(FORTUNE Magazine) – Just a few months ago time seemed to be running out for Jürgen Schrempp. Investors were screaming for the DaimlerChrysler chairman's scalp because he had destroyed $60 billion in stock market value in six years. His own management board had humiliated him by vetoing part of his Asian strategy. Every place Schrempp went, it seemed, he ran into trouble. When his $1 million armored Mercedes S600 limousine was left unattended for 20 minutes on a Stuttgart street, it was stolen. (The car has never been recovered; authorities suspect the Russian mafia.) Rumors flew that Schrempp would give up his job, and that if he didn't, he'd be asked to quit.

But a funny thing happened on the way to the funeral: Schrempp survived. That doesn't come as much of a surprise to people who know him. He is, after all, a man whose 43-year career is a straight upward line from the position of auto mechanic to chairman of the world's seventh-largest corporation. Schrempp did not get where he is--and remain there for nearly a decade--by being a wimp. With the aid of some strong backing from Daimler's supervisory board (the German equivalent of a board of directors), Schrempp managed to hang on, and now events are turning in his favor. Daimler is expected to post sharply improved results this year, and three of its four major operating divisions are running well. Investors have responded by bidding up the price of the stock nearly 10% in recent weeks. And for now, at least, Schrempp's critics have quit yapping.

But Daimler is a long way from its peak earnings of the 1990s, and Schrempp still has a lot of work to do. He has to restore consistency to his company's performance and stop shocking investors with surprise losses and big write-offs. He has to return the flagship Mercedes-Benz division to its former glory by rebuilding its reputation for quality and restoring its fat profit margins. And he has to demonstrate that his goal of creating a global transportation company can make shareholders happy over the long haul.

With Daimler's outlook brightening, Schrempp agreed to sit down for a 90-minute conversation with FORTUNE in the company's headquarters outside Stuttgart. It was his first extended interview with an American publication in more than two years. Gesturing to make his points, the 60-year-old chairman seemed none the worse for his recent travails. "Let's say I'm now in much better shape than I was at some stages in the course of this year," he says with a smile. "I've had my challenges, but I feel more excited than ever."

While the events of the past 12 months may not have left Schrempp chastened, they have left him changed. Where he used to rely on the strength of his personality to steamroll opponents, the 2005-model Schrempp has been reengineered for speed and agility. The onetime global strategist now claims he's willing to get his hands dirty with Daimler's inner workings. "The name of the game is implementation," he says. "Every day we have to get better at what we are doing. Our motto for next year is to improve further our operational excellence." Out of most CEOs' mouths, that would be so much dismissible twaddle. But in Schrempp's case it appears to be a sincere conversion to hands-on leadership. He is determined to make stodgy Daimler more responsive and more flexible. "The [economic] situation is volatile," he says. "The company's culture has to react quickly to changing circumstances because there is no constant situation where you say, 'For the next two or three years this is going to happen.'"

Chrysler Up, Mercedes Down

A case in point is the rise of Chrysler, which is currently outshining Mercedes. The American automaker had been a laggard since the ink dried on the 1998 merger that Schrempp engineered. The marriage occurred at the top of the market, but it turned out that Chrysler's cupboard was bare and its best executives about to flee. The Detroit operation racked up huge losses in 2001 and 2003. Now rigorous cost cutting, revamped operations, and new models like the iconoclastic Chrysler 300C sedan, winner of several car-of-the-year awards, have revived profits and made Chrysler a star performer at Daimler.

Mercedes, meanwhile, is struggling. The division's margins have fallen by half-- especially painful since it's the cash engine that drives the company. With cars that sell for an average of $50,000, Mercedes generated more than half of Daimler's operating profits in 2002 and 2003. But in the first nine months of 2004, operating profits were down 30% compared with the previous year, and they were off 62% in the third quarter.

Some problems are beyond Schrempp's control. Like other European products, the brand has been hurt by the cheap dollar: Made-in-Germany cars are more expensive in the U.S., Mercedes' second-largest market, than they were a year ago. But Mercedes has a couple of self-inflicted wounds. The first is the complexity of its cars, which require lots of people to produce. According to Goldman Sachs, Mercedes makes 12 cars per employee per year--comparable to BMW's rate but less than half of the 27 cars per year that each Chrysler worker produces. Also driving up cost is the way Mercedes introduces new models. "What we have done in the past," Schrempp says, "is when we bring a new car, it's bumper-to-bumper new. And that's a great challenge in terms of cost and quality." To make production smoother, Schrempp is adopting a strategy of introducing new technologies in specialty models before moving to mass production.

But the most serious issue is quality. Mercedes finished behind Hyundai in J.D. Power's most recent survey of initial defects reported by customers, and it was close to the bottom in Power's vehicle-dependability report. Customers have been complaining for years now about cheap-looking interiors and Space Age electronics that aren't debugged before being installed. "Mercedes is rather too innovative for its own good," says a Bernstein Research report.

Quality has improved over the past year, and Schrempp insists that Mercedes vehicles are in excellent shape when they leave the factory. But the division still needs to get better at integrating the electronic gadgetry it crams into its cars--and dealing with all those high-maintenance customers whose complaints clog a number of websites. One U.S. owner who paid $80,000 for a 2004 model vented recently about driver headrests that adjust themselves, climate-control devices that randomly set temperature, and electronic driver aids that take over the car while he is driving. Schrempp concedes that Mercedes owners have the final say on what constitutes a fault, although at times he seems befuddled by complaints about such seemingly inconsequential matters as cup-holder size and air-conditioner velocity. "One issue we have now is the climate control in a car," he says. "Many American customers want to feel cold air in the face. And we said possibly that's not the most healthy thing to do. [But] we have found out that if the customer wants it, you should get it."

Whether the customers are right or not, making them all happy may have cost Mercedes as much as $500 million last year in upgraded components and post-production testing. Schrempp says the money is well spent. "We are doing more than you would normally have to do," he says. "After all, we're talking about Mercedes." He expects the problems to be cleared up by 2006. "In another 12 months you're not talking about quality anymore."

Perhaps. But some analysts say the post-production testing is a Band-Aid approach. "In the longer run," Goldman Sachs noted in its November report, "we believe Mercedes needs to tackle longstanding manufacturing and product- development problems to achieve high quality at low cost."

The Trouble With Smart

Schrempp has a different headache with Smart, the tiny "city cars" Mercedes sells in Europe. The cars were introduced in 1998 to boost sales volume and improve corporate fuel economy, but Smart has been losing money--analysts figure that losses could reach $400 million in 2004 on sales of only 160,000 cars. Schrempp isn't conceding defeat. In fact, he's doubling down: Smart is adding dealers and plans to sell a model called the Formore in the U.S. beginning next year. Schrempp says he can get Smart to break even on an operating basis by 2007, two years behind schedule: "What was mentioned in the media--that we would decide to stop the project--I cannot see because there's lots invested. Smart has tremendous brand equity built up."

But translating brand equity into profit won't be easy. Small cars are inherently unprofitable, and operating in the shadow of a luxury-car culture at Mercedes doesn't help. "We do not project a very profitable future for Smart," says a Commerzbank report.

Lawsuit, Mutiny, and A Firing

Worse than the troubles at Mercedes and Smart, at least in terms of self-respect, have been Schrempp's legal and boardroom misadventures. In December 2003, Schrempp took the witness stand to defend himself in a $1 billion shareholder lawsuit filed in Wilmington, Del., by Las Vegas financier Kirk Kerkorian, who owned 11% of Chrysler stock. Schrempp had publicly characterized the Chrysler deal as a "merger of equals." But he imprudently told a Financial Times reporter in 2000 that he had always intended to make Chrysler a division of the new company. That was enough to provoke a lawsuit accusing him of misleading investors. And the explanation Schrempp offered on the stand was tortured: The merger united two equal legal entities, he said, but Chrysler's business was treated as a division for operating purposes.

"It was quite an experience," Schrempp says. "I'm not saying I want the experience again, but I think I was able to get the point across." Whether the judge in the case agrees remains to be seen; a ruling has yet to be handed down.

Angry shareholders also lashed out at Schrempp at Daimler's annual shareholder meeting in Germany in April. With losses at Chrysler having pushed the company's 2003 net profit down 91% from the preceding year, numerous investors, including major fund managers, attacked Schrempp's strategy and argued that he should be removed from office. One fund manager received loud applause when he got up and declared, "We want changes at DaimlerChrysler." Schrempp is unfazed. He says the meeting was "very interesting," adding, "The people ask very good questions, but by and large they like what they see." Schrempp may be in denial, but his aides describe it more as a refusal to be distracted by short-term setbacks.

His skill in putting the best gloss on things was put to the test later that month. After a trip to Japan, Schrempp returned with a plan to inject more capital into Mitsubishi Motors. Daimler owned 37% of the struggling Japanese automaker, and Schrempp had invested $3.2 billion in it to build a manufacturing and marketing presence in Asia. But his colleagues on the management board voted the plan down by an eight-to-three margin. They decided that Daimler wouldn't invest another euro in the troubled company. Germany's two-board corporate structure is complicated, but suffice it to say that Schrempp had to accept the decision, then present it to the supervisory board, which ratified it.

The chairman had sustained a stinging rebuke. The Financial Timessaid that the vote amounted to "dancing on the grave of the global ambitions of Jürgen Schrempp." For his part, Schrempp says he's proud of his board for taking issue with him. "I think it was good," he says. "I'm glad that I have adults on my board who actually can afford to disagree with me. I know many boards where this is not the case. So for me it was a healthy process. That it looks slightly different in the world of the media is okay."

Nor, Schrempp claims, did he consider resigning after his defeat. "I would find that bad style," he says. "You could almost say blackmail. We're always talking about good corporate governance. If I propose it, does that mean it must be right as a matter of principle? Why would I need a board? Worse would be if you made the board understand right from the start that if they disagreed with you, you would resign. That's not what I'm all about, and this would be very bad governance." As Schrempp now knows but won't quite say, the board did him a big favor: Mitsubishi continues to struggle and is once again seeking additional financing.

Although Schrempp survived the Mitsubishi dustup, there was collateral damage. Just after the Mitsubishi vote, the supervisory board abruptly rescinded its appointment of Wolfgang Bernhard, a 44-year-old engineer, as head of Mercedes. While he was chief operating officer of Chrysler, the confrontational Bernhard had led a successful crash program to cut costs and improve quality. Back in Germany, he was expected to shake up the stodgy and inbred Mercedes organization, but he was fired two days before he was to take over. Schrempp's critics saw the firing as his retribution for Bernhard's vote against the Mitsubishi bailout, but Daimler executives say there was no connection. Instead, they say thatBernhard had been promoted too quickly, developed grandiose ambitions, and was insufficiently respectful of Mercedes' traditions. Schrempp wouldn't comment on Bernhard's firing.

The derailment of the Mitsubishi deal should have dampened Schrempp's dreams for Asia. But he insists that other than Daimler's reducing its stake in Mitsubishi to 20%, "the Asia strategy has not changed. In all the other countries we are controlling our destiny. We are extremely well positioned." Schrempp has especially big plans for China, where Mercedes already has 20% of the luxury-car market. But he acknowledges it won't be easy. "While I am very, very bullish," he says, "you look at it over the longer term. We should all be aware that the Chinese automotive market will be at least as competitive as the U.S. and the European markets. It will not be a situation that for the next ten years you go there and make lots of money. You have to be very careful in what you are doing. [The Chinese] have an ambition to create their own plants, and they have said it openly: 'We want those guys to participate in the market, but at the end of the day we want to have our own brand.'"

Now What?

That Schrempp made it through the past year intact is quite an achievement. He's enjoyed the unwavering support of the supervisory board throughout the recent ordeals--the board renewed his contract last February and went out of its way to say nice things about him during the Mitsubishi flap. But now that his critics have been silenced, Schrempp still has to prove that he can leave DaimlerChrysler in better condition than when he got in the driver's seat. While he wrestles the company back into shape, he's refereeing a com- petition between two of his top execu- tives to see who succeeds him. Both have executed turnarounds at key divisions. Eckhard Cordes, 54, a finance specialist, successfully steered Daimler's truck and bus business out of a ditch and is now repairing Mercedes. Dieter Zetsche, 51, won his stripes for taking over Chrysler during a crisis in 2000, instituting tough cost controls and cranking out zeitgeist-altering new products like the 300C. Schrempp won't offer a hint who his choice will be.

Schrempp's contract doesn't expire until April 2008. If his enemies were somehow to pry him loose and into retirement tomorrow, Schrempp's career epitaph would read, "High ambitions, low on follow-through." He means to change that over the next three years by putting himself at the controls. "Even for the chairman of the board, you have to be where the action is," says Schrempp. "I've always been in operations. I have done this for a long time, and I love it." If he ever succeeds in getting all of Daimler's far-flung operations humming together, shareholders may even love him back.

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