Daimler-Benz AG

IR
70546 Stuttgart
Germany
(49) 711-1792287
Fax: (49) 711-1794109

Public Company
Incorporated: 1926
Employees: 330,551
Sales: DM 104.1 billion (US$74.0 billion)
Stock Exchanges: London New York Paris Singapore Tokyo Vienna Berlin Düsseldorf Frankfurt Hamburg Munich Stuttgart Basel Geneva Zurich
SICs: 6719 Holding Companies, Not Elsewhere Classified; 3711 Motor Vehicles & Car Bodies; 3714 Motor Vehicle Parts & Accessories; 3721 Aircraft; 3699 Electrical Equipment & Supplies, Not Elsewhere Classified; 5012 Automobiles & Other Motor Vehicles; 5013 Motor Vehicle Supplies & New Parts; 6159 Miscellaneous Business Credit Institutions; 7389 Business Services, Not Elsewhere Classified

Best known as the manufacturer of the luxurious Mercedes-Benz, Daimler-Benz AG is Europe’s largest commercial truck producer and makes more heavy (over six-ton) trucks than any manufacturer in the world. As the owner of three huge conglomerates, purchased in the mid-1980s, the company also produces everything from fighter bombers to vacuum cleaners. Acquisition of the conglomerates made Daimler-Benz the largest industrial company in Germany and the nation’s second-largest defense contractor.

The roots of this company go back to the mid-1880s and two engineers, Carl Benz and Gottlieb Daimler, who are cited by most authorities as the most important contributors to the development of the internal combustion engine. Despite the fact that they were both concerned with the same idea at virtually the same time, and they lived 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 afford 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 ten m.p.h. This engineering triumph was only slightly marred by Benz’s first public demonstration, which took place shortly afterward, in which he forgot to steer the car and smashed into the brick wall around his own home. Despite this inauspicious debut, Benz’s cars quickly became known for their quality of materials and construction. By 1888 Benz had 50 employees 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, 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 Porsche was with Daimler, he produced 65 designs, which made 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 1930s. 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 1944 destroyed 70 percent 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 1950s occurred under the direction of stockholder Friedrich Flick. A convicted war criminal, Flick lost 80 percent of his steel fortune at the end of World War II. Yet he still had enough money to purchase just over 37 percent 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 percent 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 the United States.

The acquisition probably lessened the competitive impact of the new U.S. compact cars introduced in the 1950s; moreover, Daimler-Benz faced a lesser threat than other European automakers because the Mercedes appealed to the market segment made up of wealthy, status-conscious customers, and its 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 was 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 soften the effect of the recession and gasoline shortages that had severely affected other automakers the 1970s. 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 spent time and money on model changes, Daimler-Benz had invested in engines powered by inexpensive diesel fuel. These vehicles comprised 45 percent of its output by the mid-1970s. The company was not without problems during these years, as 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’s commercial truck line was its largest source of profits for many years. The company profited from the oil price increase of the late 1970s, when demand for its commercial vehicles rose dramatically in the Middle East. Most of the company’s trucks were made outside of Germany, unlike its cars. Later, the commercial line led the company into one risk that was stalled by unfortunate timing. In 1981 Daimler-Benz purchased the U.S.-based Freightliner Corp., a manufacturer of heavy trucks, just as sales ground to a halt in the face of a U.S. recession.

Some risk-taking was inevitable, of course; 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 smaller version of its saloon car. Despite some concern that the 190 would cannibalize sales of its larger cars, the 190 expanded Daimler-Benz’s customer base, and the updated image of the new model attracted younger customers, lowering 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 1980s. Most Mercedes-Benz customers were wealthy 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 falling sales that resulted, 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 was its long-standing policy of making only as many cars as it could expect to sell, especially during a recession. The result was usually a backlog of demand when a recession ended. Additionally, since the company’s sales were good even when the market was poor, Daimler-Benz never had to cater to demands from dealers. Although the United States comprised Daimler-Benz’s largest export market, its 500 American dealers unsuccessfully requested more cars in 1985. Why wouldn’t Daimler-Benz increase shipments? One reason was that sharp upswings in supply tended to lower the value of used Mercedes, which meant that owners were less likely to sell and buy a new one. And resales were vital to the company’s success: 90 percent of West German owners bought another Mercedes when they changed cars. In foreign markets, the repurchase rate was often as high as 80 percent.

Due to limitations that the company placed on production and exports, a “grey market” in Mercedes-Benz cars operated in the United States. Dealers imported recent models from other countries without Daimler-Benz’s authority, often illegally, and modified them to meet U.S. safety and emission standards; they then sold the cars at a lower price than regular dealer franchises. Daimler-Benz often tried to protect its carefully controlled market against these “grey market” dealers, but with little success. During the mid-1980s 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 was the increasing speed and sophistication of competitors’ automotive research. For example, pioneering Daimler-Benz engineers spent 18 years developing anti-skid brakes to 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 precipitating the sudden moves Daimler-Benz made in the year 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 1985 Daimler-Benz acquired Motoren-und-Turbinen-Union, which made aircraft engines and diesel motors for tanks and ships. Daimler already had a 50 percent 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 1985. Daimler-Benz spent $130 million for 65.6 percent of Dornier, a privately held manufacturer of spacecraft systems, commuter planes, and medical equipment with 1984 sales of $530 million. In early 1986 Daimler-Benz made its third acquisition, paying $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 the company’s 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, and increased more than 50 percent in 1985 alone. Some analysts also 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, maintained 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 was 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 to significantly 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 owned 28 percent of Daimler-Benz) became increasingly troubled by Breitschwerdt’s apparent lack of a clear program for integrating the company’s $5.5 billion in recent acquisitions, and in July 1987 Breitschwerdt announced his resignation. Despite the major reservations of several board members, but with Deutsche Bank’s full approval, Edzard Reuter, the company’s chief strategic planner, was appointed to succeed Breitschwerdt. These recent upheavals seemed to have little impact on Daimler-Benz’s performance; it still emerged as the largest industrial concern in Germany. And notwithstanding its recent diversification, the company remained closely identified with its line of expensive automobiles.

In 1989 Daimler-Benz InterServices AG (Debis) was created to handle data processing, financial and insurance services, and real estate management for the Daimler group. Modeling Debis after similar internal service divisions at Eastman Kodak, General Motors, and IBM, Debis’s primary function was to trim much of the company’s corporate fat. The following year the dismantling of the Berlin Wall had both positive and negative repercussions for Daimler-Benz: while the recently acquired aeronautical and defense businesses were hurt, the resulting unification provided a welcome jump in demand for Daimler-Benz’s automotive division.

By the early 1990s the German economy took a turn for the worse, and the consequences of Daimler-Benz’s mid-1980s spending spree began to take their toll. For the first time in its history, Daimler-Benz was forced to eliminate 14,000 jobs (through early retirement and attrition) in its automotive division as Mercedes sales plunged and Daimler’s overall profit dropped 25 percent in 1992. Hoping to bolster sales by expansion, Mercedes-Benz bought a five percent stake in Korea’s Ssangyong Motor Company in December to build four-wheel-drive vehicles, vans, and later passenger cars using Mercedes engines and technology.

First-quarter figures for 1993 reflected Germany’s widening recession, with Daimler-Benz’s net income plummeting by 96 percent to $12.4 million on sales of $13.1 billion, while Mercedes’s sales (65 percent of the group’s) fell 24 percent for the period. Yet with long-term goals in mind, Daimler-Benz announced hidden reserves of $2.45 billion in an effort to become the first German firm listed on the New York Stock Exchange. The disclosure by Daimler-Benz, which had been prevented from admittance in the past by discrepancies between German and U.S. accounting procedures, was the first of several compliances offered to satisfy U.S. regulators. By mid-year, using stringent U.S. accounting procedures, Daimler-Benz reported sales of $69.6 billion and its first loss since the end of World War II. Yet the company’s financial maneuvering earlier in the year had paid off: in October 1993, Daimler-Benz triumphantly listed its stock on the Big Board of the NYSE.

Mercedes-Benz, meanwhile, was busy with both internal and external expansion. A new lower-priced C-Class Mercedes (known as the “Baby-Benz”) was introduced to appeal to younger buyers in the United States and Europe, while plans were announced to build a $300 million manufacturing facility in Tuscaloosa, Alabama, in return for massive tax breaks, investments from Jefferson County and the city of Birmingham, and a host of other incentives many labeled extravagant. Other big moves in 1993 included Debis’s construction of new headquarters in Berlin, rewarded by $5.1 billion in sales, nearly double those of 1990. Daimler-Benz finished 1993 with overall revenue of $70 billion, with sales constrained by higher interest rates, an increase in value-added taxes, and a sluggish European market. The year’s losses amounted to $1.3 billion, including an $88.3 million deficit from Deutsche Aerospace AG (DASA), which continued to hemorrhage for the next several years.

In 1994 Mercedes-Benz initiated a sweeping reorganization that included manufacturing more car parts outside Germany, appealing to younger buyers through radically different U.S. advertising, and developing more of the smaller, C-Class Mercedes or Baby-Benz models, as well as sport-utility vehicles and minivans built at the new Alabama plant. Near the end of the year Mercedes announced plans for a micro-Mercedes, a four-seat, four-door version of its luxurious A-Class car to be marketed to Americans as a “city” car for under $20,000, while an even tinier compact called the “Swatchmobile” would be built in France and sold through a partnership with Swiss businessman Nicolas Hayek (the driving force behind Swatch wristwatches). Also on the drawing board was a new model in Mercedes’s E-Class full-size cars.

While Mercedes streamlined operations, Daimler-Benz’s workforce reductions from 1992 to 1994 now totaled 20 percent of its 350,000 worldwide employees (bringing with it a $2.5 billion restructuring charge). Believing it had weathered the worst of its recessionary storms, Daimler-Benz climbed back to profitability in 1994 with earnings of $750 million, due in part to a sharp increase in both buying and selling outside Germany. Yet 1995 proved a series of highs and lows beginning with a changing of the guard: Edzard Reuter stepped down as CEO and was succeeded by former protege Jurgen E. Schrempp, former chairman of DASA.

Among Schrempp’s first moves was to stem the flow of red ink at Daimler-Benz Industrie. Arranging a 50/50 merger with the Swedish-Swiss ABB Asea Brown Boveri Ltd. in exchange for $900 million in cash from Daimler-Benz, the new venture, ABB Daimler-Benz Transportation, would become the world’s largest international rail systems provider, generating sales in the neighborhood of $4.5 billion annually. Yet the troubled DASA and Daimler-Benz Industrie, where losses were expected to reach $2 billion in 1995, still faced possible workforce reductions of 20,000 or more. On the positive side, Daimler-Benz signed up with China and Korea in May to develop a new $2.4 billion commercial jet (holding around 120 passengers) for Asian markets.

With the climb of the mark in 1995, Daimler-Benz was saddled with higher labor costs and serious setbacks as the dollar remained weak. Annointed as the Daimler-Benz group’s savior, Mercedes-Benz, which earned $1.3 billion in 1994 and was expected to do at least the same in 1995, was held up as a model to its ailing parent. Always Daimler-Benz’s cash cow, Mercedes had just agreed to a $1.2 billion joint venture with Nanfang South China Motor Corp. to build minivans and engines in China, as well as a second $50 million venture with Yangzhou Motor Coach Manufacturing Co. to build touring buses and commercial undercarriages.

Determined to keep Daimler-Benz on course, Schrempp vowed to fortify the “integrated transportation company” by eliminating 200 upper management positions at the Stuttgart headquarters. The embattled conglomerate still faced high production costs and hoped further global outsourcing would alleviate the problem. Additionally, Schrempp ordered shaky subsidiaries like DASA and Daimler-Benz Industrie to either shape up and stem losses or face the consequences. Yet despite cyclical slumps in its varied enterprises, Daimler-Benz endured as not only the parent of the perennially popular Mercedes-Benz, but as an example of German industry at its best.