Edzard Reuter
Excerpt from the speech of the incumbent chairman of Daimler-Benz AG, Edzard Reuter.I.
My fellow board members and I would like to welcome you cordially to our Annual General Meeting.
Today we could report on developments which even a cautious observer would term thoroughly positive if it were not for certain concerns arising during the past few weeks. These relate to factors as unexpected as they are uninfluenceable.
In recent years, we have been comprehensively and systematically updating and expanding our product range, improving productivity and efficiency, streamlining structures and operations, and globalizing nearly all of our activities. These measures have paid off impressively: in 1994, our results showed a turnaround that can truly be called dramatic. Moreover, we have set the course such that our earnings can continue to develop positively in the coming years.
Even so, I make no secret of the fact that before your company fully meets those high standards you have right-fully set for us, there is still work to be done. This includes completing a number of steps long ago initiated, such as those that will streamline our fields of activity even more. Above all, we have to deal with the burdens arising from the latest upheaval in currency exchange rates and from the recent, irresponsibly high metalworkers' pay agreement.
The fact that the management nonetheless proposes increasing the 1994 dividend from 8 to 11 German Marks reflects our conviction that we have successfully introduced most of the measures necessary for continued good growth.
Our confident outlook is not merely wishful thinking, but is based on data and facts that prove that our measures are taking effect. And seeing how quickly and effectively we overcame the serious recession of 1992 and 1993, the bleakest years in your company's postwar history, we have even more cause for optimism.
II.
Of course, we were also helped by the general economic recovery that not only grew stronger last year, but also spread to the rest of the major economic regions. In Western Europe, the recession was supplanted by a clear upturn bringing economic growth of 2.8 percent .
In the United States, the economic boom continued, leading to gross domestic product growth of about 4 percent. In mid-1994, Japan's economy was able to pull itself out of its two-year slump and take part in the global recovery; the rest of the Asian-Pacific region also contributed to growth. And finally, the Central European nations undergoing reform increased imports, boosting the upswing in Western Europe.
In Germany, revival came chiefly from stronger foreign sales. Unfortunately, persistently high unemployment put the brakes on private consumption, hindering growth. What is more, in contrast to many earlier surges, investments did not pick up substantially.
This may all be part and parcel of the problems that continue to jeopardize Germany's status as a business and industrial location. One of these burden is that governmental budgets are still in deficit and in need of further consolidation, which pretty much stifles financial incentive.
Another drawback of Germany as a business location are tax policies that tax away purchasing power and result in unnecessary quarrels, leaving consumers and companies feeling insecure. Topping it off are recently agreed metalworkers' pay-scales that end up adding to our unemployment problem. Also confronting us are exchange rates for the U.S. dollar and for important European currencies that no longer bear any relation to the economic fundamentals.
To tell the truth, I can't figure out how anybody in this country, leading politicians included, could fail to see that long term, serious distortions of economic parameters threaten the very fiber of much of Germany's business and industry. Given present exchange rates, it's virtually impossible to sell German products profitably on many foreign markets. Not only in North America, but also in Asia and the Pacific, orders must be placed primarily in U.S. dollars. The enormous additional cost disadvantages suffered by German companies competing against American and even European competitors - as a result of the strong German Mark - do not affect Germany's chances on selected markets only, but rather worldwide.
An additional onus is that political influence, brutally wielded at times, increasingly restricts shares in the new growth markets. This is very much the case for their huge markets for communications, energy, and transport infrastructure.
Such practices, like those exercised by the U.S. Administration, contradict the principles of the World Trade Organization. Founded at the start of the year to succeed the General Agreement on Tariffs and Trade, the WTO was to promote the liberalization of world trade. Understandably, we are very worried that these methods will distort the parameters of competition and could easily lead to escalating trade conflicts.
Some people say that we could compensate for these detriments by offering higher quality or a better standard of technology. Such people have obviously not realized that the days are long gone when that strategy was feasible.
Others say that exchange-rate fluctuations are inherent risks when you do business internationally - which is true. They add that there are ways to counteract these fluctuations, for a limited time, such as through hedging. However, those measures also cost money.
It would be a different story altogether if the exchange rates were to remain at the current levels. In that case, rationalization or hedging on any scale would not compensate sufficiently. The only alternative then would be to transfer production abroad.
During the last few weeks, we have done our best to make these consequences clear to public and political decision-makers. So far, the response has been mostly lip service. Should this remain the case, we will not hesitate to take whatever steps are necessary, as we have done in previous years. Let's just hope that everyone involved would be fully aware of the dramatic developments which would inevitably unfold.
III.
To become more immune to exchange-rate fluctuations, we are adjusting the structure of our value added. We now import 20 percent of our supplies, an amount that will increase to at least 30 percent in the long term.
Our fields of activity are becoming more international on the production side as well. As you know, this is particularly true of DASA and of Mercedes-Benz's Commercial Vehicle Division.
DASA, which was renamed Daimler-Benz Aerospace on January 1, 1995, in order to better communicate its membership in the Daimler-Benz Group, now achieves 80 percent of its turnover through international cooperation. This percentage is growing, for capacities in defense systems and space technology can be filled only through European collaboration.
As for the Commercial Vehicle Division at Mercedes-Benz, almost 80 percent of sales is generated abroad, and more than 50 percent of production now takes place outside of Germany.
We are also globalizing our production structures throughout the Passenger Car Division. You are already acquainted with the new North American factory in Tuscaloosa, Alabama; and the selection of Hambach, France, as the site for manufacturing what we first called the Micro Compact Car, and which is now named the SMART automobile family. These two large-scale projects are only the beginning of our ambitious campaign to set up production plants the world over - not least in Latin America and the Asian-Pacific region.
What makes the Asian-Pacific economy crucial to our glo-balization strategy is its incredible dynamism. At the same time, this business potential can be tapped only through local presence. Thus, long-term partnerships with local companies - such as with Telco in India or Ssang Yong in South Korea - are imperative. This also applies to the ongoing internationalization of all of our fields of activity.
To that end, DASA and the China Aerospace Corporation have founded a joint company, EurasSpace, to develop the Chinese market for communications satellites. And just two weeks ago, we signed an agreement with the Chinese aviation industry and South Korea's Samsung Aeronautics to conduct a feasibility study on jointly developing ultra-modern regional aircraft. This approach takes into account that surplus capacity worldwide will make aero- space collaborations uncompetitive in the future if they are limited to European partners.
AEG Daimler-Benz Industrie is also very active in this growth region. For example, in Shanghai, we are engaged in two joint microelectronics companies, and are managing a consortium to build the new Guangzhou underground tram. In Kuala Lumpur, AEG Daimler-Benz Industrie and a British partner will be constructing the light-rail city train.
In this context, I would like to address the subject of traffic and transportation systems. Many of you are familiar with the STORM project, the Stuttgart Transportation and Organizational Regional Management concept. Led by our subsidiary ITF Intertraffic, public administration and private industry are working together to integrate nearly all of the local transportation systems and carriers in one data network.
This unique pilot project entered the test phase at the start of this year, and at the end of 1995, customized components of STORM, such as emergency call systems, traffic and travel information systems, or guidance technology for individual users, will be marketed. Additionally, we plan to extend much of STORM throughout the entire Stuttgart area, and thereafter throughout all of Baden-Württemberg.
We think it is a very good sign that politicians are also beginning to pay serious attention to the issue of traffic and transportation management, and are helping make these systems a reality. Estimates indicate that this kind of system could improve traffic efficiency by 10-15 percent, thus helping reduce traffic-related environmental strain.
In the light of growing traffic volumes, it has long been clear to us that systems like these are a necessity, especially for the world's developing markets, which cannot expand without mobility and efficient infrastructures. Furthermore, our ability to provide these systems solutions will give our related industrial products a competitive boost.
IV.
As for the individual corporate units, DASA did well in 1994, establishing all the prerequisites for improving its results markedly in an environment that remains very difficult. Since most of you are familiar with the parameters of DASA's areas of operation, I will only touch on them today.
First of all, the economic difficulties confronting the commercial airlines have suffered resulted in a sharp decrease in orders for aircraft since the start of the decade. Since 1990, they have suffered losses of U.S. $16 billion, nearly equal to the profits they have accumulated since the end of WWII.
Although the situation has improved slightly in the meantime, incoming orders for commercial aircraft have yet to reach anticipated levels. Consequently, competition for the lowest prices and best conditions has become even stiffer, especially for smaller passenger aircraft. The market price for regional jets, for example, has dropped by more than 20 percent.
The space technology and defense systems division was once again affected by a decline in government orders during 1994. However, policy-makers increasingly seem to be realizing that the future of our country as an industrialized location demands expertise in these key technologies.
For decades now, Germany has been committed to obtaining considerable know-how in space technology, securing a strong position for our nation. Space technology has long made a contribution to the protection of the environment, nature conservation, and security. Nonetheless, a mere 0.4 percent, or 1.8 billion Marks, of the Federal budget has been allocated for aerospace expenditures for 1995.
The French aerospace budget, on the other hand, is about double that amount, as is Japan's. Whereas Germany has had to reduce the workforce in its aerospace industry by about 25 percent, other nations have been busy creating new jobs.
Against this background, DASA's strategy aims to systematically expand its commercial telecommunications and satellite business, a promising growth market. This will reduce DASA's dependency on government contracts.
DASA is already involved in a number of international projects and programs. When France's Aérospatiale and DASA co-found European Satellite Industry, as planned, this new company will be a leader in Europe in terms of size and market access.
In every respect, DASA was quick to implement comprehensive measures to deal with the dramatic changes in its business environment. Through its restructuring program introduced in October, 1993, DASA has made considerable progress in strengthening its core fields of activity, streamlining and/or discontinuing unrelated activities, and adapting structures and capacities. All in all, costs were reduced by 1.6 billion Marks in the last two years, and by 1999, these savings will reach 3.7 billion Marks.
DASA has successfully streamlined its structures and modernized its production methods. The amount of committed capital, the degree of value added, stock on hand and assembly times have all been greatly reduced. At the same time, international benchmarking processes have been introduced, which will lower costs by an additional 30 percent at Daimler-Benz Aerospace Airbus.
Unfortunately, jobs have had to and must still be cut and certain plants closed. This is also the case at Fokker, which recently adopted a further reorganization plan to bolster its lead in the regional jet market. Similar measures are being implemented in the rest of DASA's Aircraft Division to streamline inherited double capacity and to facilitate the introduction of new production structures in the relevant plants.
In the Defense and Civil Systems division a new management structure was set up in 1994 to orientate it even more closely towards commercial-sector growth markets. The recently established joint venture between Collins Avio-nics (a subsidiary of Rockwell International) and DASA for advanced avionics systems and satellite-controlled aircraft navigation systems, as well as our collaboration with Aviapribor of Russia, the most important avionics manufacturer in the CIS, illustrates DASA's determination to access new growth markets.
Further activities sharing this goal include environmental technology and recycling and disposal. Finally, there is the new business field, Airport Systems, providing airport planning, air traffic installations, and airport management systems. The enormous demand for new airports in the developing regions offers great potential for this field of activity.
You can see: an enormous amount has already been accomplished. Until recently, DASA was confident these measures would enable it to not only achieve a turnover comparable to the previous year, but also black figures for 1995. But Germany's aircraft industry invoices in dollars the world over, and its stiffest competitors manufacture in the dollar area. Subsequently, this industry has been hit harder by the fall of the US-dollar than has any other branch in Germany.
In total, Daimler-Benz Aerospace's turnover amounted to 3.3 billion Marks as of April 1995, or 14 percent below the previous year's level. This is due to declines in the aircraft field of activity, which accounts for half of DASA's total volume of turnover, and also to reduced propulsion systems business. The prognosis for the year in total is largely dependent on the dollar exchange rate. If the dollar should average below $1 : DEM 1.60 throughout the year, as currently feared, then DASA will be unable to reach its targets this year.
Similarly, at AEG Daimler-Benz Industrie, we have made much more impressive progress with the strategic and structural reorganization than certain advisors and commentators could ever imagine. This process has cer- tainly been more difficult and time-consuming than we had expected. Notwithstanding, our results are quite presentable.
Out of a company operating in nearly every area of electronics and electrical engineering, often limited by its small size and unfavorable regional structure, a new AEG Daimler-Benz Industrie has emerged. It is an organized, streamlined company concentrating on key areas important to the entire Group. In these areas, it has the critical mass and the position to make it internationally competitive.
This also characterizes Rail Systems and TEMIC, which has been industrially managed by AEG Daimler-Benz Industrie since January 1, 1995. It is also true of diesel propulsion systems or MTU-Friedrichshafen, which has been under AEG Daimler-Benz Industrie management since mid-1994. It equally applies to vital segments of industrial automation and energy systems technology, such as postal automation and programmable control systems.
As you see, at no time have we considered the much rumored sell-out of AEG. Our goal has always been the carefully thought-out restructuring which is being followed through with a steady determination.
Since 1991, AEG Daimler-Benz Industrie has acquired nine companies, including last year's acquisition of the American company ElectroCom Automation, to fortify the corporate unit's worldwide lead on the market for postal automation. Other acquisitions, such as LEW, the Hennigsdorf locomotive factory, or Kiepe Elektrik in Düsseldorf, have made an important contribution to our systems competence in the rail division.
Also noteworthy are thirteen strategic alliances, for the most part joint ventures. Without a doubt, amongst the most important are our joint venture with Groupe Schneider of France, making the joint company the world's second largest supplier of programmable control systems; and our joint company for drive systems automation, which is managed by Cegelec and is the world's third largest.
But the crucial step forward was our decision to merge our track-bound activities with those of ABB into "ABB Daimler-Benz Transportation". This company will be the world's largest supplier, by far, of track-bound transportation systems.
Desinvesting, transferring certain production facilities abroad - but also setting up new plants the world over and extending its cooperation network - are all part of AEG Daimler-Benz Industrie restructuring program. Within this framework, we are very pleased with the progress of TEMIC. In the year under review, this company's incoming orders increased by 26 percent, and its turnover by more than 30 percent. These trends characterize the first four months of 1995 as well.
The same applies to diesel propulsion systems. Despite a market hurt by surplus capacity, this field enjoyed higher turnover, especially in the Asian-Pacific region, and once again had positive results for the past financial year.
As per April, 1995, AEG Daimler-Benz Industrie's turnover of 2.7 billion Marks had put it slightly below the previous year's level. While it made marked gains in microelectronics, these were juxtaposed by declines in Rail Systems, due mainly to billing factors.
Domestic business declined by 18 percent, whereas foreign turn-over grew by 16 percent. Not taking into account our joint venture with ABB, AEG Daimler-Benz Industrie expects turnover for the year in total to be considerably higher than that of 1994.
All in all, we are firmly convinced that these strategic and structural measures, the comprehensive reorganization program aimed at streamlining operations and increasing flexibility, together with our continuing efforts to cut costs, we have laid the foundations for sound future growth. Consequently, we expect to see a clear improvement in AEG Daimler-Benz Industrie's results by 1996 at the latest.
Daimler-Benz InterServices, or debis, which will be five years old on July 1st, again improved its turnover and results significantly in 1994. Since its foundatio in debis has increased its turnover from 4 billion to 10.8 billion Marks. This represents an average annual growth rate of about 28 percent.
Almost four-fifths of debis's turnover are now generated by clients outside of the Daimler-Benz Group. This corporate unit is also well on the way to becoming an international company. Foreign business already accounts for 45 percent of turnover, with the U.S market providing the largest share at 28 percent.
1994 was again a very successful year for our mobile communications business. It enjoyed a phenomenal growth boom which continued into the first months of this year as well. By acquiring Bosch Telecom Service, debitel increased its share of the network-independent services market to 18 percent, further strengthening its market position in Germany.
debis Systemhaus also showed positive growth. Thanks to its cost-cutting measures and across-the-board, branch-related reorientation, Systemhaus chalked up positive results for 1994. With its three segments - Consulting, Software Projects and Products, and Computer Communication Services - Systemhaus, the leading manufacturer-independent supplier of information technology services in Germany, offers comprehensive, future-orientated solutions. The development of its competitive position in Europe is not least due to the ongoing cooperation with our French partner, Cap Gemini Sogeti.
Financial services, which remains debis's largest divi- sion, showed strong gains in turnover in 1994. As of April, 1995, revenue from financial services had declined somewhat, primarily due to the strength of the German Mark and the new structure of its domestic leasing and financing business. In order to make our refinancing even more flexible, external financing partners were accepted as majority shareholders in MBL Fahrzeug-Leasing GmbH & Co. KG. This company, of which we now hold only 20 percent, will no longer be fully consolidated.
The financial services division has also come a long way towards its goals of broader international presence and a wider range of services. Highlights include several Airbus and Fokker aircraft leasing funds, financing of other Group products, as well as the foundation of a number of new companies; for example, in Japan and Great Britain.
debis's other divisions, not the least of which is marketing services, are also doing well.
All in all, in the first four months of 1995, debis achieved a turnover of 3.5 billion Marks, a slight increase over the same period in 1994. For the total year, we again expect sound growth above 1994's level.
Finally, turning to our largest corporate unit, Mercedes-Benz, where the outstanding volume of business which characterized 1994, continued during the first four months of 1995. In 1994, over 590,000 cars were sold, the second-highest volume of sales in the company's history. Above-average growth was achieved in many key markets, accompanied by very healthy market-share gains.
As of April, Mercedes-Benz had increased its turnover by an additional 6 percent, to reach about 22.8 billion Marks. Revenues from passenger cars grew slightly over the previous year's outstanding level, and, in the commercial vehicle division, by 13 percent.
In particular, our large foreign commercial-vehicle companies reported exceptional growth. But in Western Europe, strong signs of recovery are also evident. For the year in total, the commercial vehicle division projects record sales of well over 300,000 units worldwide.
Passenger car sales, on the other hand, are likely to fall marginally below 1994's level. This is not not because of any slack in demand, but because of the model change-over in our new E Class this year. The introduction of this new series again demonstrates the fact that Mercedes-Benz has completely overhauled its entire passenger-car product range in only five years.
The introduction of this new series demonstrates the fact that Mercedes-Benz has completely overhauled its entire passenger-car product range in only five years - something that would have been deemed impossible not so long ago.
More new products are in store, such as the C-Class and E-Class station wagons; the SLK Roadster; and the roomy Viano, which we will be manufacturing in Vitoria, spain. In 1997, we will launch an independent mid-range coupé; the A-Class; and the All Activity Vehicle, which will be made in the United States. Last but not least, there is the Smart Car we are developing with SMH through which we will take a completely new approach to development, production and marketing.
The commercial vehicle division's product campaign has got off to a very successful start with the launch of the new "Sprinter" van, while this fall, we will introduce our new light city van. Also towards the end of the year, Freightliner, our subsidiary, will be presenting a new generation of heavy trucks in the U.S.. The product campaign at Mercedes-Benz is rounded off by the latest version of the large van, a new series of city buses, and the follow-up series to our light an heavy truck classes.
Along with renewing the entire product range, Mercedes-Benz is reorganizing its internal structures and procedures, e.g. by creating product and regional sections carrying a high degree of responsibility, market proximity and flexibility will be improved.
The steps devised and implemented by Mercedes-Benz characterize the entire group: A whole range of measures which aim to optimize processes, reduce costs, and increase productivity. This involves further decentralization, promoting an entrepreneurial business environment as well as group work in production and revising our performance and reward system. The range of parts has been reduced, new purchasing sources located and the standard of cooperation with our suppliers further improved. All this has led to a drastic, if not dramatic, improvement of our cost structures.
For the year in total, Mercedes-Benz expects turnover higher than that of 1994.
At the end of the first four months of 1995, total Group turnover had risen by 2 percent to 30.7 billion Marks. Particularly gratifying was the strong growth on Western European foreign markets, and on up-andcoming-markets the world over. In the United States, on the other hand, we faced a decline in turnover largely due to exchange rates. For the 1995 year in total, we forecast growth slightly over that of 1994.
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