Polishing the Star

Interview with Daimler’s Dieter Zetsche

From his first days of prominence during the “merger of equals” between Chrysler Corporation and the former Daimler-Benz AG in 1998 — a $36-billion acquisition, more accurately, of the former by the latter — Dieter Zetsche put the global auto industry on notice that he stood apart from Germany’s executive ranks.

Born in Turkey of German parents, he grew up near Frankfurt and graduated as an electrical engineer from University of Karlsruhe in 1976. He was awarded his doctorate in mechanical engineering in 1982 from the University of Paderborn, having already been employed as an engineer for what was then called Daimler-Benz, the world’s oldest maker of vehicles. He rapidly advanced through a series of engineering and leadership posts, including stints in Brazil and Argentina. His first U.S. assignment was to run the company’s maker of heavy trucks, Freightliner.

Assigned by Daimler chief executive Juergen E. Schrempp to integrate Chrysler’s U.S. operations into the new DaimlerChrysler, Zetsche proved to be anything but the stereotypical rigid, micromanaging overlord from Stuttgart. Affable and well-liked, with a talent for listening intently and team-building, he gained trust and promoted accessibility by making a point of speaking English with fellow German executives as a courtesy to American Chrysler executives. For a short time, a cartoon character of him, featuring his handlebar moustache, starred in “Ask Dr. Z” televised commercials promoting the pricing of Chrysler vehicles.

The acquisition, designed to increase Daimler’s range of products and sales volume, in turn gave Chrysler access to the German company’s technology and design, made famous worldwide by its renowned Mercedes-Benz brand. Using parts borrowed and adapted from Mercedes E-Class, Zetsche championed development of new Chrysler cars like the 300 sedan, a smash hit. The midsized station wagon Pacifica, by contrast, was a notable failure.

The company summoned Zetsche to Germany in 2006 to succeed the retiring Schrempp. With sales crumbling in the U.S. and Chrysler absorbing the brunt of a weakening economy and U.S. market, he made one of the toughest decisions of his career: the divestiture of Chrysler to Cerberus, a private equity company. Zetsche believed the U.S. operations might be forced into bankruptcy, sinking the entire company.

His cautiousness proved prescient in 2009 when Chrysler, while under Cerberus’s majority ownership, filed for Chapter 11. Daimler shares rose giddily on the avoidance of Chrysler’s failure, then crashed with the realization of how badly the global recession would hurt the automaker’s business. Daimler’s supervisory board didn’t flinch: It renewed Zetsche’s contract as chief executive.

One of Zetsche’s key strategies was to intensify the company’s focus on designing and manufacturing beautiful, compelling automobiles, particularly a full range of smaller and more-affordable models that could attract a new fan base of younger buyers. In a symbolic move to dramatize a “return to basics,” Zetsche transferred hundreds of executives and managers from plush quarters in Stuttgart to the company’s austere factory complex in adjacent Untertürkheim.

With the failure of the Chrysler acquisition still fresh, Zetsche, 61, explored different governance frameworks to achieve symbiotic links with other automakers. Germany’s industrial old guard was startled when he disclosed in April 2010 a broad strategic partnership with the Paris-based Renault-Nissan Alliance. The goal was efficiency: to save cost and time by jointly developing engines, vehicles and architectures, including one that soon will debut as the next generation of Daimler’s Smart small car, the new ForFour that shares parts with Renault’s Twingo and will be produced in a Renault factory. In late June, Renault-Nissan and Daimler announced plans to build a joint-venture plant in Mexico to produce small luxury sedans for Infiniti and Mercedes-Benz.

Zetsche met with Korn Ferry’s Paris-based Regional Market Leader for Global Industrial Markets, Yannick Binvel, and Briefings contributing editor Doron Levin in his office in Untertürkheim to discuss his views on leadership, motivating the corporation and the rigorous global competition among premium automotive brands.

Q: When you joined the company as a young engineer, Mercedes-Benz occupied the top position among premium automotive brands. Today, it must battle BMW, Audi, Lexus and, in the U.S., even a resurgent Cadillac. How must you lead differently today in the midst of this brutal global competition among brands?

A: Competition is what drives success. I guess it’s easier to run a company when there is tough competition than when you are a monopolist. Short term, being a monopolist is more fun. But for sustainable success you need competition to keep things moving.

Q: The Mercedes-Benz brand got to be known as the premium brand for older, more successful people. Now your company wants and needs to attract younger buyers. Can you discuss the role of the CEO in positioning the brand so that it fulfills the new mission?

A: In any automotive company, product is the key. Without the right products, you won’t have a chance to change perceptions. It’s our job to create fascinating cars, in this case for younger people. You have to change the marketing approach, change the attitude of people, and the whole company has to go along. You can’t achieve anything without your people sharing this goal. But everything is led by the product. First you have to make sure you have the product that will convince people (in the company) to go for growth among younger customers. I’ve set the goal of being [No. 1] in volume among premium brands, and that can only be achieved by adding younger customers. The target is to pass Audi and BMW by 2020. The idea is to offer better cars, more fascination, more dreams — and the consequence will be for more customers to come to the brand. You can’t accomplish anything without people sharing this goal. In the early 1990s, there was a lot of frustration after the new S-Class came out and was heavily criticized in Europe for being too large. That was new for Mercedes. To re-motivate the engineering team I rented the big event center across the street for 10,000 people, a place for huge rock concerts. We built a big wall and then destroyed it to symbolize the need to get past this wall of our blocked thinking. This impact of putting 10,000 colleagues together was a milestone. Because it’s harder and harder to reach people physically around the globe, we’ve been doing unusual things, more Internet-based large meetings where I invite all the employees to ask questions. This is much stronger than a physical setting.

Q: Mergers have been shown to be risky and mostly unsuccessful. Daimler has experienced this and afterward entered into an alliance, rather than a merger, with Renault and Nissan. Can you discuss the rationale for these relationships and how you’ve overcome internal barriers to joint relationships with companies that otherwise are your rivals?

A: We’ve obviously added a prominent example of this type of merger [that didn’t work]. The Chrysler one was, “Yeah, that’s a great idea; let’s marry and then set up committees to develop what we’ll do together.” From the partnership we learned a lot. And we re-engineered our approach as we still saw strategic necessities that we could better address with a partner. That was the development of the next generation Smart and smaller displacement engines. So we were looking for someone that was active in these fields. That’s how, after discussion with different potential partners, we started discussing with Renault-Nissan, and the rest is history. In the case of the alliance, we came to it by way of the content and decided to work on these things together, and beyond that, if we saw more potential content, then we would go for it. It’s a preferred partnership, but it’s not an exclusive partnership. And it’s a partnership of three totally independent companies that want to stay independent but benefit from partnerships of this kind. So far it’s working very positively.

Q: How did you and Carlos Ghosn, CEO of Renault and Nissan, form this partnership?

A: I was head of Freightliner in 1992, and Carlos was head of Michelin in the U.S. He invited customers of Michelin, and that’s where we met. Since then we’ve stayed in contact. Obviously, we talked about areas of mutual interest. Obviously, if a partnership is to work, it must be based on trust. Trust is between people, and this had to be developed over time. It certainly helps when CEOs have trust. You listen, you learn more about the other side. You learn whether, in spite of tensions and troubles, you can rely on the partner telling the truth. If so, that makes the groundwork for a successful relationship. Or, otherwise, it’s the beginning of failure. Even in your own company, you can go through similar phases. There are disappointments within companies and between companies. Between cultures and nations. In the end, it comes down to very simple facts: Do we see the other side as open, reliable, trustworthy? These are the key points. Then, it’s about competence. The good intention of the other side is key.

Q: As you’ve moved further away from the merger with Chrysler and gained the perspective of time and experience, what do you view today as the reasons for its lack of success?

A: From a technical standpoint, Daimler at that time was a maker of premium and luxury cars. Chrysler’s strength was mainly its light-truck business (Jeep, pickups and minivans) in North America. There was very little overlap or common ground, even though Mercedes did sell the M-Class in North America and Chrysler did sell some small cars in Europe. Adding these two together didn’t create value. At the beginning, we thought [the lack of common ground] was an advantage. We said, “This is good. We don’t have to fire anyone.” The side effects that came along included a more complex organization. These brought burdens without benefits. We thought it should be possible to grow the value of the Chrysler brand in the car business, to give the brand greater equity and charge higher prices in comparison to the other U.S. brands. Over five to six years this could not be proven; we could not charge in the premium space.

Q: Explain the rationale of the new Mercedes-Benz CLA-Class, a car whose retail prices start at less than $30,000 in the U.S., territory one usually associates with Toyota Camry. What are the factors driving the creation of this model and how can you gauge its success?

A: We have with this new product and pricing an ability to lower the access point to Mercedes-Benz without diminishing the brand. To do this, we knew it was important not to come up with a cheap or “me-too” product, rather an emotional car, not driven by functionality. Design, therefore, was the No. 1 priority, and I think this comes across. As a result, we have a conquest rate from non-Mercedes-Benz models of 80 percent. The customers for CLA are 10 years younger than the average Mercedes-Benz buyer. This is what we wanted to accomplish, but we were surprised by the extent of success we are having. When we first came up with A-Class, it was criticized as too progressive, and [critics said] that we have to be more subtle. We said, “No, we have to appeal to new customers and, therefore, they have to see us. We are winning awards for top design.” The key point is that kids in school are now talking about Mercedes as cool. For some time, others were cool and we were the old man’s brand. It takes time for momentum to build. What was important was to make Mercedes-Benz something different than what it had been, to do it in a balanced way. Many think we did it with the new S-Class. We did it with a brand extension that’s not spreading us too far.

Q: When you returned to Germany from the U.S. to become chief executive in 2006, you shook up the headquarters culture, moving hundreds of top executives in the main factory complex from a plush location. Why?

A: We used to own a nice headquarters 10 miles from here. It was like a campus far away from our products. I had a room there, never my main office. Even though the place was much nicer, I thought it was much more important that we must spend every day coming to the office and recognize that this is a car company, that it’s about plants, about presses shaking the ground, not about paper. It was symbolic, of course. We sold the building and leased back the space for our sales organization. I continue to think what we did was important and the right move.

Q: Having spent a great deal of time as an executive in the U.S., can you point to differences between “Euro-style” global business leadership and “U.S.-style” leadership?

A: Of course, there are lots of stereotypes. I came to the U.S. in 1991 as head of Freightliner. In Germany, I had been used to a top management team that raised ideas, had lots of discussions and engaged in a long process before coming to a decision. [When] I was new at Freightliner, a topic popped up, and I would say, “Perhaps we could…” and immediately everyone said, “Yes sir.” The experience was similar at Chrysler: “The buck stops here.” The U.S. was more top-down, more CEO-driven, less questioning as part of the decision process than in Germany. In many cases, I think a middle ground is the best. In the U.S., there is a board of directors, everyone responsible for everything. As a matter of law, the German stock-traded companies have two-layer boards, supervisor and management, internal and external directors. Management board has a mutual responsibility, requiring more consensus. That’s the template, but it always comes down, of course, to individuals.

Q: Daimler holds a 4.3 percent stake in Tesla. There have been reports that you are interested in deepening those ties. Please identify the areas of cooperation in electric that you see as most fruitful for the two companies.

A: We have an existing cooperation. In the Smart electric drive, we have Tesla batteries. The new B Class Electric Drive will have a Tesla drive train. The Tesla Model S has a lot of our know-how. I don’t want to claim the success of Model S for our company, but there is a very good relationship and intense exchange of ideas. It’s a two-directional cooperation. We’ll see if we have further ideas to develop that.

Q: In your latest shareholder’s address, you used the words “consistency” and “determination” and made the point that determination pays off. Can you relate this idea to anything about your viewpoint on leadership, the development of future leaders and company values?

A: I think that goes along with sustainability. You should not have the idea that you can change things all the time. You have a long-term strategy and pursue it in a determined way. That doesn’t mean you have to be stubborn and not correct when you’ve made a mistake. You need a key idea that you can focus on and pursue it in a determined way. This determination has to go along with motivation and convincing the entire team that this direction is the right one to go for. Even Nobel Prizes aren’t won by individuals anymore, they’re the product of teams. Especially in a car company, this whole group of 275,000 has to work together. Teamwork and social skills are extremely important. That’s why we have a well-developed leadership process, called Lead. In the first step of your leadership career, you are rated according to core values and leadership principles by a number of people on a frequent basis. When you first come to the company, you go through an assessment center not so much based on knowledge but on social skills. People have to pass an initial assessment test to be a leader. In the past, the best designer of front axles was promoted to design front and rear axles. That’s not good enough. Today you have to go through these assessment centers and prove that you know more than axles. And it’s according to how your peers evaluate you. That’s a pretty well-developed process, and we want to make sure we have the best leaders possible, because they influence the success of a company in the long run.

Four Quick Questions

Q: Your handlebar moustache has become your signature, at least in terms of appearance. When did you adopt it, why, and have there been periods when you’ve reconsidered or gone without?

A: I didn’t adopt it, it just grew. I’ve had it since I was 16, 17 and never thought about it. Sometimes a full beard, too. It’s like a little finger, just part of me.

Q: What books might we find at your bedside table these days?

A: John Irving is one author I always love to read.

Q: What is your best guess about when and under what circumstances autonomous cars will take to the road?

A: Fully autonomous? By the end of the decade we will have semi-and-highly-autonomous functions on specific roads like the autobahn or in specific situations like parking. And you can be sure it will be a Mercedes; and it will be available around the world.

Q: Your favorite vacation spots or means of relaxation?

A: Sailing. In the Mediterranean or the Caribbean.

“Even Nobel Prizes aren’t won by individuals anymore, they’re the product of teams. Especially in a car company, this whole group of 275,000 has to work together.

Lane Changes

By Dr. Martin Stemmler

Today the automotive industry is facing some of the biggest changes in its history, and no one knows for certain which road it will take. The uncertainty is all-encompassing — what kind of power train will we have in the future? What kind of sales channels will emerge? Which governments will allow self-driving cars? What kind of safety and environmental regulations will be enacted? How will the automobile integrate itself into the entire transportation network? These are just some of the questions the automotive leaders have to answer.

In the past 25 years, the car industry has been driven by the “continuous improvement” process, an idea developed by Toyota. There was also a shift in leadership styles from autocratic and hierarchical management, before 1990, to a more team-oriented approach with job enrichment and rotation of duties. Another major change was the decision to outsource to suppliers the development of components, modules and systems. The focus was on increasing productivity, reducing cost and increasing product quality and reliability. Performance management and a “results” orientation were often viewed as the foundation of the industry’s leadership model.

But with so many unanswered questions about the future of the automobile, today’s markets are much more volatile than those of the past. Some companies even talk about an industry in “perpetual crisis.” This generation of leaders has to cope with what we call a “VUCA” world — volatile (Which of the established automobile manufactures will survive? Which new players will enter the market?), uncertain (What will the design look like?), complex (How much technology will be integrated into the automobile?) and ambiguous (Is the desire to own a car still strong?).

The automotive industry needs more leaders who have high levels of learning agility as well as emotional intelligence. They have to be flexible, open-minded and authentic, leading change, leading themselves, forming diverse teams that interact virtually. Managers must thrive in a multicultural and multigenerational environment, possess a strong sense of responsibility and maintain high ethical standards. With so much change and uncertainty, having the right leaders is more important than ever.