(FORTUNE Magazine) – Talk about a lousy start to a new job. On Oct. 21, barely six weeks after being named chief executive of ABB, the Switzerland-based electrical engineering giant, Jurgen Dormann was forced to issue a profit warning and admit that the company won't make its earnings targets. And that was just the beginning of the bad news. ABB also announced that it might seek bankruptcy protection for a U.S. subsidiary, Combustion Engineering of Norwalk, Conn., because of soaring asbestos-liability claims. The next day Moody's downgraded ABB's debt to the lowest possible investment rating. ABB shares promptly lost more than 40% of their already declining value. Bonds also dived. Dormann apologized to shareholders, but since he had been breezily confident only weeks before that ABB would make its numbers, they were unforgiving. "He has lost our trust within one month," said Andreas Riedel, an analyst at Sarasin bank in Zurich. Riedel's advice: Sell.

Compare this turmoil with Dormann's assured mood when FORTUNE met him in early October, about a month after he became CEO. Then Dormann had insisted that ABB would make its earnings targets and that its asbestos liabilities were "not out of control." How could he have been so wrong? His answer to that crucial question was nuanced, as befits a student of the existential philosopher Karl Jaspers: "If you are the chairman [of the board], you do not have regular contact with the people doing the day-to-day business," he told FORTUNE in late October. Less than a week after he became CEO, he continued, he demanded that his top managers justify their forecasts. They did. "How could I say, 'Hey, guys, I don't believe you?'"

It's not an answer that inspires confidence. After all, if a CEO can't get a straight answer from his executives, who can? Worse, analysts and fund managers were already questioning ABB's promises--and as chairman of the board for almost a year, Dormann had access to information they didn't. "They were much closer to the reality we are facing now," Dormann acknowledged.

Just as in the U.S., the hubris of a good many CEOs in Europe--bonjour, Jean-Marie Messier!--has been punctured by reality. American CEOs have spent a lot of time recently answering questions about their ethics as widespread conflicts of interest and scattered instances of criminality cast a pall on the business world. The question being asked of European CEOs is different but equally fundamental: Do they know what they are doing?

As recently as a month ago, most people would have been confident that in Dormann's case the answer was yes. Prior to the profit warning, Dormann was one of Europe's corporate superstars, praised for turning around Hoechst, an ailing German chemical group, and then masterminding the cross-border merger that created Aventis, the Franco-German pharmaceutical giant. He was one CEO, investors on both sides of the Atlantic agreed, who got it.

At ABB, Dormann made his presence felt even before being named CEO in early September. He joined the ABB board in 1998, and he played a key role in the departures of Goran Lindahl and Jorgen Centerman, the two previous CEOs. Now he has to show he can succeed where they didn't. It is the toughest kind of job: turning around a company in which confidence is faltering, with a management team whose judgment he has reason to doubt. Then there are customers to please, shareholders to soothe--and laws to follow in the 100-plus countries where ABB does business. It's the latter issue, specifically America's liability system, that has turned trouble into full-blown crisis.

Neither ABB nor Dormann can be blamed for the asbestos mess. No one anticipated that this made-in-America legal monster would mutate into the tort that would eat entire companies. But the possible consequences could hardly be more chilling: "Because of asbestos, there is a serious risk that ABB could go under," warned Simon Marshall-Lockyer, managing director of the Cheuvreux brokerage in Zurich.

On Oct. 21, following an out-of-court settlement in West Virginia, ABB reported that its asbestos-related costs would probably exceed Combustion Engineering's total asset value of $812 million; independent estimates of ABB's asbestos liabilities start at $2 billion. But if Combustion Engineering files for bankruptcy, as Dormann is considering, ABB itself could end up on the hook.

Nevertheless, it's not just asbestos that's making ABB sick. In the early 1990s the company bought dozens of state-owned businesses in Eastern Europe; many of these turned out to be labor-intensive duds. Meanwhile, ABB was making huge bets on Asia. From China's Three Gorges Dam to Malaysia's ambitious hydroelectric contracts, it invested in huge deals that carried lots of prestige but also high risk and low profit margins.

ABB's overextended business portfolio began to unravel in 1997, when it was hit first by the Asian economic meltdown and then by a similarly serious slump in Latin America. Its problems were compounded by egregious strategic and managerial errors. In the late 1990s, ABB tried to repackage itself as a high-tech, Internet-enabled services company. Two years ago ABB even joined a consortium that was bidding for a third-generation mobile-phone license in Sweden (the bid failed). And while ABB was wandering into the dot-com forest, the company was failing to streamline its chaotic back office. By 2001, ABB had 576 overlapping enterprise-management software systems. When the global economy slowed, the cracks in the company could no longer be concealed.

The result: In 2001, ABB registered a net loss of $691 million, including a $470 million asbestos charge. It did better in the first three quarters of 2002, recording a net loss of $82 million. But revenues fell 2%, and its pretax profit margin of 2.5% was well below the target of at least 4%--and not in the same league as competitors like France's Schneider and Britain's Invensys, which have margins in the range of 8% to 10%.

If all that weren't enough to make Dormann wish he could bury himself in a philosophical tome, the irony is that he didn't particularly want the job in the first place. He has no operational experience in the industry; he stepped in only when Centerman, the previous CEO, resigned in early September. When members of the board looked around the company for a successor, they couldn't find anyone up to the job. "I'm not saying [I was] the best candidate," Dormann says, "but the best available candidate." And then, the deluge.

Though he is giving up his job as chairman of ABB's compensation committee, he plans to stay on as chairman of Aventis (he was CEO until last March). In that role Dormann regularly travels from ABB's modest headquarters on the outskirts of Zurich to cope with his Aventis in-box in Strasbourg, France.

Despite Dormann's insistence that he was "totally relaxed," it is hardly ideal that he cannot give his entire attention to ABB. But Dormann said he was still confident that he could hammer it into competitive shape. A keen mountain walker who looks a decade younger than his 62 years, he declared in late October, "I have the energy and stamina to make this happen."

After all, he has done it before. In 1994, Dormann was promoted from chief financial officer to CEO of Hoechst, the Frankfurt-based pharmaceutical and chemical company. Hoechst then had a lot of similarities to ABB now: It was a sprawling, underperforming multinational with terrific R&D, a wildly diverse portfolio, and operations in more than 100 countries. Dormann won't take these comparisons too far. "This [engineering] industry is different," he stated flatly. But he learned lessons from Hoechst that he can apply at ABB.

One is to let people know what is coming. When he took over at Hoechst, Dormann's 31 years' experience in the company told him it needed shaking up. In a speech called "New Beginnings" at the start of his tenure, Dormann put Hoechst's 170,000 employees on notice that the group had to become less bureaucratic, more shareholder-friendly, and more profitable. That mission statement earned him the nickname "Mr. Shareholder Value" in the German business press. Another lesson is to make management more international. At Hoechst he appointed the first non-German board member in 1995. At ABB he wants to chip away at the Nordic and Swiss overload in the senior ranks; he has already warned veterans that they are going to have to compete for every top job.

Yet if Dormann's thinking was influenced by Wall Street, his methods were rooted in Europe's slower-paced corporate culture, where nicknames like "neutron" or "chainsaw" are not highly valued. Bit by bit, the strategy became clear. The low-profit basic- and specialty-chemical divisions were sold off; so was the cosmetics unit. That left Hoechst focused on agricultural and pharmaceutical products. Mr. Shareholder Value lived up to his name. Between 1994 and the end of 1998, Hoechst shares more than doubled in value.

The following year Hoechst merged with Rhone-Poulenc to form Aventis, the world's sixth-largest pharmaceutical group. Dormann became CEO, stepping down in March after a solid run. In an admittedly thin field, the deal that created Aventis is--in terms of sales, profits, and growth prospects--the most successful cross-border merger by two major European firms since World War II.

The company that claimed that title before Aventis, of course, was ABB, which was born from the 1988 merger of Sweden's Asea group with Switzerland's Brown Boveri. ABB's answer to Abba was Percy Barnevik, the superstar CEO from 1988 to 1996, who jet-setted around the world buying companies and promoting ABB as a serious rival to General Electric. But by 1997, when Barnevik stepped down as CEO to become chairman, ABB had lost its way. Lindahl, the new CEO, led ABB into its ill-advised--and in retrospect ludicrous--attempt to reinvent itself as a high-tech services company. He was pushed out at the end of 2000 as costs spiraled. To make matters worse, Barnevik and Lindahl had been awarded pension and severance deals worth $88 million and $55 million, respectively, without the full board's approval. There was nothing illegal here, just unseemly; earlier this year each agreed to give back much of this money.

Centerman, another Swedish veteran of Asea, inherited this poisoned chalice from Lindahl. "Centerman did what he could to bring the company back on track," Dormann said. "He had 26 years with the company, so he worked for Goran and he worked for Percy. We all have our roots and our history." Reached by telephone, Centerman refused to comment on his removal. But in his only public remarks since his resignation, he told a Swedish radio station in September, "My decision [to resign] is totally connected to Jurgen Dormann."

Dormann got dragged into this swamp when Barnevik recruited him to the board in 1998. At the time ABB's stock price was still buoyant, belying the rot beneath the surface. "I didn't see the problems," said Dormann ruefully. Nor did he anticipate taking over as chairman from Barnevik, who quit last November. But during 2001, Barnevik found himself "facing a lot of friendly and less friendly questions," as Dormann put it to FORTUNE in February. Dormann took over.

It's a measure of ABB's dire straits that Dormann is losing his patience with those in the company who don't match his exacting standards. On Oct. 11, for instance, he sent a letter to ABB's staff in which he complained about being inundated with PowerPoint files whenever he asked for information. "I don't want to be sold to when we are discussing real-life business issues within the company," he wrote. "I don't want self-promotion; I want someone to lay out the issues at hand so we can examine them and find solutions."

As at Hoechst, Dormann wants to "optimize ABB's portfolio." In plain English, that means identifying good performers and unloading the rest. Under the plan unveiled Oct. 24, Dormann identified power technology (everything from high-voltage lines to plug socket fuses) and factory automation as ABB's core businesses. It's easy to see why. The company is a dominant global player in both sectors, and those divisions make decent money. Between January and September the power technology division registered pretax profits of $76 million on sales of $1 billion, a margin of 7.6%. During the same period the automation technology division recorded pretax profits of $86 million on sales of $1.2 billion, a margin of 7.1%. By comparison, the results from ABB's other divisions make grisly reading.

As ABB concentrates on these core areas, other divisions will be absorbed, sold, or shut down. Centerman got the ball rolling, arranging the sale of 68% of ABB's financial services division to General Electric for $2.3 billion in September. That will go a long way toward meeting ABB's target to reduce its net debt. Dormann is going much further faster--and rather more brutally. He wants to bundle the utilities unit (falling sales, minuscule profits) into the more successful power technology division, ending an illogical overlap. The hope is that ABB can ride out the global slump in the energy sector and then start filling its utilities order book again.

In addition, the industries unit, which supplies automotive products to customers like cargo distributors and food retailers, is being folded into the automation unit. (Don't ask why this duplication existed; ABB just evolved that way.) The group processes unit, which specializes in products like rolling mills for steel manufacturers, is being dissolved. The oil, gas, and petrochemicals division will be sold. Oh, and costs will be cut by $800 million over the next 18 months.

But Dormann, like ABB, is hardly out of the woods, to use one of his favorite expressions. In fact, he is in a dark and scary place, having staked his considerable prestige on rescuing ABB. As a board member, he was impatient with the slow pace of change and played a key role in the exits of both his predecessors. As CEO, he has to prove he can do better--or exit himself. And right now Mr. Shareholder Value's credibility is badly damaged. Unless Dormann can deliver solid earnings growth rather than further nasty surprises, his reputation as one of corporate Europe's greatest business strategists will start to unravel. And so, too, will ABB.

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