Daimler's Dr. Z hands over reins with need for deep savings

FRANKFURT -- Bidding farewell to the company he led for more than a decade, Daimler AG CEO Dieter Zetsche urged sweeping cost cuts to prepare the carmaker for unprecedented industry upheaval.

“Everything is under scrutiny,” Zetsche said Wednesday at the annual shareholder meeting in Berlin, citing costs, investments and the Mercedes-Benz maker’s product range. “We cannot and will not be satisfied with the current level of profitability.”

Click here for Daimler's full summary of Wednesday's annual meeting.

The walrus-mustached Zetsche, 66, and CFO Bodo Uebber, 59, who is also leaving, turned Daimler from an industrial conglomerate that included holdings in aviation into a company focused on upscale passenger cars and commercial vehicles. Among their key decisions was selling Chrysler to Cerberus Capital Management in 2007 before the financial crisis pushed the U.S. mass-market manufacturer into bankruptcy.

Following the ill-fated merger with Chrysler, the duo shepherded the painful restructuring of Mercedes-Benz after quality woes dented sales. This included axing thousands of jobs, shaking up design and expanding the brand’s compact-car offerings, culminating in winning back the global luxury-car crown from BMW AG in 2016.

Zetsche and Uebber both received applause for their farewell remarks from some 6,000 shareholders gathered in Berlin, showing support despite eroding earnings in recent quarters and a weak start to the year.

“We are not satisfied with the latest quarterly results and our share price,” Zetsche said.

Arch rival -- and now partner on car sharing and autonomous cars -- BMW AG published a clip on Twitter thanking Zetsche “for so many years of inspiring competition.” In the tongue-in-cheek film, a lookalike Zetsche leaves the Daimler headquarters to be driven home where, once left to his own devices, he hops into a BMW i8 sports car.

Zetsche will now hand the wheel to Ola Kallenius, 49. He faces the difficult task of how to allocate shrinking profits and find savings to finance the shift toward electric cars and digital services with a payoff that might be years away.

The smooth-talking Swedish-born executive gave a first glimpse on his strategy last week, pledging to make Daimler greener. The manufacturer that generates the vast majority of profits with hulking sport utility vehicles and sedans expects more than half of global deliveries to be fully-electric or plug-in hybrid cars in 2030 and plans to make its entire model lineup carbon-neutral by 2039.

Daimler’s target remains to return the main Mercedes-Benz Cars unit back to a “profitability corridor” of 8-10 percent by 2021, the Stuttgart-based manufacturer said. At the heavy trucks and bus divisions, the goal is to achieve a sustainable return of 8 percent.

Onus on automakers

Zetsche told reporters this month the onus is on automakers to show they can generate adequate profit margins from electric cars to lift stock valuations, which have been squeezed as investors deem traditional manufacturers ill-prepared to adopt to the looming industry changes.

Mercedes-Benz will roll out 130 electric and hybrid models across the entire product range by 2022, Zetsche said, cautioning that “the mobility of the future is not a monoculture.”

Diesel technology that offers lower carbon dioxide emissions than comparable gasoline engines will “will continue to play an important role in Europe for at least another decade -- maybe even longer in the commercial vehicle area,” he said.

Adding to headwinds are swirling trade woes that threaten vehicle exports as well as stricter emission limits in key markets. Tighter rules on carbon emissions that take effect in Europe next year mark the biggest hurdle. “I have never seen such a material event risk in my career,” Evercore ISI analyst Arndt Ellinghorst said in a note last week.

Daimler is also wrestling with pending probes into its diesel-car emissions and a recall imposed by German authorities. Its U.S. litigation risk related on diesel cars may exceed $4 billion, according to Bloomberg Intelligence estimates.

Corporate overhaul

As expected, Daimler shareholders on Wednesday approved by a "large majority" the biggest corporate overhaul since the merger with Chrysler that’ll split the group into three legally separate units comprising cars, trucks and financial services.

The new structure -- which will cost roughly 700 million euros ($780 million) -- is meant to speed up decision making and allow the individual units to forge collaborations more easily. Shareholder representatives like Ingo Speich from Deka Investment renewed calls for Daimler to unlock value through a separate listing of the trucks business, similar to Volkswagen Group's plan for Traton SE. Deka represents 9 million Daimler shares.

“The new structure is a clear forward strategy that will make us stronger and protect long-term employment," Michael Brecht, chairman of the General Works Council at Daimler and deputy chairman of the supervisory board, said in a statement. "For us as the General Works Council, this was the top priority for all decisions on Project Future right from the start." 

Zetsche echoed recent remarks from his successor Kallenius, foreshadowing closer ties with peers, suppliers and technology firms to navigate the industry transformation. The next version of the flagship Mercedes-Benz S-class sedan in 2020 will be able to steer longer stretches of highway on its own.