Last ride?

Doubts about Dr. Z and Daimler’s chairman succession plan

main 0204482221 AP – Dieter Zetsche Daimler Mercedes-Benz cars chairman CEO investor criticism profit warning shareholders
I’ll be back. Source: AP

After Daimler again cut its profit outlook on Friday — the second time since June — investors are having second thoughts about the carmaker’s succession plan. Dieter Zetsche, the carmaker’s current CEO, is slated to become non-executive chairman of the Mercedes-Benz maker in May 2021 after a two-year cooling-off period.

“Two consecutive profit warnings represent a huge liability for Zetsche,” said Marc Tüngler, head of the German association of retail investors, DSW. “If the situation escalates, it will be a wobbly road for him to lead the supervisory board in 2021.”

Mr. Zetsche, known to Americans as Dr. Z for the tongue-in-cheek commercials he featured in, has been celebrated as a successful manager since becoming CEO in 2006. He helped undo the costly merger with Chrysler, and turned the Stuttgart-based company into the world’s biggest seller of luxury cars, ahead of BMW and Audi. After two profit warnings, however, he has to show he’s worthy of taking over the chairmanship in two years’ time, Tüngler said.

The CEO’s reputation took a blow when the carmaker was associated with Dieselgate. While Daimler denied cheating diesel emissions, the way VW did, the luxury carmaker is recalling close to 800,000 vehicles in Europe after the German transport ministry forced Daimler to exchange the engine software that manages emissions purification.

Last year, German police raided 11 Daimler offices as part of a probe into fraud and false advertising related to emissions tinkering. In February, news broke that US investigators were combing through Daimler’s internal emails, searching for evidence of manipulation.

G S16 Daimler-01

These incidents weighed on Daimler’s share price, which has lost more than a quarter of its value since the start of the year. In that time, the German blue-chip DAX index has dropped 11 percent. “Our patience is wearing thin,” said an investor, who declined to be named.

Daimler, which is planning a restructuring that could result in a listing of a subsidiary, blamed “governmental proceedings” and costs related to diesel cars as the main reason for its lower profit outlook. It said it is also selling fewer vans and buses in some markets and needed to book a charge for using an illegal refrigerant in some cars’ air conditioning systems in Europe.

Models lose appeal too quickly

Analysts were shocked by the announcements, which included an expected 27 percent drop in operating profit for the third quarter. Daimler’s forecast that its 2018 operating profit will be “significantly below the prior-year level” was a “hammering for shareholders,” said Frank Schwope, analyst at bank Nord LB. “One has to wonder how well Daimler’s internal controlling is working.”

Jürgen Pieper of Metzler Bank said the second profit warning this year was a “disaster” and the preliminary third-quarter results were “disappointing.” Mr. Pieper, who has followed Daimler for many years, is especially worried about Mercedes-Benz cars, where unit sales have been falling the past four months. This was a sign of a “production problem” and “the models lose appeal too quickly,” the analyst said. “I can’t foresee that Daimler will find the right track again soon. The company will face turbulent times.”

If that prediction proves true, Zetsche’s resignation as CEO in May next year may be the last time he is a member of a Daimler board. Exit Dr. Z.

Franz Hubik is an automotive reporter for Handelsblatt; he previously covered the energy sector. To contact the author:

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