Purging Chrysler

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.