Turbulent economic development after the First World War
The hour of the speculators
The 1970s oil crisis shakes the industry
There have been several crises in the history of the company, but ultimately it has always pulled through. Let us take a look at two examples of difficult situations – the period immediately following the First World War and the 1970s oil crisis.
The First World War had a devastating impact on the German economy. In the second half of 1917, the food supply in the country collapsed completely, and this was followed by calls for political reform that culminated in industrial action at the end of January 1918. Thus, shortly before the end of the war, action was required on the part of employers. In 1917, Benz & Cie. changed the company’s employee’s relief fund into a relief and pension fund and also spent 1.5 million marks on setting up a workers’ welfare fund, which was henceforth financed from annual profits.
After the First World War, foreign markets disappeared, and some international subsidiaries were expropriated. German automotive manufacturers not only lost the state as a major customer but also had to stand by and watch the military sell off large quantities of vehicles on the open market. At this point, mass vehicle ownership had not yet taken off in Germany – an automobile was still regarded as a luxury purchase. The luxury tax of 15 per cent imposed in 1906 was not reduced until 1925. And compared with the pre-war years, vehicle tax had quadrupled.
In the annual report for 1919, the DMG board nevertheless expressed its optimism about opportunities for exports: ‘Demand for our products has been buoyant; there are again signs of interest and confidence from abroad.’ But output was low: ‘Working time reductions, frequent strikes and other forms of disruption to production, as well as problems with coal supplies and transportation and a lack of materials have delayed a full return to levels of peacetime manufacturing and reduced output at our plants. Despite all our efforts it has not reached a level that reflects the capacity of our production facilities and size of our workforce. As a result we have only been able to partly satisfy our customers.’
The response of Daimler and Benz to economic crises was to diversify. Thus it was not just automobiles that were produced but also typewriters in Untertürkheim and bicycles in Marienfelde. In the former aircraft factory at Sindelfingen, vehicle bodies and furniture were produced in a bid to fully utilise capacity.
But the transition from war to peace also led other companies to diversify – and competition within Germany was growing. Many factories saw civilian automobile manufacture as a way of keeping their production processes running. After the war no fewer than 86 companies found themselves competing in a market whose needs Daimler and Benz could easily have met on their own. By 1927, following an initial process of concentration, there were fewer than 30 manufacturers left.
During the course of 1919 there were repeated strikes at all three DMG plants, where employees were calling for wage increases to keep pace with inflation. This was a general problem during the post-war period: the money you earned one day was hardly worth anything the next. Inflation was ruining the German economy. In October 1922, operating costs were around 500 million marks, but less than a year later they had reached 22 trillion 600 billion marks. Germany money had also lost its value abroad, endangering companies’ ability to purchase raw materials.
At Benz and Daimler – as elsewhere – a succession of capital increases now started to run parallel to devaluation of the currency. In 1920, DMG increased its capital stock from 32 million to 100 million marks. Benz & Cie. followed in November 1920 and January 1922 with a capital increase to 68 million marks initially and then also to 100 million. In terms of capitalisation, both were Germany’s biggest companies.
With so many new shareholders, the two companies took measures to avoid the danger of hostile takeovers. For example Daimler-Motoren-Gesellschaft and Maschinenfabrik Esslingen exchanged preference shares with 16-fold voting rights. Benz also issued ‘protection shares’ which could not be sold for a period of ten years, as well as two million marks’ worth of preference shares with 12-fold voting rights that remained in the hands of the emission consortium.
Schapiro the speculator
When the economy starts to falter, the speculators move in. In addition to all their economic woes, Benz & Cie. also had to deal with a Berlin-based wheeler-dealer called Jakob Schapiro who almost managed to bring the company to its knees. Schapiro bought up large numbers of automobiles from Benz as well as other manufacturers, but only paid for them when the money had already lost value and the price could easily be covered by what he made from reselling them. His first order from the Benz plant came in spring 1921, when he purchased 200 chassis for the 8/20 hp.
Schapiro hoped to use this trick to gain exclusive distribution rights from the Benz plants. By November 1922 he had managed by means of secret purchases to acquire nearly half the shares – and Benz & Cie. were forced to make concessions to him. In 1923, he forced his way on to the supervisory board, where he did his best to pursue his own private interests. In the end, Benz had to grant him a right of disposition over up to 30 per cent of production.
When the financial situation in Germany returned to normal in 1924 as a result of the introduction of the Rentenmark and from 30 August 1924 the Reichsmark, Schapiro’s exchange manoeuvres no longer worked. The exchange dealings collapsed and the insolvency of the man who for a time had been Germany’s biggest car dealer nearly brought ruin to a large proportion of the domestic car industry. It was only after the merger with Daimler in 1926, which Schapiro as a member of the supervisory board had done his best to prevent, that the speculator was at last forced to retreat.
Long-term planning during the oil crisis
Another major challenge was the oil crisis in the 1970s. Although it had far-reaching consequences, its impact was hardly reflected in Daimler-Benz’s accounts: ‘Only one German company in this sector continued to record rising production figures during 1974: Daimler-Benz,’ wrote Max Kruk and Gerold Lingnau in their book ‘Daimler-Benz. The Company’. ‘All over the world, automobile manufacturers – with very few exceptions – recorded a dramatic drop in revenues and a massive collapse in profits, with some even ending the year in the red. But not Daimler-Benz. The company published year-end accounts that hardly showed any impact of the dramatic events in the market.’
The secret of success was once again long-term planning – the fact that the company had ‘focused on long-term requirements rather than short-term peaks in demand,’ as the 1973 annual report put it. In addition, Daimler was pursuing an anti-cyclical investment policy. In 1974, despite the poor state of the economy, the company invested DM169 million more than the previous year, and the following year it increased investment by a further DM197 million.
The first oil crisis of modern times began in the autumn of 1973, when the Organisation of Petroleum Exporting Countries (OPEC) announced that it was going to reduce oil output by some 5 per cent. This was a politically motivated decision designed to put pressure on the oil-dependent West to distance itself from Israel in the so-called Yom Kippur War (6 to 24. October 1973) – the fourth Arab-Israeli war within the framework of the Middle East conflict.
On 17 October 1973, the price of oil rose from around US$3 per barrel (159 litres) to more than US$5 – an increase of around 70 per cent. During the course of the following year, the price rose again to more than US$12. In the Federal Republic of Germany an increase of around DM17 billion in the cost of oil imports in 1974 further exacerbated the economic crisis and resulted in a significant increase in short time working, unemployment, social benefit payments and company insolvencies.
At Daimler-Benz the idea was revived of adding a ‘small’ car to the company’s range of models. The decision was partly triggered by an American policy decision: in 1975, in the wake of the first oil crisis of 1973/74, the American Congress introduced strict regulations for fleet owners in a bid to reduce energy consumption. At the time, the larger models from Daimler-Benz could not meet these requirements, which were based on the average consumption of the entire range of imported models.
Expanding capacity without too much risk
Despite the crisis, Group management took a long-term view and decided it was important to launch a limited expansion of capacity. The Board of Management initially took a cautious approach, expanding capacity at its Sindelfingen plant to 30,000 passenger cars per month from 1977. The company’s medium-term plan for the 1970s was to increase output from 340,000 in 1972 to 360,000 units by 1976. But capacity in Sindelfingen turned out to be inadequate and it was clear that new structures had to be developed for the future.
This was done. In what was known internally as the ‘Long-term Production Order’ (LPO), it was decided that trucks would be exclusively produced in Wörth and Düsseldorf and passenger cars in Sindelfingen and Bremen – a basic organisational structure that has largely survived to the present day. The aim of the LPO was to achieve balanced capacity utilisation, improve responsiveness to market trends and flexibility for program modifications, and optimise costs.
This new capacity planning had become necessary because in the late 1960s and early 1970s the Group had taken a significant leap forward: between 1965 and 1973, Group revenue almost trebled from DM4.9 billion to DM13.8 billion. Truck production alone increased more than threefold from 73,000 to 216,000 units, making
Daimler-Benz the world’s biggest truck manufacturer. There was also a lot happening in the passenger car segment in the 1970s. The compact Mercedes-Benz 190 was designed, the 123-T-model series became the first estate car to bear the brand name, the range of diesel vehicles was expanded, and the first oil crisis in 1973 demonstrated that flexibility could secure long-term employment. At the start of the 1970s, Daimler-Benz’s medium-term plan catered for increasing output from 340,000 cars in 1972 to 360,000 in 1976. But the executive was concerned that the plant at Sindelfingen would not be big enough.
In addition to the four ‘LPO assembly plants’ – Sindelfingen and Bremen for passenger cars and Wörth and Düsseldorf for trucks, the Mercedes-Benz A-Class and B-Class are now built in Rastatt, Mercedes-Benz minibuses in Dortmund, the Vario and Sprinter in Ludwigsfelde and buses in Mannheim as part of the EvoBus production partnership. The Ludwigsfelde plant, a former GDR state-owned factory, was taken over in 1994. Other domestic production facilities such as Berlin, Hamburg, Gaggenau, Rastatt, Untertürkheim, Kassel, Mannheim and Ulm operate as important suppliers. Since production of the first estate started in spring 1978, more than 5 million Mercedes-Benz passenger cars have been manufactured in Bremen. Today the North German plant builds the Mercedes-Benz C-Class (saloon and estate), CLK (coupé and convertible), SLK, SL and GLK.
Daimler also survived a more recent global financial and economic crisis: 2009 saw a decline in global economic output for the first time since the Second World War, with many automobile markets shrinking temporarily by between 20 per cent and 40 per cent, and an even more dramatic decline in commercial vehicle markets.
The figures for Daimler initially reflected this market collapse. EBIT amounted to minus 1.5 billion Euros and the Group posted a net loss of 2.6 billion Euros.
‘That is unsatisfactory – yet the loss would have been even bigger if we had not taken enormous countermeasures. We systematically streamlined our business processes increased efficiency, reduced costs, cancelled bonuses and otherwise left no stone unturned. Those who could bear more sacrifice were required to make one,’ wrote Dieter Zetsche to shareholders in the 2009 annual report, in which he also suggested that no dividend should be paid out. ‘No-one enjoys strict savings, short-time working or waiving a portion of one’s income. But the exceptional nature of the market crisis left us with no alternative. And management, along with our represented employees, often worked together in co-ordinated actions.’
The rigorous cost savings introduced by the company rapidly took effect. By April 2010, the group was able to double its profits forecast for the current year, and a publication like ‘Stern’ magazine featured the euphoric headline ‘Daimler powers its way out of the crisis.’ Following positive figures for the second quarter of 2010, Daimler further increased its forecast at the end of July.