G379

With a shareholder lawsuit, tumbling stock prices and a money- losing unit, DaimlerChrysler CEO Juergen Schrempp faces his toughest challenge since he engineered the merger of Daimler-Benz and Chrysler in 1998.

And how he handles the challenge will likely determine if the 56- year-old former mechanic survives as CEO.

"Schrempp has a lot invested in positioning DaimlerChrysler as consolidators of the global auto industry," says analyst David Garrity of Dresdner Kleinwort Benson.

But nervous shareholders and Chrysler's mounting U.S. losses spell trouble for Schrempp, he says. "The issues may ultimately lead to a change in management at the top, including Schrempp."

Other analysts say it's too soon to give Schrempp his walking papers.

"They should put him on the hot seat, but they shouldn't execute him," says Rajesh Kothari of GMA Capital. "Chrysler started bleeding red ink, and he started making changes."

And Hilmar Kopper, chairman of DaimlerChrysler's supervisory board and head of Deutsche Bank, its biggest shareholder, recently told reporters that he has "complete confidence" in Schrempp.

Before the merger, Schrempp won praise for increasing shareholder value in Daimler-Benz, which he took over as CEO in 1995. He was credited with reversing a disastrous strategy by his predecessor to make Daimler-Benz a technology company involved in aerospace, software, electronics and a wide range of non-automotive industries. He slashed costs, eliminated unnecessary units and let Fokker, the Dutch airplane maker acquired in 1993, slip into bankruptcy.

But such success has eluded Schrempp since the November 1998 merger. The problems:

* DaimlerChrysler's shareholder value has dropped dramatically, raising investor doubts about whether he can turn things around. Instead of the growth and synergies Schrempp promised, DaimlerChrysler is struggling.

"Both of the companies were extremely successful using their own methods," says analyst David Healy of Burnham Securities. But "at this point, they are getting into drastic cost-cutting measures just to get earnings back to where they were before the merger."

* Chrysler posted a $512 million loss in the third quarter and is expected to continue reporting losses in the fourth quarter and the first quarter next year. That's a big reversal from the fourth quarter of 1999 when DaimlerChrysler reported record net income of $1.6 billion and handed workers average profit-sharing checks of $8,100.

* Billionaire investor Kirk Kerkorian has emerged as one of Schrempp's toughest critics. Kerkorian, largest Chrysler shareholder at the merger and now the third-largest DaimlerChrysler shareholder, filed a $9 billion lawsuit against Schrempp on Monday, arguing that the CEO deceived investors and the Securities and Exchange Commission when he claimed the deal was a merger of equals.

The lawsuit blasts Schrempp for having a "cavalier attitude toward American executives" while displaying "arrogance" and "deceit" to shareholders.

DaimlerChrysler officials say the lawsuit has no merit.

Some industry watchers say Schrempp has failed to manage the delicate marriage of German and U.S. cultures, resulting in bruised egos among some Americans.

Last week, he reportedly apologized to 400 top Chrysler officials for saying that he always intended for Daimler-Benz to control Chrysler and not for the companies to be co-managed as equals.

But defenders say Schrempp shouldn't be blamed for Chrysler's woes. He let an American management team run Chrysler for two years, and some analysts say he was duped by their claims that sales and profit problems were only temporary and soon to be corrected.

Chrysler's fall was inevitable, says analyst Susan Jacobs of Jacobs and Associates. "Competition has caught up to Chrysler," she says, because the company didn't "anticipate the kind of intense competitive pressure in the truck market, and the loss of pricing power in all markets."

Chrysler no doubt looked better two years ago to Daimler than it does now, she says: "When the merger took place, Chrysler had an extended period of dominance in the minivan and (sport-utility) markets. By the late '90s, we started to see a lot more competition in SUVs as the Europeans and Japanese came in."

Although morale among Chrysler workers has dropped as they lost their American leadership, some analysts say Schrempp made the right move last week when he replaced James Holden as president of Chrysler with a German, Dieter Zetsche.

"Dieter Zetsche is an excellent choice for Chrysler. His track record is very good," Jacobs says.

She also bets the Daimler board won't throw Schrempp out anytime soon. "They tend to be patient if action is being taken. And this probably doesn't seem to be the moment to be making changes at the top."

Leo Welt, executive director of the German American Business Council, a non-profit group created to promote German business, says shareholders need to be patient and not rush to blame Schrempp.

And, he says, that's likely to happen.

"European companies are in more for the long haul. They are not in it for quarterly earnings," he says.

"Schrempp is very astute and a very smart manager," Welt says. "He is dynamic. He is going to turn the company around."