, corrosive publicity: complaints soared. New Mercs were bad news and recalls got bigger, more regular and, for the up market German carmaker, more expensive as warranty claims spiraled. Engineered like no other car in the world? Even Korean cars did better in reliability and quality surveys. The 1998 merger between Mercedes parent company Daimler-Benz and troubled American automaker Chrysler compounded the problems. Both were hugely different car companies with very different cultures and histories. Originally tagged as a “merger of equals” the idea was that Daimler-Benz would donate engines and drivetrains to Chrysler while the American car maker would launch itself more upmarket while protecting Mercedes from the squalls of the premium-brand sector.
It was to be a lesson in synergies – one of the buzzwords of the time – and learning from each other. Jürgen Schrempp, then CEO, tagged it “a marriage made in heaven”. But Chrysler sucked up the cash while Mercedes’ quality problems worsened. There was some horror too from Stuttgart that plebian Chrysler would benefit from proprietary Mercedes technology. Much of Wall Street’s analyst community were simply blinded by the two-party merger, as were executives from both sides of the two auto giants.
To his considerable credit, Zetsche managed to return Chrysler largely back to profitability (though leaving the US marque with a dearth of new models). By the start of 2006 he succeeded Schrempp as chairman of DaimlerChrysler (though now renamed Daimler AG). Zetsche promptly demerged Daimler and Chrysler the following year.  
Since then, Zetsche has been busy focusing on restoring lustre to the marque’s wrecked image. Zetsche says the new Mercedes E-class is the toughest and most reliable yet, and this model has received largely positive reviews so far. The recently launched C-class has upped the pressure on BMW’s popular 3-series. Mercedes’ entry-level model is crucial; many C-class owners are new to the brand and the C-class is a model that needs to be competitively priced but retain the traditional lost-but-found hallmarks of the Stuttgart company.

The man who fixed Chrysler
To the casual eye, Zetsche’s bushy white moustache and the kindly, reserved manner may appear a mismatch for a business titan leading the world’s best-known auto brand into the 21st century. But Zetsche didn’t get where he is now by being a soft touch. He’s sacked tens of thousands of workers – particularly in the Chrysler-Daimler adventure – and he’s also had to motivate those who were left, all while inside a management culture at odds with his own. “The least productive thing you can do is to point fingers, always longing for the good old days,” he told the Detroit Free Press at the time. Zetsche also had to hone his diplomacy skills. When he arrived in Detroit it was a wise move not to drag a phalanx of senior German managers behind him. Zetsche’s management style is also informal, possibly a by-product of working for a long time in South America; his communication skills are also strong. Even in hard times, people generally knew where they stood with him. He uses colloquialisms, avoiding corporate clichés and jargon whenever possible. In the US he made a point of eating in the company cafeteria and parking in the employee parking lot.
But technical innovations into genuinely new areas, particularly hybrid technology, have remained frustratingly thin on the ground for Mercedes in a market crying out for ideas. Automotive industry writer Georg Kocher in Automobilemag recently wrote that Mercedes and BMW had not recognised the importance of hybrids until pretty recently – a highly odd omission in Kacher’s view – which leaves Mercedes worryingly exposed, particularly to the Japanese. “In the small-car segment, BMW has been arguably more successful than Mercedes with its pricey and prestigious Mini brand,” says Kacher. “The opposing Smart brand has only the rear-engine ForTwo, which is still dynamically flawed. The ForFour sedan and the roadster/coupe were quickly withdrawn due to slow sales, and the proposed ForMore never saw the light of day. In 2012, BMW will launch the supergreen Project i family to form its third satellite (after Mini and Rolls-Royce), while Mercedes is currently looking for a partner – Peugeot? Renault-Nissan? – that will develop, build, and share the still-tentative next-generation Smart car.”

Where next, Dr Z?
Zetsche still needs to cut costs. Ironically, a partnership Mercedes could benefit from most is with arch rival BMW. Both operate in similar markets and pooling of resources – the two car makers have had some hybrid co-operation in recent years – could yield cost benefits, provided separate brand identities are retained. Both car makers are anxious to penetrate the lucrative Asian markets as quickly as possible, bolstering their position to take on the likes of Japanese giants Toyota and Honda. Obviously, innovation is cheaper when the costs are shared. But perhaps Zetsche has had his fill of tie-ups for the moment. “We are the top of the industry with the Mercedes car brand and any integration of another brand would tend to drag us down,” he has said in the past.
However, if Mercedes cannot weather the current conditions, it could be dragged down, perhaps even being the victim of a takeover. Already this year Mercedes had to subsidise German dealerships by more than €50m. New, unwanted Mercs lie on forecourts across Germany, not to mention Europe. Sovereign Wealth investors Kuwait and Abu Dhabi, which own around 15 percent of the stock, recently added €2bn to the corporate pot; wages have been clipped across wide swathes of the workforce and exec bonuses have been trimmed. Union bosses like Erich Klemm meanwhile mutter that Mercedes is playing a game of catch-up, blaming ex boss Schrempp for not getting on the environmental green bandwagon fast enough (the marque still struggles with truly class-leading environmentally-friendly models, only recently put right by its Blue Efficiency range).
It’s also a tricky marketing issue for Zetsche. Traditionally fast luxury cars had little interest in talking up their green, ethical credentials. That’s all changed, especially with increased concern about global warming and the fall-out over the economic credit seizure. There’s even a growing green sports car market – an unheard of niche until recently.
So, are there any escape routes at all? There had been speculation that Daimler could build a partnership with Toyota, but Toyota ruled this out recently. Unless the global recovery gets a move on, Zetsche knows his company could be in serious trouble. Shortly before going to press, Zetsche announced he expected Daimler’s sales performance to improve in 2010. Responding, shares in the stock lifted 2.3 percent to €31. Analysts at JP Morgan recently said they expected premium car sales to lift before the mid-range mass market competition, like VW and Fiat, helped by cash-for-clunker schemes. Zetsche will be praying that the analysts are right. The comfy days when a new Mercedes was a byword for quality are long gone. But the memory of them hasn’t completely disappeared, yet.