DAIMLER-BENZ CONGLOMERATES The king of luxury cars has racked up big profits by staying with what it knows best. Now it has acquired three giant high-tech firms -- and lots of problems.
By Louis S. Richman REPORTER ASSOCIATE Katharena Leanne Zanders

(FORTUNE Magazine) – THE ENGINE springs to life and revs to a powerful whine. Wheels grip surely as the sleek machine whooshes off on a carpet-smooth ride. Ladies and gentlemen, presenting the Mercedes-Benz vacuum cleaner. Has someone been putting schnapps in the water coolers at Daimler-Benz? After years of sober concentration on cars and trucks, the Stuttgart-based automaker has diversified with a vengeance. In a 12-month buying spree that ended earlier this year, the company acquired three large industrial conglomerates that make a bewildering range of products from airplanes to home appliances. Daimler-Benz got a lot bigger (see chart), rivaling Siemens as West Germany's largest industrial company. But the acquisitions so far have not done much for the bottom line. Though the companies Daimler-Benz bought have footholds in high-growth, high-tech businesses, none has been able to match Daimler-Benz's sparkling profits in the car business. Sticking to cars has been a marvelous strategy so far. ''When other carmakers diversified, we just shrugged and went back to work,'' says a former Daimler-Benz manager. As king of the luxury-car market worldwide, the company cruised through recessions without a scratch. Profits increased every year but one for the past 15, and stockholders' equity rose almost 15% compounded annually. Profits jumped 52.4% in 1985, to $577 million. Buyers in Europe have to wait up to two years for delivery of some models. Dealers in the U.S. are down to a 15-day supply. Says sales chief Hans-Jurgen Hinrichs: ''Our product line today is the strongest we've ever had.'' With those numbers, diversification seems not just unnecessary but possibly dangerous. The first acquisition, in February 1985, was MTU (1984 sales: $768 million), a maker of aircraft engines and diesel motors for tanks and ships, in which Daimler-Benz already had a 50% interest. When Daimler-Benz's partner, MAN, a maker of heavy trucks and buses, wanted to raise cash, the automaker bought MAN's share for $160 million. Three months later Daimler-Benz paid $130 million for 65.6% of Dornier (1984 sales: about $530 million), a privately held builder of commuter planes, spacecraft systems, and medical equipment. The company came up for sale because of bitter feuds in the Dornier family. Early this year Daimler-Benz paid $820 million for control of AEG, a sprawling electronics and household appliances giant that had $3.7 billion in annual sales but had just emerged from bankruptcy. ''This looks like management by chance,'' says a German auto industry consultant. ''I'm not sure they know what they've bought.'' Werner Breitschwerdt, 58, the strong-willed chairman of Daimler-Benz's management board, insists he knows not only what but why. Like Roger Smith at General Motors, Breitschwerdt argues that he must have a solid base in high technology to stay competitive in the car market. By sharing the cost of basic research with its new subsidiaries, Daimler-Benz can match the deep pockets of GM and other big competitors. ''In the past we didn't need partners,'' he says. ''Today we do. It is not Daimler but the world we operate in that has changed.'' Trained as an electrical engineer, Breitschwerdt joined Daimler-Benz in 1953. He rose quickly through the passenger-car business, with stops as head of styling and product development, and became a member of the managing board in 1977. He was named chairman in 1983, when his predecessor died after three years in the top job. ''Every time I've gotten the job I most wanted to have, I've been promoted out of it,'' he says. He is the first engineer to head the company in decades, and other Daimler-Benz managers praise him as a team builder. What worries Breitschwerdt is the stepped-up competition in the luxury-car market. High-priced cars are the fastest-growing segment of the car business, and profits are lush. According to J.D. Power & Associates, a California-based automotive research firm, luxury-car sales in the U.S., Daimler's largest and most profitable export market, have nearly doubled since 1980 to top 1.2 million this year and will grow to nearly 1.5 million by 1990. Swedish carmaker Saab has jumped into the market. Unsurprisingly the Japanese are coming. Power expects five models from Nissan, Toyota, and Honda priced as high as $35,000 to make their debut by 1989. Breitschwerdt thinks buyers will demand ever more sophisticated cars. Normally cautious Daimler managers are peppering their conversation with references to 21st-century ''intelligent'' cars and trucks that ''see'' through fog and ''talk'' to each other. But Breitschwerdt is sure that the company's stately pace of automobile research and development is no longer adequate. Daimler-Benz engineers spent 18 years developing antiskid brakes that enable a driver to keep control of his car during a sudden stop. The company finally began offering the computer-controlled system in its top models in Germany in 1978 and in U.S. models in 1984. Within months of the U.S. introduction, Lincoln came out with a similar system as standard equipment. Says Wolfram Jacobi, head of production at the company's + Sindelfingen plant near Stuttgart, quoting Swiss philosopher Hermann Lubbe: ''The future is a big black wall racing toward us.'' To avoid being flattened, Breitschwerdt and Rudolf Hornig, chief of research and development, are banking on technical help from their new subsidiaries. AEG boasts West Germany's second-largest electronics research establishment after Siemens. Hornig also thinks AEG's head start in radar technology may lead to devices that detect obstacles in a car's path that a driver does not see. Dornier is a leader in materials technology. It has developed tough, lightweight carbon fibers and synthetic alloys that may one day be used to build car frames and body panels that do not corrode. Dornier's navigation and tracking systems could be applied to vehicles that steer themselves. MTU's research into large-scale diesel motors and jet engines may have applications in smaller car and truck engines. Among other things, MTU is working on ceramic engine parts that can withstand high temperatures to burn fuel more efficiently. Breitschwerdt also wants the new subsidiaries to help him get production costs down while maintaining Daimler-Benz's high standard of quality. Daimler- Benz was one of the first European automakers to use robots on the factory floor. Today it has 790 of them. But to keep up its quality, the company still uses humans for much final assembly work. Skilled workers, for example, mount and adjust doors by hand, and they listen as attentively as piano tuners to make sure the doors close with a properly harmonic whump. Daimler production managers will work with AEG and Dornier engineers to draw the best line between what humans and machines should do. Getting these benefits depends on Daimler-Benz's ability to fire up its new acquisitions. That will not be easy. Europe's Tornado fighter provides about half of MTU's aircraft engine sales. But Tornado production will probably wind down well before the new Eurofighter cranks up in the mid-1990s. With worldwide overcapacity in shipbuilding, MTU is straining to keep its diesel motor business profitable. At Dornier, years of brawling among the heirs of founder Claude Dornier paralyzed management and stifled investment in promising projects. The weak dollar is crippling sales of Dornier's commuter airliner, the 15-passenger Dornier 228. The NASA shuttle disaster and a series of launch mishaps involving the French Ariane rocket have put Dornier's space technology business on hold. % Daimler's biggest buy -- and its biggest question mark -- is AEG. During the 1970s AEG borrowed heavily to finance acquisitions but lost $904 million over nine years building nuclear power plants. When AEG's creditors handed the job of saving the company to Heinz Durr, 51, in 1980, it seemed headed for oblivion. Durr, a witty and energetic entrepreneur from Stuttgart, got bankers to write off $824 million in loans and suspend interest payments on the rest. He also cut a layer from the company's bloated bureaucracy. BUT WHETHER AEG has emerged from its ordeal as a healthy company or a frail survivor will take some time to know. The company's Olympia office-equipment subsidiary remains a big money loser, the energy technology division slipped into the red last year, and profits from communications systems, vacuum cleaners, and other household appliances have sagged. Only three of seven divisions -- automation equipment, marine products, and industrial products -- posted earnings gains in 1985. The first joint research project combining engineers from Daimler-Benz, AEG, and Dornier is called Prometheus, a tiny effort with audacious ambitions. Due to get under way this fall, Prometheus is out to engineer a 21st-century traffic control system in which sensors and computers in cars and trucks help drivers avoid hazards and traffic jams. To spur on Daimler's engineers, the board has formed what has come to be called the synergy committee, which will try to pull together Daimler's far-flung businesses. For a company as rich in good habits and discipline as Daimler-Benz, the trick is to maintain them. It is Daimler's best guarantee that it won't have to fall back on building vacuum cleaners to clean up.