The Future's Electric

5 May 2011 Dieter Zetsche

After losses of over €2bn in 2009, Dieter Zetsche guided Daimler to earnings of over €7bn the year after. Now the CEO has conquering China and the development of the 'car of the future' on his mind - and is preparing for the added pressure this could place on the supply chain. Barry Mansfield reports.

Daimler earned €1.05bn ($1.4bn) in the fourth quarter of 2010, as revenue shot up by nearly a quarter - capping a year in which a recovering global market and strong Chinese and US demand gave the German car maker the boost it needed to get back into the black. Full order books are set to create 10,000 new jobs at Daimler, 4,000 of those in Germany, with CEO Dieter Zetsche looking to appoint up to 2,000 trainees, graduates and experienced engineers in R&D positions.

Zetsche, who also serves as chairman of the Daimler management board, described the revival as an "excellent comeback" and declared that the company will be "stepping on the gas" in 2011, but warned that the automotive supply industry will face a big test as manufacturers' fortunes rebound. He pointed out that the Mercedes S-Class, E-Class and C-Class models were market leaders in their segments, and that 2010 saw the company introduce half a dozen new models.

Supply chain reaction

Indeed, 2011 looks set to be the year of recovery for the auto industry as a whole, as the top manufacturers in Germany struggle with supply chain issues in the wake of a sharp increase in demand for their cars. Volkswagen, BMW and Porsche have all admitted that suppliers were experiencing problems as demand for their products has grown significantly in foreign markets. At the end of January, Volkswagen decided to close its Wolfsburg plant for one day because of a shortage of parts.

It is not apparent where in the supply chain problems are occurring, or whether electronic components such as engine control units, are the cause. Volkswagen was quoted as saying that it would take advantage of the closure by installing additional equipment and that it was able to catch up with lost production.

Its Wolfsburg plant is known to have the capacity to produce up to 3,000 vehicles per day. Zetsche's own view is simply that the supply industry overall is under quite a strain. "Everyone is struggling, some successfully, while others run into a hiccup," he notes.

Zetsche predicts a healthy future for the global car industry, estimating that the number of cars in the world will double by 2030. As a result, Daimler is having more problems with supply than with demand; Zetsche notes that Mercedes customers currently face waiting times of several months for their new cars to be delivered. "How do we get the parts on time and in enough quantities?" he asks. "We're reaching our capacity everywhere."

Strength in numbers

As Daimler CEO, Zetsche has a track record of acquisitions that involve working closely with supply chain partners. In 2008, Daimler paid €585m for a 22% stake in Tognum; it said that the investment in this fabricator of engines for agricultural threshers, military tanks and ships made good business sense because it was such an important supplier. Under the prosaic project name ‘Business Innovation', the Zetsche has assigned several high-ranking managers the task of identifying new targets for synergy.

"As Daimler CEO, Zetsche has a track record of acquisitions that involve working closely with supply chain partners."

The 57-year-old is himself planning to conclude a deal with Gaz, the second biggest Russian car manufacturer, to produce the Mercedes-Benz ‘Sprinter' minivan for the Russian market. In exchange for providing Gaz with new technology, Daimler is hoping to improve its prospects in what is considered a huge growth market for the car industry. The deal allows Mercedes-Benz to evade the Russian Federation's punishing import tolls, which resulted in the company selling fewer than 2,000 Sprinters in Russia in the past year.

When asked if life is still fun at the helm of Daimler, a company to which he is contracted until the end of 2013, Zetsche's answer is "a very clear yes" - especially, he says, as the direction the company is headed in is the right one.

"We started 2009 with a significant impact from the worldwide crisis," he remarks, "but we defined counter-measures and developed very positively throughout the year up to a significant profit in the fourth quarter driven by cost reduction."

Zetsche looks back on 2009 as "one of the worst years in history", the effects of which were felt by the entire automotive industry. He credits Daimler's "fantastic brand" and new products as the keys to the company's turnaround. However, the world's second-largest luxury vehicle manufacturer failed to hit expected earnings in 2010, despite its success.

It attributed this to its decision to increase R&D spending by more than 14% - to almost €5bn - with particular focus on fuel-efficient and environmentally friendly technology.

The intensified demand from China and the US will surely create many challenges for Wolfgang Bernhard, production chief at Mercedes-Benz and the man regarded by analysts as the most likely successor to Zetsche. Bernhard rejoined the Daimler management board a year ago and is now involved in plans for a €800m factory to be built near the city of Kecskemét, Hungary, to produce two compact cars.

Bernhard's job will be to churn out profitable cars at Kecskemét and its sister plant in Rastatt, Germany, and to shift small-engine production away from the high-cost Stuttgart base. In 2011 Mercedes wants to surpass its record output of 1.21 million vehicles. Last year's all-time high production was achieved despite the manufacturer beginning the year with factories operating on shortened schedules.

Industry insiders claim that Bernhard spent much of 2010 reassuring staff and suppliers that the turnaround in demand was tangible and that overtime, instead of short working weeks, was vital. In his current position, he typically conducts meetings on the factory floor rather than conference rooms, so that he can evaluate production issues in-person. 

Electric dreams

In the meantime, Zetsche is confident that the monopoly of the combustion engine will eventually come to an end, and identifies the lithium-ion battery as the most promising energy storage method. But he stresses that the combustion engine will not be replaced overnight. At the International Car Symposium in Bochum, Germany, in January 2011, he emphasised that as long as electricity and hydrogen are not derived from renewables, innovative diesel and gasoline engines can hold their own against fledgling electric car technology in the environmental stakes.

New techniques such as downsizing - that is, vehicles fitted with small displacement and turbo chargers, and lighter materials - can make engines far less thirsty. On this point he is in full agreement with other captains of the industry in Germany, including Bosch CEO Franz Fehrenbach, who boldly proclaimed that "the CO2 balance of a 3-litre car with a combustion engine is superior to that of an electric vehicle".

"Zetsche expects Chinese consumers to become the biggest buyers of Mercedes-Benz cars in the next three to five years."

Daimler's increased R&D budget around electric vehicles is, Zetsche says, all about creating emotion.

"As we are the inventor of the car, we will be the inventor of its second phase. We'll lead this development," he says. "The main component, but not the only one, is the increasing electric part of the total vehicle. It begins with start-stop, then moves on to full hybrid and ultimately the full electric car, either with a battery or a fuel cell."

In attempting to cut costs and improve their brand, automotive companies like Toyota have experienced quality problems. The prospect of the same thing happening to Mercedes draws a measured response from the German. "We have a highly sophisticated quality system and philosophy, which means handling probabilities and minimising the likelihood that anything critical could happen. We are making huge progress here, quality being better every year. No manufacturer could say it's absolutely impossible that a flaw would pop up."

Zetsche expects Chinese consumers to become the biggest buyers of Mercedes-Benz cars in the next three to five years, equating to sales of 300,000 units annually by 2015.

"China, with its huge population, has to bet on alternative sources because there is just not enough gasoline or diesel fuel available for its huge population, which wants mobility," he notes. "BYD is the leading manufacturer in China for electric cars. This, in combination with Daimler as technology leader is unbeatable."

Zetsche compares BYD's mentality to that of a start-up company. He plans to establish a new brand for the product, which "certainly will not be premium brand or volume brand, but somewhere in the middle".

Daimler expects prices for oil and raw materials to rise in the wake of the economic upturn. It believes exchange-rate volatility will likely remain high, but already the company has largely hedged the resulting risks for 2011.