Daimler-Benz A.G.

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Daimler-Benz A.G.

Mercedesstrasse 136
Postfach 202
D-7000 Stuttgart 60
Federal Republic of Germany
(0711) 17-0

Public Company
Incorporated: 1926
Employees: 232,000
Sales: DM 58.5 billion (US$30.1 billion)
Market Value: DM 52.1 billion (US$26.8 billion)
Stock Index: Berlin Dusseldorf Frankfurt Hamburg
Munich Stuttgart

Daimler-Benz has an image befitting the manufacturer of the Mercedes-Benz. Conservative and stable, the automaker has a history that goes back to the very beginnings of the gasoline-powered engine. Yet, in addition to being a manufacturer of luxury cars, Daimler-Benz is Europe’s largest commercial truck producer and makes more heavy (over six-ton) trucks that any other company in the world. And when the company unexpectedly bought three large conglomerates (between February 1985 and February 1986), the list of Daimler-Benz products grew to include everything from spacecraft systems to vacuum cleaners. The acquisitions also made Daimler-Benz the second largest industrial company in West Germany and its second largest defense contractor.

The roots of this company go back to the mid-1880’s and two engineers, Carl Benz and Gottlieb Daimler. Most authorities cite them both as the most important contributors to the development of the internal combustion engine. Yet, although concerned with the same idea at virtually the same time, and living within 60 miles of each other, the two apparently never even met. They certainly never envisioned the 1926 merger of their two companies.

Although Benz drove his first car in 1885 and Daimler ran his in 1886, neither was actually the first to create gasoline-powered vehicles. However, they were the first to persist long enough to make them viable as transportation. At this time the obstacles to motorized vehicles were enormous: gasoline was considered dangerously explosive; roads were poor; and few people could have afforded an automobile in any case. Nevertheless, Benz dedicated himself to revolutionizing the world’s transportation with the internal combustion engine.

Early in 1885 Benz sat in a car and circled a track next to his small factory, while his workers and his wife stood nearby. The car had three wheels and a top speed of 10 m.p.h. This engineering triumph was only slightly marred by Benz’s first public demonstration which took place shortly afterwards. He forgot to steer the car and smashed into the brick wall around his own house. Despite this inauspicious debut, Benz’s cars quickly became known for their quality construction and materials. By 1888 he had 50 workmen building his three-wheeled car. Two years later, he began making a four-wheeled vehicle.

Daimler’s convictions about the internal combustion engine were as intense as Benz’s. Originally a gunsmith, Daimler later trained as an engineer, studying in Germany, England, Belgium and France. After working for a number of German and British firms, he became technical director for the Gasmotorenfabrik Deutz. Disillusioned by the company’s limited vision, however, he and researcher Wilhelm Maybach resigned in 1882 to set up their own experimental workshop. They tested their first engine on a wooden bicycle. Later, they put engines into a four-wheeled vehicle and a boat. Daimler sold the French rights to his engines to Panhard-Levassor (which later fought him for the use of his name). In 1896 he granted a patent license to the British Daimler company, which eventually became independent of the German Daimler-Motoren-Gesellschaft.

The story of how Daimler found a new brand name for its cars has become legendary. In 1900, Austro-Hungarian Consul-General and businessman Emil Jellinek approached the company with a suggestion. He offered to underwrite the production of a new high performance car. In return, he asked that the vehicle be named after his daughter—Mercedes.

Daimler’s Mercedes continued to make automotive history. In 1906 the young engineer Ferdinand Porsche took the place of Daimler’s oldest son, Paul, as chief engineer at the company’s Austrian factory. (Paul Daimler returned to the main plant in Stuttgart.) In the five years that Porsche was with Daimler, he produced 65 designs, which makes him one of the most influential and prolific automotive designers ever. Approximately the same time, in 1909, the Mercedes star emblem was registered; it has embellished the radiators of all the company’s cars since 1921.

In 1924 the Daimler and Benz companies began coordinating designs and production, but maintained their own brand names. They merged completely in 1926 to produce cars under the name Mercedes-Benz. The merger undoubtedly saved the two companies from bankruptcy in the poverty and inflation of post-World War I Germany.

The company continued to grow throughout the 1930’s. The most consistently successful participant in automobile racing history, Mercedes-Benz scored international victories that added to its reputation. The company’s racing success was also used as propaganda by the Third Reich in the years before World War II. The Mercedes-Benz became Adolph Hitler’s parade transportation. Whenever he was photographed in a vehicle, it was a Mercedes.

In 1939 the state took over the German auto industry, and during the war Daimler-Benz developed and produced trucks, tanks, and aircraft engines for the Luftwaffe. The company’s importance to the German war machine made Daimler-Benz a primary target for Allied bombing raids. Two weeks of air strikes in September of 1944 destroyed 70% or more of the company’s plants.

Although little was left of the company, workers returned to resume their old jobs after the war. To the surprise of many people the factories recovered, and the company again became one of the most successful auto manufacturers in the world.

Much of Daimler-Benz’s growth in the 1950’s occurred under the direction of stockholder Friedrich Flick. A convicted war criminal, Flick lost 80% of his steel fortune at the end of the World War II. Yet he still had enough money to purchase a 37¹/2% interest in Daimler-Benz between 1954 and 1957. By 1959 his $20 million investment was worth $200 million, and he had become Germany’s second ranking industrialist.

Flick’s holdings allowed him to push the company to buy 80% of competitor Auto Union, in order to gain a smaller car for the Daimler product line. The acquisition made Daimler-Benz the fifth largest automobile manufacturer in the world and the largest outside of the United States.

The acquisition probably lessened the impact of new U.S. compact cars in the 1950’s as well. However, Daimler-Benz was less worried than other European automakers for another reason. Mercedes’ appeal was to the wealthy, status-conscious customer, and that appeal grew steadily. By 1960 Daimler-Benz already had 83,000 employees in seven West German plants. Additional plants were located in Argentina, Brazil and India, and the company had established assembly lines in Mexico, South Africa, Belgium and Ireland.

Daimler-Benz’s conservative outlook is evident in its strategy of gradual growth, concentration on areas of expertise, foresight, and willingness to sacrifice short-term sales and earnings for long-term benefits. This conservatism helped to soften the effect of the recession and gasoline shortages that had severely affected other automakers by mid-1970. While many manufacturers were closing facilities and cutting workers’ hours, Daimler-Benz registered record sales gains.

Chairman Joachim Zahn, a lawyer, said the company had foreseen “the difficult phase” the auto industry was about to confront. Between 1973 and 1975 Zahn had set aside some $250 million as “preparation” for bad times. And while other automakers had spent time and money on model changes, Daimler-Benz had invested in engines powered by inexpensive diesel fuel. These vehicles comprised 45% of its output by the mid-1970’s.

The company was not without some problems during these years. High labor costs and the increasing value of the deutsche mark were making Mercedes-Benz automobiles more expensive than ever. Rather than reducing costs or cutting corners, however, the company began to speak of its cars as “investments.”

Although primarily known for its passenger cars, Daimler-Benz has a commercial truck line that was its largest source of profits for many years. The company profited from the oil-price increase of the late 1970’s, when demand for its commercial vehicles rose dramatically in the Middle East. Most of the company’s trucks are made outside of Germany, unlike its cars. Later, the commercial line did lead the company into one risk that was stalled by unfortunate timing. In 1981 Daimler-Benz purchased Freightliner, a manufacturer of heavy trucks, just as sales ground to a halt in the face of America’s recession.

Some risk-taking was inevitable, of course. And usually it paid off. Daimler-Benz increased its car production from 350,000 to 540,000 units a year between 1975 and 1983. Most of the increase was due to the introduction in 1983 of its 190 model, a small version of its saloon car. There was a chance that sales of the 190 would detract from sales of its larger cars, rather than add to them. Yet, the 190 not only attracted new customers, but the updated image of the new model lowered the average age of a Mercedes owner from 45 to 40.

As a manufacturer of luxury automobiles, Daimler-Benz was less vulnerable than most automakers to shifts in demand during the early 1980’s. Most Mercedes-Benz customers were rich enough to rise above concerns about finance rates, inflation, recession, gasoline prices or tax breaks. In early 1985, for example, German lawmakers vacillated over tax breaks for buyers of cars with lower exhaust emissions. And many Germans delayed purchasing a car until they could see which way the balance would swing. While other auto manufacturers suffered through the resultant falling sales, Daimler-Benz was unaffected. Not only were its diesel-powered cars producing fewer fumes, but most Mercedes drivers were unconcerned about tax perks.

Another traditional safeguard for Daimler-Benz is its long-standing policy of making only as many cars as it can expect to sell, especially during a recession. The result has usually been a backlog of demand when the recession ends. In addition, since the company’s sales are good even when the market is bad, Daimler-Benz does not have to cater to demands from dealers. Although the U.S. is Daimler-Benz’s largest market (after West Germany), its 500 American dealers unsuccessfully requested more cars in 1985.

Why wouldn’t Daimler-Benz increase shipments? One reason is that sharp upswings in supply tend to lower the value of used Mercedes. That means owners are less likely to sell and buy a new one. And resales are vital to the company’s success; 90% of West German owners buy another Mercedes when they change cars. In foreign markets, the rate of repurchasers is as high as 80%.

Due to the limitations that the company places on production and exports, a “gray market” in Mercedes-Benz cars operates in America. Dealers import recent models from other countries without Daimler-Benz’s authority, often illegally. Then they modify them to meet U.S. safety and emission standards and sell them for less than regular dealer franchises. Daimler-Benz tries to protect its carefully controlled market against these “gray market” dealers, but with little success.

During the mid-1980’s Daimler-Benz was confronted with a dramatic increase in competition for the luxury car market, the fastest growing segment of the automobile business. Along with this market competition is the increasing speed and sophistication of competitors’ automotive research. For example, pioneering Daimler-Benz engineers spent 18 years developing anti-skid brakes that enable drivers to keep control of their vehicles during sudden stops. A few months after the company introduced the breakthrough in the United States, Lincoln brought out a similar system as standard equipment.

Competition and the high price of research and development were two of the factors that precipitated the sudden moves Daimler-Benz made between February 1985 and February 1986. Industry analysts were surprised when the company acquired, in quick succession, three large conglomerates. This was a departure from Daimler-Benz’s tradition of gradual growth. In February of 1985 Daimler-Benz acquired Motoren-und-Turbinen-Union, which makes aircraft engines and diesel motors for tanks and ships. Daimler already had a 50% interest in the company, and when MAN (a Daimler-Benz partner and manufacturer of heavy trucks and buses) wanted to acquire some cash, the company bought MAN’s share for $160 million. Motoren-und-Turbinen-Union sales were $768 million in 1984.

The second acquisition followed in May of 1985. Daimler-Benz spent $130 million for 65.6% of Dornier, a privately-held manufacturer of spacecraft systems, commuter planes and medical equipment. The company was up for sale because of disputes within the Dornier family. Dornier sales were about $530 million in 1984.

In early 1986 Daimler-Benz made its third acquisition. The company paid $820 million for control of AEG, a high technology manufacturer of electronic equipment such as turbines, robotics and data processing, as well as household appliances. Although annual sales in 1984 were an impressive $3.7 billion, the company had just emerged from bankruptcy after losing $904 million in nine years building nuclear power plants.

Many industry-watchers were dubious about the diversification of a company that was already doing so well. Profits had increased every year but one between 1970 and 1985; in 1985 they increased more than 50%. Some analysts questioned the speed of Daimler-Benz’s purchases, as well as management’s ability to hold such a large and diverse enterprise together.

Yet Werner Breitschwerdt, chairman of Daimler-Benz’s management board, claimed full confidence in the moves. Breitschwerdt, an electrical engineer, joined the passenger car division of the company in 1953 and served as head of styling and product development. He became a member of the managing board in 1977 and chairman in 1983 after the death of his predecessor Dr. Gerhard Prinz. Breitschwerdt is the first engineer to head the company in decades, and the only research and development expert to hold that position.

By bringing the technical and research expertise of the new subsidiaries to Daimler-Benz, Breitschwerdt hoped significantly to expand the company’s research base. The prospects were highly promising for the automotive division, whose engineers were already interested in developing “intelligent” cars. In this area, the radar technology of AEG and the materials expertise of Dornier would be extremely useful.

However, the Deutsche Bank which owns 28% of Daimler-Benz, became increasingly troubled by Breitsch-werdt’s apparent lack of a clear program for integrating the company’s recent acquisitions. In July 1987 Breitschwerdt announced his resignation. Despite the major reservations of several board members, but with Deutsche Bank’s full approval, Edvard Reuter, the company’s chief strategic planner, was appointed to succeed Breitschwerdt.

These recent upheavals seem to have had little impact on Daimler-Benz’s performance; it has emerged as the largest industrial concern in West Germany. And not withstanding its recent diversification, the company remains closely identified with its line of expensive automobiles.

Principal Subsidiaries

Holzindustrie Bruchsal GmbH; Machinenfabrik Esslingen AG (97.3%); Hanomag-Henschel GmbH; Industriehandel Handels-und Industrieausruestungs-gesellschaft mbH; Mercedes-Leasing-GmbH; Daimler-Benz Wohnungsbau Gesellschaft mbH; Daimbler-Benz of North America Holding Co., Inc.; Mercedes-Benz of North America, Inc.; Freightliner Corp. The company also has subsidiaries in the following countries: Argentina, Australia, Austria, Belgium, Brazil, Canada, England, France, Greece, India, Indonesia, Iran, Italy, Japan, Mexico, The Netherlands, Nigeria, Saudi Arabia, South Africa, Spain, Switzerland, and Turkey.