Veering Off

Mercedes-Benz boss faces crash test

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Completely in control. Source: Christoph Schmidt

His mustache might be a few decades out of date, but that doesn’t stop Dieter Zetsche from being one of Germany’s most hip and celebrated executives. Wherever he goes, people line up to take selfies with the 64-year-old engineer, who has led Daimler, the maker of Mercedes-Benz cars, since 2006. At public events he often appears in jeans, wearing sneakers instead of black leather shoes. Mr. Zetsche is Mr. Laid-Back, who has turned a battered brand into a world-beater.

Mr. Zetsche, known as “Dr. Z” in the US, has overcome Daimler’s past mishaps, including costly ventures into aerospace production and the takeover of Chrysler. He made Daimler sell the US carmaker in 2007 for a fraction of the purchase price, losing around $26 billion, according to one calculation. He then focused the company on renewing its models and controlling costs, laying the foundation for today’s enviable successes.

In 2016, the Stuttgart-based company overtook arch rival BMW as the world’s largest maker of luxury cars. Mercedes factories are working at full capacity, delivering sturdy G-Class SUVs to Arnold Schwarzenegger, slick C-Class coupes to China’s nouveau riche and nearly half a million semi-trailers and buses to truckers around the globe. Last year saw record revenues of €164 billion ($202 billion), record dividends (€3.65 per share), spectacular profits (€10.9 billion) and booming sales (2.4 million vehicles worldwide). At his zenith in 2017, Mr. Zetsche took home €8.6 million in salary and was able to award every single employee a bonus of €5,700. He’s working out plans to turn Daimler into a holding company and has heavily invested in ride-hailing and car-sharing apps to stave off the rise of Uber.

“No one committed fraud at our company, no emissions values ​​have been tampered with at our company.”

Dieter Zetsche, Daimler CEO

The brightly shining Mercedes-Benz star could, however, fade, overshadowed by investigations and a new, ambitious Chinese shareholder. Mr. Zetsche’s legacy faces risk which could costs billions, hurt Daimler’s reputation and limit the carmaker’s independence. It might even lead to Mr. Zetsche’s early departure.

As with Volkswagen’s diesel scandal, the past is catching up with Daimler and its CEO. Daimler received a €1 billion fine in 2016 for colluding with rivals to jack up the price of semi-trailers. Logistics firms are now suing to recoup damages from the conspirators, including Daimler. The company is also subject to investigation for possible collusion in the passenger car market, where Audi, BMW, Daimler, Porsche and Volkswagen may have illegally cooperated on a emissions cleaning additive. In theory, these cases could result in fines and settlements running into the hundreds of millions or billions.

Emissions technology poses another, bigger roadblock for Daimler and Mr. Zetsche, who has been with the company since 1976. Dieselgate’s toxic fumes, the scandal that has cost Volkswagen €25 billion so far, are also engulfing the luxury carmaker. The German Federal Motor Vehicle Transport Authority, or KBA, has ordered an investigation into one of Mercedes’ best-selling diesel vans, possibly paving the way for a massively expensive recall.

Volkswagen’s troubles, which cost then-CEO Martin Winterkorn his job in 2015, came from manipulating diesel engines so that they would pass environmental tests. On the road, the cars reverted to belching high levels of pollution. Mr. Zetsche has always denied that Daimler did anything similar. “No one committed fraud at our company, no emissions values ​​have been tampered with at our company,” he said last year. But the KBA are taking a good hard look at the Mercedes Vito van. Daimler says the case only involves “around 1,000 vehicles” and, anyway, there was no manipulation. The case has not been decided, but should it come out against Daimler, it could set off a domino effect of investigations into other models.

main 0200377786 AFP – Dieter Zetsche left Daimler CEO Mercedes Benz Arnold Schwarzenegger present G-Class SUV Detroit auto show Jan 2018 cowboy hat
Almost as famous. Source: AFP

Stuttgart prosecutors are also looking into diesel emissions. Last May, hundreds of police officers searched eleven Daimler premises for possible evidence. In the United States, the Department of Justice as well as environmental regulators are painstakingly piecing together the history of Daimler’s emissions testing, reading years of test data and corporate emails to see if manipulation took place. Similar investigations have already seen a number of Volkswagen managers put behind bars.

In the courts, several class-action suits are under way, including one led by Steve Berman, a lawyer with a history of winning billions in damages from corporations. This month, a judge in that case will rule if Daimler must submit to “discovery,” opening up its archives to the prosecution. Behind all this lurks the question: What does Mr. Zetsche know? If Daimler cheated, it would plunge the company into crisis and spell the end of Mr. Zetsche’s tenure, which runs until the end of 2019.

Over the last several years, Daimler quietly set aside billions to cover possible legal threats. In its 2017 report, the company wrote about emissions investigations: “If the outcome of such legal proceedings is detrimental to Daimler, the group may be required to pay substantial compensatory and punitive damages or to undertake service actions, recall campaigns, monetary penalties or other costly actions.”

Daimler’s long commitment to diesel has also exposed another weakness: electric vehicles. It may have lost sight of changes transforming the industry. In January, Mr. Zetsche stood beside Arnold Schwarzenegger and launched the new Mercedes G-Class, a decades-old luxury SUV design with mileage of just 13 miles per gallon. Mr. Schwarzenegger asked when an electric version might be available. Mr. Zetsche couldn’t give a clear answer.

26 p05 Daimler vs. Geely-01

The launch sums up the problem for Daimler. It is already losing ground on electric cars, and does not have an immediate answer. In Europe and the US, the Tesla Model S now outsells the Mercedes S-Class. Unlike BMW and VW, Daimler is not in the world’s Top 10 electric vehicle makers. Its new electric models do not go into production until next year, at the earliest.

Li Shufu, owner of Chinese carmaker Geely, saw this deficit and made his recent move to become Daimler’s biggest stockholder. China is Daimler’s biggest market and will introduce quotas for the production of electric and hybrid cars next year. Mr. Li wants to guide Daimler “on the path to becoming the world’s leading supplier of electromobility.” Mr. Zetsche and his board were not pleased. Daimler already has two major e-vehicle partners in China and doesn’t need more, particularly not when forced upon him via aggressive financial moves.

For the moment, Mr. Li says he does not even want a seat on the board, but his actions at Volvo, the Swedish brand he bought from Ford in 2010, show his ambitions are high. With Mr. Li owning 10 percent of Daimler, it is very unlikely that the Germans can keep doing business as usual, industry insiders said. Although the Chinese have no plans “for the time being” to buy additional Daimler shares, financial sources said Geely could increase its stake to 20 percent if Daimler continues to push back.

The next 21 months will show if Mr. Zetsche can strike a deal with Mr. Li and cope with the numerous investigations and court cases. If not, a successor is ready to take over: Ola Källenius, a 48-year-old Swede who is currently responsible for Mercedes-Benz car development and group research. For Mr. Zetsche, an early departure could crush his hopes of becoming its non-executive chairman. Yet diesel fumes and a wind from the East may put an abrupt end to his hero status, and to the boom times at Daimler. Just like his trademark mustache might one day appear out of date, he could be scrapped like an old diesel car, fallen out of fashion. Daimler’s slogan — The best or nothing — might also apply to his imminent, uncertain future.

A version of this article was published in the business weekly Wirtschaftswoche, a sister publication of Handelsblatt. Reporting by Simon Book, Lea Deuber, Annina Reimann, Christian Schlesiger, Martin Seiwert, Cornelius Welp. It was adapted for Handelsblatt Global by Brían Hanrahan and Gilbert Kreijger. To contact the authors: annina.reimann@wiwo.de, simon.book@wiwo.de, martin.seiwert@wiwo.de, christian.schlesiger@wiwo.de, lea.deuber@wiwo.de and cornelius.welp@wiwo.de

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