Riding With Dr. Z

For a brief moment, Dieter Zetsche was something of a household name in the United States. As the very visible leader of Chrysler from 2000 to 2005, Zetsche poured beers for journalists at auto shows, headed up a civic improvement organization in Detroit, and pitched cars in national television spots. Then, just like that, he was gone.

Of course, he wasn’t actually gone. Rather, he had returned to Stuttgart to become head of Mercedes-Benz cars and then chairman of the board for Daimler AG, which soon thereafter separated from Chrysler.

I had the opportunity to chat with Zetsche as he drove a 2015 Mercedes-Benz C-class around Marseille, France. He reflected on the challenges he faced at Chrysler and at Mercedes, assessed how both companies are doing today, and discussed how the auto industry is changing. He also got a little lost.

Zenlea: Mercedes-Benz seems like it’s in a good position right now. That was not the case five years ago. How did you recover?

Zetsche: First of all, the success of an OEM is defined by its product…Product and brand. Obviously, when I went over [from Chrysler], the situation on the car side was that in a number of areas, [Mercedes-Benz] did not have the competitive position it used to have. Quality was showing some significant issues. Styling was not perceived as that exciting anymore. We had a huge challenge with C02 emissions—especially in comparison with BMW. We had major [holes] in our portfolios. So, we set up strategies in all of these areas and defined a path, where to get and at what time. The cycle in our industry is seven years. It really takes seven years to shift the tanker around. The stuff we’re seeing now is the harvest of what we had planted.

Zenlea: And jettisoning Chrysler [in 2007] was part of that strategy?

Zetsche: When I came back from Chrysler, I learned for the first time that there was no firewall whatsoever between Chrysler and Daimler. Which means, on the one hand we had an upside of perhaps three, four, five percent margins with Chrysler. But we had a downside risk of $100 billion. So, Chapter 11 for Chrysler would have represented the Chapter 11 of DaimlerChrysler. When I saw that, I knew immediately that there was only one [choice]: to go. Even though it was a tough one after five years in Detroit.

Zenlea: How hard will it be for Mercedes to meet upcoming C02 targets, particularly in the United States, where targets are based on vehicle footprint?

Zetsche: An improvement of four to five percent on an annual basis is, just by physics, impossible over the long run. It’s becoming a major challenge pretty fast. We are working our way through this challenge, and, of course, this involves more and more technology; lots of added content and cost; and a step-wise shift to more electric components, be it a starter-generator, a hybrid, a plug-in hybrid, or a hydrogen or battery electric. It’s a tremendous challenge. We are taking it on and we are making major progress. But I cannot see how that could continue over the next twenty years. Other than going battery electric, for which today I don’t see the technology being available.

Zenlea: The Mercedes-Benz lineup in the United States currently stretches from about $30,000 for a CLA-class to about $150,000 for a well-equipped SL-class. Does that wide spread concern you? Do you think there will be perception problems with the brand?

Zetsche: All of us—the German luxury brands—have taken the idea of premium to the segment of smaller cars, as we are doing with the CLA and GLA. What we have seen so far is this rather supports the relevance of the brand to the upper-end buyers—because it’s a modern brand, it’s a brand that shows life and moves.

It certainly reduces the exclusivity, in a literal sense, somewhat. But at the same time, we are selling around 2 percent of the market in the United States, which I think is still a very exclusive position. And a big portion of our growth is not growth within markets but new markets and other places. In Germany, we’re running at 10 percent [market share] and we’re still perceived as a luxury brand. So, I don’t think there is any downside, so far.

Actually, when we introduced the 190 (the baby Benz) thirty years ago, this was the debate for five years on the board—whether it would kill the brand…The original decision was to only do it in the U.S. [where the car was needed to meet CAFE standards] and then to restrict ourselves to no more than 70,000 vehicles, otherwise we’d kill the brand. Obviously today we wouldn’t live without the C-class segment.

Zenlea: Do you think there’s a future for V-6 engines?

Zetsche: There are…[takes wrong turn] I think that was wrong.

Zenlea: Here’s the test: can the executive use the infotainment system.

Zetsche: Of course, of course I can. [Looks up route on the navigation system]. That looks good.

Zenlea: So, we were talking about V-6 engines.

Zetsche: There are two trends.One is that, seemingly, the customer even in the U.S. is paying less attention to the number of cylinders…[Consults again with nav system and with German-speaking press representative in the back seat]. Probably the best thing is to go back [the way we came]. Let’s do that.

So, the issue is that on the one hand, the customer is paying a declining amount of attention to the number of cylinders and on the other hand, as we discussed before, you need cylinder [downsizing], turbocharging…

Zenlea: With your modular engine approach can you continue to produce four- and eight-cylinder engines [Mercedes-Benz’s new 4.0-liter V-8 shares many components with its 2.0-liter four-cylinder]. But can you continue to do six-cylinders? Or will Mercedes not offer one ten years from now?

Zetsche: No, I don’t see that. I’m pretty sure we will have six cylinders in ten years. I hope we’ll still do eight cylinders, as well, but perhaps not in Europe.

Zenlea: Given how much time you spent there, what do you think of Chrysler’s current direction?

Zetsche: Chapter 11 helped a lot. The new labor setup is certainly helpful, the shift in segments more towards light trucks is helpful as well. Ultimately it will depend on product...I don’t like all that I am seeing…The success is driven quite a bit on pickups and SUVs…

Zenlea: Falling into old habits?

Zetsche: A little. It probably isn’t wrong. If you try to make your living in the U.S. just on cars, then you’re Volkswagen. I’m not too impressed by the styling direction Jeep is taking. But that’s very much personal taste…I wish the very best to Chrysler for sure. They certainly have done a very good job to bring it to the point it is now. The sustainability of the success will depend on the acceptance of the new product. And by the cadence of new product.

Zenlea: Looking back, is there anything you’d have done differently at Chrysler?

Zetsche: What we had not accomplished was to take Chrysler to a higher level as far as brand perception is concerned. That was probably one of the bigger problems. Some products went very well—others less. Probably, what we should have focused on even more was the interior, there were deficits there…

It was a tremendous experience. Most people at Mercedes are used to having the brand as a tailwind. When you work in an environment where the brand, at least in some areas, is a headwind, it’s a totally different ballgame. With that consciousness, you can do a better job at the helm of a premium brand. Because you are aware of what you have there and you can be careful. And you have more respect for people who work without that.

Zenlea: It looks like every automaker—except maybe Volkswagen—has moved away from a strategy of mergers and acquisitions. Can you foresee any situation where Daimler would consider buyouts or mergers or are strategic partnerships sufficient?

Zetsche: What I think we are doing with Renault and Nissan these days is a very promising approach. You can get the benefits and don’t have the challenges of financial interaction. There might be exceptions. We don’t plan to, but if we were to buy Aston Martin, this would not endanger our future. But as a general pattern, as a trend of consolidation, I don’t see that happening that much…I think there’s at least as much opportunity in leveraging the volume we have with platforms and modular approach. Beyond that, the economies of scale curveis flattening out. There’s a tremendous difference between fifty and one hundred thousand units, and there’s a big difference between one hundred and five hundred thousand. Between five hundred thousand and a million, less so. And beyond a million, it really flattens out. And when you bundle your componentry within a two million-vehicle portfolio, you can get pretty close to the best point.

Zenlea: Do you see an end, eventually, to the continually higher sales projections?

Zetsche: There are two aspects of growth. One is just the scale aspect. The other is when you look to the financial markets. Of course, your improvement is defined by profitability and by growth. And as long as your profitability is above the cost of your capital, growth is producing value. And you want to grow your stock price. You have to at least maintain or increase your profitability and grow. Or basically you’re falling back.That is not triggered just by the cost of parts, but by adding value to your company by growing.

Zenlea: But couldn’t sales growth to meet short-term financial targets potentially endanger your long-term stability?

Zetsche: No, I see it just the other way around. If you are growing because you are buying market share, you’re totally right. But if you are growing by creating demand, it’s a different story. [Misses another turn]

Zenlea: I have nowhere else to be, so I’m fine.

Zetsche: [Laughs] For the long run, you have to stay relevant. There were about two thousand [automotive] brands in the early twentieth century, and now there are twenty or something. We are among the ones who stayed alive. And that’s because we have been growing for 125 years. For the long-term sustainability, we have to find ways and means to continue to stay relevant. And there, of course, the emerging markets are helping a lot, because you don’t have to go into new segments. You just grow with the new markets.

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