Autos: Can Mercedes Be a Star Again?

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DaimlerChrysler has also paid the price for its mismanaged global ambition. Two successive chief executives, Edzard Reuter in the 1980s and Jürgen Schrempp in the '90s, aggressively pursued visions of international growth and diversification and financed them by tapping into the cash hoard Mercedes had built up over decades. In the process, the company, which once prided itself on its provincial roots in Baden-Württemberg, acquired a worldwide scale and presence in both cars and trucks--and bought some absolute dogs. That included a near bankrupt household appliance company (AEG), a teetering airplanemaker (Fokker) and a 37% stake in Japan's inept Mitsubishi Motors. Those and other investments drained management's attention and the company's account; Daimler's share of Mitsubishi's 2002-04 losses totaled more than $1 billion. The company's biggest acquisition, the $36 billion purchase of Chrysler Corp. in 1998, remains deeply controversial. The market value of DaimlerChrysler, the combined firm, is about one-third less than when the merger was announced. "They frittered away their cash," says Helmut Becker, a former chief economist of rival BMW, who works as an industry consultant. "If they hadn't, the quality problems wouldn't have come about."

Those problems now belong to Zetsche, who sports a bushy walrus mustache and a big broom. He was once considered a dark-horse candidate for the top job, but his star rose over the past three years. Dispatched to Auburn Hills, Mich., to sort out Chrysler, he has led a remarkable turnaround at the company, which swung back into the black in 2004 after years of heavy losses. In September Chrysler reported its 18th consecutive month of sales increases. In the U.S., Zetsche quickly wielded that favorite American management tool: the hatchet. He axed 26,000 jobs and browbeat suppliers to lower costs, but he also introduced what he called "disciplined pizazz"--a program to bring a focus on efficiency to the company's business operations without sacrificing its character. The imperious Schrempp, by contrast, continued to lurch from crisis to crisis until the Daimler board showed him the exit, three years before his contract expired. DaimlerChrysler stock soared about 10% on the news. The change of leadership "dramatically alters investor perceptions," said Merrill's London-based auto analyst Stephen Reitman, who upgraded the stock to neutral.