Zetsche Faces the Shareholders' Music
April 03, 2007

By Joseph Szczesny

BERLIN -- For Dieter Zetsche, the stakes have never been higher.

When he steps out on to the stage at the ICC meeting hall in Berlin Wednesday, the DaimlerChrysler chief executive will face one of the supreme tests of his career. He will have to report on the company’s overall condition, and it has been hurt badly by the Chrysler Group’s losses, which are now expected to continue through 2007.

Zetsche also could face some serious questioning about the growing strain between his management team and the influential German union, IG Metall. Open labor-management conflict like the American model is frowned upon in Germany. A battle with the union could ultimately put Zetsche’s job in jeopardy under the dual system, which places labor representatives on board of supervisors like that of DaimlerChrysler.

The board of supervisors has the power to hire and fire management. Indeed, DaimlerChrysler’s board has demonstrated a willingness to fire. Revolt on the labor side of the board ultimately led to the firing of Zetsche’s protégé, Wolfgang Bernhard, in 2004.

Still, Zetsche is not expected to talk much about the terms of any potential sale of Chrysler or what it might means for the future of the company now called DaimlerChrysler. Stock markets, particularly in Germany, have already spoken in favor of the sale, boosting DaimlerChrysler shares by 25 percent since Zetsche made his now-famous announcement that all options were on the table in February.

Despite shareholder glee at the prospects of a Chrysler sale, reversing the Daimler-Benz/Chrysler merger is no easy task.

For one thing, finding the financial formula for a sale to a private equity group is difficult. It will have to involve a final settlement of Chrysler’s substantial pension and health care liabilities.

Second, the difference between what Daimler-Benz paid for Chrysler stock in 1998, about $36 billion, and what it might fetch now, between $6 billion and $9 billion, would mean the Daimler organization would face a substantial write-off of assets.

Third, Chrysler and Mercedes-Benz now work through a common purchasing group. Separating the two groups would leave each with relatively less clout with key suppliers. In recent years, those suppliers have gradually assumed responsibility for entire systems of the vehicle, from complete interiors to suspensions.

Another issue that’s gotten scant attention in the press since Zetsche’s announcement is China. DaimlerChrysler’s initial efforts to penetrate the Chinese market were hurt in 2004 when an alliance with Mitsubishi collapsed.

Since then, the DaimlerChrysler organization in China has become highly integrated. Chrysler’s old Beijing Jeep unit, the first such operation run by an American company in China, has become the launching pad for the German-American company’s efforts to gain a foothold in China. More recently, Chrysler signed a deal with China’s Chery Automotive to build small cars for North America and Europe. A buyer for Chrysler undoubtedly would demand some of the China assets as part of deal, since automotive growth in the future will be in China.

Beyond China, the Chrysler Group depends on help from Mercedes-Benz in its ongoing drive to boost sales of vehicles outside North America. The export effort is beginning to pay dividends for Chrysler. Its overseas sales are expected to grow again this year as the marketing of Dodge and Jeep brand vehicles expands across Europe.

Another unanswered question is what becomes of DaimlerChrysler Financial Services. The financial unit has two primary and different faces -- one for Chrysler/Dodge/Jeep customers and dealers and another for Mercedes-Benz customers. Both are critical to the marketing and sales efforts of both brands. The back office functions of the two -- critical to running financial services efficiently -- have become tightly integrated over the past decade. Dividing the unit would probably create more expense and headaches.

Zetsche and the team studying the sale probably don’t have any answers yet and are likely to reveal little at Wednesday’s meeting. That means the DaimlerChrysler CEO is likely to spend the better part of the long day on the defensive in front of what is expected to be a large crowd of shareholders and proxy holders, some of them likely unruly.

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