German 3

DaimlerChrysler: The Grace Period Is Over
Pressure is building for the merger to start showing results

DaimlerChrysler Co-Chairman Jurgen E. Schrempp follows a management principle that he has dubbed ''the Schrempp Curve.'' It steered him through the wrenching restructuring of Daimler Benz after he took over the German industrial giant as chief executive in 1995. Simply put: When taking a controversial strategic step, pause and wait for the negative reaction to come. Don't make the next move until both the mood and the bottom line have curved back up. ''Never go too far in the first step,'' he likes to say. ''Always keep the next three moves to yourself.''

Yet with the ink barely dry on the new DaimlerChrysler business cards, Schrempp violated his own code by making a lunge for Nissan Motor Co. (NSANY). He had been talking with Nissan Diesel, the truck arm, about a deal for over a year. But then Renault upped the ante by itself starting talks with debt-ridden Nissan Motor. Rather than waiting to get DaimlerChrysler (DCX) running smoothly, Schrempp plunged into a whirlwind of fact-finding missions on the risks of taking a Nissan stake. Finally, on Mar. 8, he acquiesced to his board's objections to the deal. Co-Chairman Robert J. Eaton and Chief Financial Officer Manfred Gentz were among those opposing.

Schrempp and team have learned a hard lesson: In the grand experiment that is DaimlerChrysler, there is little room for error. Schrempp pledged to cut costs in the new company by $1.4 billion in 1999. Distracting managerial talent to help fix Nissan would have risked that effort. The deal ''would have overextended our resources,'' Schrempp told BUSINESS WEEK. DaimlerChrysler people are already ''working to the limits.''

Taking on Nissan would have been doubly hard since financial markets have decided not to cut DaimlerChrysler any slack. Despite posting a 1998 earnings gain of 29% on Feb. 25, DaimlerChrysler's shares slipped 11% over five trading days on Nissan-related jitters. The price recovered 5.5% on Mar. 12, after Schrempp flew to Tokyo to end the talks. ''People don't give us credit for the fact that six months ago we weren't even a company,'' snaps DaimlerChrysler President Thomas T. Stall-kamp. ''They ask, 'Why don't you have the annual report out yet? Why don't you have the logo stapled on your forehead?' Give us a break.''

Such complaints are galling, but they won't go away. Even the pace of the merger is now fair game. ''Integration is going slowly,'' frets one fund manager, citing a lack of movement on combining suppliers. MaryAnn N. Keller, an analyst with ING Baring Furman Selz, is concerned because 25% of the time of the top 300 managers is absorbed by details of uniting the companies--not making and selling cars.

Two high-profile defections have accentuated the merger pains, as well. Ford Motor Co. Chief Executive Jacques A. Nasser, hunting for fresh blood, snatched Chrysler platform engineering specialist Chris Theodore and manufacturing chief Shamel Rushwin away in February. DaimlerChrysler executives dismiss this as career decisions unrelated to the merger. But fears are rising that Stuttgart leadership will destroy the creative spirit at Chrysler.

BIG QUESTION. Nevertheless, DaimlerChrysler is trying to get on with building a car company. For now, the priority is Europe. There the carmaker dominates the luxury segment, but its overall 5% share lags market leader Volkswagen, with 18%. The first new product will be a subcompact under the Chrysler brand, to compete against the VW Golf and be launched by 2002.

Given the Nissan deal's collapse, Asia is a big question for DaimlerChrysler. It still needs a partner to be a serious player in the region, but Schrempp says he is no longer interested in an acquisition. Instead, DaimlerChrysler will launch new autos through its Mercedes-Benz infrastructure. And it may renew talks on joint truck projects--but no equity stake--with Nissan Diesel.

Schrempp faces a big job getting DaimlerChrysler to run properly around the world. From the Nissan fiasco, he's drawn one conclusion: When he next makes a big move, he's going to do it quietly--just as he did when he went after Chrysler itself.

By Karen Lowry Miller in Frankfurt and Joann Muller in Washington

Transition Troubles

DEFECTIONS
Two top Chrysler executives defected to Ford, and more could leave as U.S. managers worry that their Daimler counterparts will dominate decision-making.

OVEREXPANSION
The management board, including Robert Eaton, nixed Jurgen Schrempp's ambitious move to add Nissan to the company's fold.

ANXIOUS INVESTORS
Fund managers and analysts are demanding swifter results, as integrating the two companies absorbs one-fourth of top management time.

DATA: BUSINESS WEEK