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Mercedes Goes Back to the Past With ‘Dr. Z’ Model

Mercedes Goes Back to the Past With "Dr. Z" Model

(Bloomberg Opinion) -- Ola Kallenius’s first nine months as Daimler AG boss have been a real shocker. A string of profit warnings, production delays and mounting diesel-related legal troubles have pushed the share price ever lower. The company’s cost base is too high and hence margins at the Mercedes-Benz car and van units are too low. The van unit lost a staggering 3.1 billion euros ($3.4 billion) last year, primarily related to diesel issues.

After already announcing thousands of job cuts, Kallenius dished out some pain to shareholders too on Tuesday, slashing the dividend by more than 70%. An unpopular move, no doubt, but one that’s necessary to preserve cash for electric vehicle investments and remaining diesel-related legal liabilities.

Daimler expects operating profit and free cash flow to increase “significantly” in 2020, although previous disappointments will make investors wary.

And there’s another issue hanging over Kallenius. Daimler’s former chief executive officer, Dieter Zetsche, is due to return to the company in 2021 to take up the role of supervisory board chairman. Several German shareholders are strongly opposed to that happening — and you can see why they’d have misgivings. 

Kallenius has had a rocky start but he deserves a shot at rebuilding Daimler’s reputation with the capital markets. He’s refreshingly frank about the carmaker’s problems, and he sounds determined to fix them. It will be awkward having his mentor come back to mark his homework. 

The current chairman, Manfred Bischoff, 77, is stepping down next year and he’s said Zetsche will succeed him, as long as  investors approve. Under Germany’s dual board system, supervisory boards are tasked with hiring and firing managers, setting their pay and scrutinizing their decisions.

It’s pretty common in Germany for a former CEO to return as chairman after a mandatory two-year cooling off period, but rarely will one have done so after such a sharp deterioration in performance and with damaging legal questions hanging over the company.

Known in the U.S. as “Dr. Z,” and for his trademark mustache, Zetsche unwound a disastrous merger with Chrysler, overhauled the fusty image of Mercedes cars and helped make the company a force in China. This is all to his credit and his deep experience would doubtless be of value to the board.

Yet much of what’s gone wrong lately at Daimler dates back to Zetsche’s tenure. The company was too slow to invest in electric vehicles and too quick to dismiss diesel emission manipulation claims (U.S. and German regulators appear to think otherwise). The company’s European car fleet is a long way from satisfying the continent’s new limits on carbon dioxide emissions; Mercedes could be hit with fines if its electric vehicle plans don’t go smoothly.

Perhaps too enamored by growth, Zetsche also failed to tackle the company’s German cost base, and he didn’t do enough to help investors fully appreciate the value of Daimler’s assets. Today the world’s largest luxury car and heavy trucks maker is worth barely one-third as much as Tesla Inc. (Daimler was once a Tesla shareholder but sold its remaining 4% stake in 2014).

Union Investment and DekaBank are among German shareholders that have called on Daimler and Zetsche to rethink his return. Kallenius could do without the distracting debate. 

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.

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