Structural Change

Divisiveness at Daimler

Daimler AG Media Night Ahead Of The IAA Frankfurt Automobile Show
Keep your eyes on the road and all nine hands on the wheel! Source: Daimler AG

A decade after it offloaded Chrysler, German auto group Daimler is embarking on its next big reorganization by moving to create separate legal entities for its Mercedes-Benz cars and Daimler Trucks divisions, the company said on Monday.

Daimler wants to create a more agile structure to cope with mounting competition from the likes of Tesla and Uber in electric drive technology and self-driving cars, said Daimler executives.

“Whoever aims for sustainable competitiveness and profitability must continuously evolve and adapt to rapidly changing surroundings,” said Chief Executive Dieter Zetsche.

If the plan is implemented as expected, the car and truck divisions would become standalone companies capable of independently deciding whether to obtain funds via the stock market or with partners, freeing them to more easily make the large-scale investments needed to develop new technologies.

To help win support for the revamp from worker representatives, Daimler pledged to invest some €35 billion ($41.3 billion) in its German plants by 2025 and gave its 130,000-strong workforce job guarantees up to 2030. It also enlarged its pension fund by €3 billion.

While the plans have yet to be set into stone, there’s little doubt at Daimler that investors will be asked to vote on the reshaping plan at the annual shareholders meeting in 2019. The company will conduct a feasibility study of the plan over the coming months.

17 p16 Key Figures Daimler-01

The planned new structure consists of a holding company with three independent stock corporations: Mercedes Cars and Vans; Truck & Bus; and Financial Services AG, the latter of which is already a separate company.

At present, analysts say, Daimler still operates much like a 20th century industrial giant with a structure that remains too rigid for the coming technological upheavals. The reshaping plan counts as the second organizational change recently announced at Daimler. The company is also moving under a separate program to streamline its complex, often byzantine decision-making processes.

Daimler isn’t ruling out initial public offerings to help finance the huge investments needed in electric and self-driving technology. But such a move would not come in the immediate term. “There are no plans for Daimler AG to divest individual parts of its business,” the company said.

That restriction has dumbfounded some analysts. “Isn’t it pointless to give your teenagers freedom and then to not let them leave home when they’re ready?” said Arndt Ellinghorst of consultancy ISI Evercore.

With its current market capitalization of approximately €73 billion, Mr. Ellinghorst, says Daimler is significantly undervalued. The car business on its own, he said, is worth €41 billion and the truck division €31 billion, and the group has an additional €21 billion in liquid funds. Splitting up the company, Mr. Ellinghorst said, would unlock this hidden value.

Activist investors or potential predatory buyers could be making similar calculations. An attack on Daimler would be difficult, but not impossible, especially since the automaker’s share price has fallen by a quarter since 2015, when the emergence of VW’s emission-cheating scandal shattered confidence in the future of diesel technology.

Unlike BMW with its Quandt family and VW with the Porsche and Piech clans, Daimler has no anchor investors to fully shield it from a hostile bid. The biggest stakeholders in Daimler are Kuwait with 6.8 percent and Renault Nissan with 3.1 percent. Institutional investors hold 70.7 percent of Daimler shares.

“The additional income from IPOs, for example, will help to stabilize companies”

Ferdinand Dudenhöffer, University of Duisburg-Essen

The revamp could become a model for the entire auto industry. Rival automakers and suppliers are also thinking about changing their structures to ease their access to fresh financing. German firms face the twin tasks of investing in new technologies while vowing to continue to develop and improve diesel engines over the next decade or so.

“The additional income from IPOs, for example, will help to stabilize companies,” said auto expert Ferdinand Dudenhöffer of the University of Duisburg-Essen. VW has already merged its commercial vehicles business into its “Truck & Bus” division in order to save assembly costs through component-sharing for its MAN and Scania brands.

Fiat-Chrysler, meanwhile, plans to spin off its components subsidiary Magneti Marelli next year. Group CEO Sergio Marchionne said this month that a spin-off and IPO of the subsidiary would be the best way to unlock its value.

At Daimler, the role that CEO Zetsche would play in the planned new structure remains in question. His contract runs to the end of 2019. According to company insiders, there is a strong possibility that he may move to the supervisory board after a “cooling-off period” dictated by corporate governance rules.

Marcus Fasse covers the auto industry for Handelsblatt. To contact the author: fasse@handelsblatt.com

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