DaimlerChrysler and Canada

John C. Koopman, Partner, Heidrick & Struggles and Ist Vice-President, The Empire Club Of Canada; Matt Salvian, OAC Student, Iroquois High School, Oakville; Reverend Dr. John Niles, Victoria Park United Church and Director, The Empire Club Of Canada; Uwe Harnack, President and CEO, Canadian German Chamber of Industry and Commerce; Linda Hasenfratz, President and CEO, Linamar Corporation; Ed Brust, Chairman, President and CEO, DaimIerChrysler Canada Inc.; Ray Finnie, President and CEO, Wescast Industries Inc, and President, Auto Parts Manufacturing Association; Buzz Hargrove, President, Canadian Auto Workers; Red Wilson, Chairman, Nortel Networks Corporation; William G. Whittaker, QC, Partner, Lette Whittaker and 3rd Vice-President, The Empire Club of Canada; Robert A. Renaud, Vice-President, Public Affairs and Government Affairs, DaimIerChrysler Canada Inc.; Tom Macmillan, CEO, CIBC Mellon Global Securities Services Co.; Belinda Stronach, President and CEO, Magna International Inc.; Rob Lander, President and CEO, Stackpile Limited; Robert Schad, President and CEO, Husky Injection Molding Systems Ltd.; Edward Lumley, Vice-Chairman, BMO Nesbitt Burns; and Sean Weir, National Managing Partner and CEO, Borden Ladner Gervais LLP.

January 30, 2003

Introduction by Ann Curran

As cliche as it may sound, the automotive industry is an essential driver of the Canadian economy particularly here in Ontario.

Over the years the Empire Club has heard several experts speak about the industry and its trends. In fact we have had four presidents of the Chrysler Corporation address the club--Lester Colbert in 1957, Lynn Townsend in 1964, John Riccardo in 1973 and Lee Iacocca in 1951.

Needless to say a lot has happened to Chrysler since 1981, most notably the merger between Chrysler Corporation and Daimler-Benz, so we are delighted to have the current President and CEO with us today to bring us up to speed and Into the future.

Today, DaimIerChrysler Is one of the world's leading automotive, transportation and services companies. A good word to use when describing this company is global. It has a global work force, a global shareholder base, a global brand awareness and a global outlook.

With over 370,000 employees in 2001, DaimIerChrysler achieved revenues of close to 153 billion euro. It sold close to four million passenger cars and half a million commercial vehicles, manufactures In 37 countries and sells product in more than 200 countries.

Since November 17, 2000, Dr. Dieter Zetsche Is responsible as President and CEO for the Chrysler Group on the Board of Management of DaimIerChrysler AG. Previously he was responsible for the commercial vehicle division.

Prior to this, Dr. Zetsche was a member of the board of management of DaimIerChrysler AG with responsibility for the sales division. This included responsibility for worldwide brand management for the Mercedes-Benz and smart brands, as well as for the sales of all brands In Europe, Africa, Asia and Australia/Pacific.

Zetsche was born in Istanbul, Turkey, on May 5, 1953. After studying in Germany, he graduated in 1976 as an engineer.

He joined the research division of Daimler Benz AG in 1976 and was appointed Assistant to the Chief Engineer of the commercial vehicle division in 1981. In 1982, he was awarded a Doctorate in Engineering at Paderborn Technical University.

Dr. Zetsche, as President and CEO of the Chrysler group, will provide an update on the longstanding business relationship between his company and our country.

He will offer a glimpse of the blueprint for Chrysler's "new era of innovation"--and a few tantalizing hints of the bold new cars and trucks it is introducing.

He will also outline Canada's role in the company's evolution from the smallest of Detroit's big three to a major component of a giant global manufacturing enterprise.

Given the headlines in today's newspaper, I'm sure everyone is looking forward to hearing our speaker. Ladies and gentlemen please welcome Dr. Dieter Zetsche.

Dieter Zetsche

Thank you Ann for that kind introduction.

The Empire Club boasts a long list of distinguished speakers, and I can truly say that I'm honoured to join you today. However, I noticed my invitation didn't come until we had signed up two of Canada's national treasures to represent our Chrysler brand.

First, the celebrated jazz singer Diana Krall for Chrysler here in Canada. Then we signed up Celine Dion for a similar function in the U.S. And, presto! Within a month here I am at the Empire Club! (By the way, you are going to see a bit of Celine here in Canada as well as Diana.)

Both Diana Krall and Celine Dion fit extremely well with our company. Both have risen to the top of their professions because they have discovered their own unique formula for success: they first mastered the science of their craft, and then they balanced it with a passion that elevates it to art. (Around the Chrysler Group, we refer to that combination as "Disciplined Pizzazz.")

It's a formula that I believe has a more universal application.

Some of you might think that it's a bit of a stretch to relate the need for passion in music to the auto industry, but I submit that it's a necessary ingredient for success. It's what "puts you over the top."

Let me explain. Just a few weeks ago in Detroit we kicked off the opening of the North American International Auto Show, which jumpstarts the New Year for the global auto industry.

For those of you who haven't experienced it, you might imagine that it's where Detroit meets Hollywood (except that people have to wear coats and boots instead of shorts and tee shirts!).

Looking back on this year's auto show, I think it's fair to say that the two things that may have generated the most "buzz" were not even cars! The first was a motorcycle. And the second was one of the talented Canadian singers I mentioned earlier.

The motorcycle was a concept vehicle that we developed for the show called the "Dodge Tomahawk." The Tomahawk is literally a sleek, gleaming chromed motorcycle chassis built around the powerful 500-horsepower Dodge Viper engine.

On a race track, the Tomahawk has a zero-to-100 km/h time of about 2.5 seconds and a top speed of 500 km/h. Or, as one automotive publication wrote, it is "fast enough to rearrange your internal organs."

The second attention grabber was Celine Dion. She sang three of her hit songs at our Chrysler brand exhibit during the auto show's charity night preview.

A large number of the 17,000-plus attendees simply staked out places at our exhibit, listened to Celine's amazing and powerful voice, and then went home happy, without ever "kicking a tire."

Now, how could these two non-car products just about steal the show--the biggest auto show in the industry? The answer might be in the word passion.

Both the Dodge Tomahawk and Celine Dion are what you might call "ultimate expressions of their genres." And they move us.

We haven't decided to produce the Dodge Tomahawk motorcycle. But if we do, its small volume would not contribute much to the bottom line and nothing to our car and truck market share numbers.

Nevertheless, since unveiling the Tomahawk, I've had numerous journalists, industry analysts, colleagues in the industry--even our own employees--tell me that this demonstrates that "the Chrysler Group is really back." Why would they say this? Because the Tomahawk serves as a symbol of the reinvigorated emotion within our company for what we do. And that is to build vehicles that provide more than just economical and reliable transportation; they help stir the soul.

And "stirring the soul" need not be purely an exercise in proving the influence of aesthetics. For example, the all-new Hemi-engine-equipped Dodge Ram pickup truck--a true workhorse--also has the right formula of human passion and technological innovation. It came about when the right ingredients were blended in the right test tube--in this case, the Dodge test tube. Ram can stir many souls, while generating profit and capturing market share, as can any vehicle with the "right stuff" in any market segment.

People get excited about cars and trucks for one simple reason--they stir something deep inside so many of us, whether we're deeply involved in the business, or everyday consumers on the street. There's a powerful and undeniable emotional connection that many people have to motor vehicles.

And it starts at a young age. Most young adults are more excited when they reach driving age than when they reach the age to vote.

If we can add that special ingredient of passion to what we do--whether in the case of designing, engineering, assembling and marketing vehicles or, in Celine's case, singing and performing or whatever one's professional pursuits may be--we will be inspired, we will innovate, and we will have a shot at success (and maybe we'll even steal a show of our own.).

If you can't, you can probably expect to slowly wither away.

As a proof of point, it's interesting to note that whenever Chrysler has fallen on hard times--which in the past

40 years has seemed to occur on or about the turn of each decade it has happened when the company may have lost its passion or maybe just backed off the throttle a bit.

My guess is that Toronto native Mike Meyers, playing Austin Powers, would describe this phenomenon as "losing your mojo."

And conversely, our renewals have always been fueled when we've gone back to our roots, recaptured our spirit of innovation and brought it to the market quickly with vehicles that deliver on the rational level, and yet still excite.

It's how we get our mojo back.

It was the same passion for creating great products that gave birth to our ground-breaking, "segment-busting" vehicles, including our trend-setting Dodge and Chrysler minivans in the '80s. And our "cab-forward" Dodge Intrepid, Chrysler Concorde and Chrysler 300M sedans in the '90s. (All of these vehicles are still assembled here in Canadatoday.)

A more recent example is the Chrysler PT Cruiser, which remains, as we like to say, "just too cool to classify." Two new products this year, the Chrysler Pacifica and Chrysler Crossfire, also reflect our passion for innovation and excellence and to succeeding in the market in the long term, based on the strength of our products (and not on the shorter-term thinking of the "deal of the day" or incentives.)

The Chrysler Pacifica kicks off a big product offensive for the Chrysler Group this year. In fact, the first vehicles for consumer purchase will be rolling off the line in Windsor just a few days from now.

With its low, step-across entry and exit, three rows of seats and car-like handling, the Chrysler Pacifica will re-define the large-vehicle segment in the same way the PT Cruiser defined the small-vehicle segment.

This spring, we'll also launch the Chrysler Crossfire, which is a showcase for the combined strengths of DaimlerChrysler. The Crossfire is a combination of creative American design and solid German technology. We like to say it is where Route 66 meets the Autobahn. And, in Chrysler's style of speed-to-market, it will find its way into dealer showrooms just 18 months after we made the decision to produce it.

Just a few weeks ago, at the North American International Auto Show in Detroit, we also unveiled the Dodge Durango Hemi R/T concept vehicle, which bears a "striking resemblance" to the next-generation Durango that will go into production late this year.

I hope you all get a chance to see these vehicles and the rest of our products in person at the Canadian International Auto Show here in Toronto next month. Perhaps those new Dodge, Chrysler and Jeep vehicles will ignite a passion among some of you to visit a nearby dealership.

The fact of the matter is that a passion for developing, building, marketing and selling great vehicles has been--and always will be--integral to Chrysler's success. That is the case here in Canada, as it is elsewhere.

However, in the complex auto industry (as in marriage!) we cannot survive on passion alone.

Although that ingredient is absolutely critical to success in the auto industry, if the "hard science" foundation is not in the mix, the end result may be confusion at best, and failure at worst. (Going back to my analogy with our famous singers, just imagine if they still had their powerful voices, but couldn't carry a tune.)

I'd like to discuss four issues in the auto industry where I believe this applies: quality, sport-utilities, the environment and sustaining the industry

First, quality. If we build vehicles that are all pizzazz--but lack the quality that results from a disciplined approach to design, engineering and manufacturing--then our customers' "dream cars" could turn into their worst nightmares.

We are working hard to improve quality-to-industry benchmark levels, and we're making good progress. In the 2002 model year, our product quality--as measured in warranty costs--improved by more than 20 per cent. That trend has continued in the early part of the 2003 model year. And it's a rate of improvement that is four times greater than previous years.

Second issue: sport-utilities. As many of you know, there is a spirited debate over sport-utility vehicles playing out in the U.S. and Canadian media.

On one hand, there are small, vocal and well-organized groups that want to indict an entire class of vehicles as evil and that ranges from thrifty, all-wheel-drive runabouts all the way up to 7,000-pound vehicles that were originally designed for heavy cargo and towing.

On the other hand, you have some equally diehard SUV owners whose response is something akin to: "Don't tread on my SUV,"

In between we have more than four million satisfied SUV buyers in North America a year.

While I can appreciate the passion that moves all of these groups to act, I'd suggest that what might be more productive than an emotional debate (driven by the extreme end of either side), is a rational discussion on the complex issues around SUVs.

For example, we need to consider long-term policies that best lead to overall energy conservation efforts, instead of focusing on one class of vehicles (or even one industry). Strategic policies that extend beyond the auto industry and address economic, supply and consumption issues may achieve results that best benefit society as a whole.

We also need to ensure that we maintain consumer choice in our free-market economies, and allow people to purchase vehicles that fit their needs and aspirations.

Perhaps a more productive dialogue would be to look at what the auto industry can do to give consumers additional new choices in vehicles that deliver the utility of SUVs in a package that offers car-like efficiencies. The Chrysler PT Cruiser does that, so will Chrysler Pacifica.

We clearly accept our responsibility to conserve fuel and protect the environment. And, for our part, we continue to improve on the significant advancements we've made in emission control and alternate-fuel technologies.

This brings me to the third issue: the environment. It's another example of an auto-industry issue that requires a more balanced formula of passion and science to get results.

We know that environmental concerns are high on Canada's list of priorities--as exemplified by the recent ratification of the Kyoto Accord and the recent adaptation here of new emission regulations that harmonize with U.S. (Tier 2) requirements. Those are important steps and we share the concern for the environment.

However, some people might have you think that the auto industry has no interest in finding technologies that will power our next generations of cars and trucks. That couldn't be further from the truth.

We are dedicated to improving the fuel efficiency of our vehicles and are committed to our ongoing work on low-emission and alternative fuel vehicles that can help reduce greenhouse gasses.

Our hope is that we can work together with the government to come up with fuel efficiency and emissions policies and, most importantly, vehicles that are "win-win-win"--for automakers, government and, most importantly, consumers. We are committed to developing for sale innovative alternate-fuel vehicles that might, one day, win a growing share of the market here in North America and around the world.

For example, DaimlerChrysler is by far the world's largest producer of flexible-fuel vehicles (or FFVs), in

which all fuel sensing and calibration of the gas and alcohol mix is clone electronically.

Consider these numbers: there are currently an estimated 1.7 million FFVs on the road in North America that can operate with some percentage of ethanol. Chrysler, Jeep and Dodge vehicles account for more than one million of these vehicles.

If the infrastructure were in place to allow for greater ethanol use, it is estimated that those 1.7 million vehicles could save 30 billion litres of oil in their lifetime and reduce CO2 emissions by 67 million metric tons.

While FFVs are a potential near-term solution to the conservation and environmental needs of today, fuel-cell technology is an example of another solution that is promising--but much further away.

DaimlerChrysler has already invested more than C$1.5 billion in fuel-cell technology programs. DaimlerChrysler set a record for durability when we drove a fuel-cell vehicle from Sacramento, California, to Washington, D.C., this past year.

Never had a fuel-cell vehicle been driven so far, in challenging real-world conditions, including high elevation and low temperatures. This vehicle was also equipped with an on-board "reformer," a system that pulls hydrogen from liquid methanol, increasing the technical challenge.

Chrysler is also developing fuel-cell vehicles powered by sodium borohydride--essentially laundry detergent mixed with hydrogen. I'd advise you not to attempt this at home with your own detergent.

But this unique system gives our Natrium minivan concept vehicle a range of 300 miles, and it emits no smog-forming or greenhouse gases. In fact, the only thing it emits is water. This past November, Popular Science magazine gave the Natrium its "Best of What's New" award for 2002.

We will produce 60 fuel-cell-powered vehicles this year for sale around the world.

Still, the reality is that fuel-cell vehicles are not yet commercially viable--and electric vehicles may never be. We continue to explore the viability of mass-market hybrids, and we'll continue down that road by introducing a hybrid Dodge Ram truck later this year.

These are all potential solutions and all are important to test and research, market and test some more. But it is too easy in this world of instant gratification to be conned into believing that this technology is available on the back shelf of some automaker's Research Centre. It just isn't true.

And it is our responsibility--our corporate and governmental responsibility--to continue to look for nearer-term successes as well as the "silver bullets" that might never be. I've talked about FFVs as one potential near-term opportunity. Another is diesel technology.

When it comes to finding ways to reducing greenhouse gases and the dependence on foreign fuel, there are some simple answers right in our own backyards, if we only allowed them to be accepted.

DaimierChrysler has long been recognized as a world leader in diesel technology--and we see increasing opportunities to emulate here in North America our company's success with clean diesels in Europe.

Today's lean-burning diesels can improve fuel economy by up to 30 per cent, reduce C02 emissions by an average of 20 per cent, and provide durable and smooth "gasoline engine-like" performance.

Diesel has the potential to power vehicles the public will demand, as compared to the alternative of forcing something on the market that it doesn't want.

In fact, a J.D. Power study released earlier this week indicates that, given a choice, more consumers would select a clean diesel than a hybrid electric engine to power their next vehicle.

And that's why we recently announced that next year we will begin selling a diesel Jeep Liberty with a 2.8-litre common-rail turbo-diesel, part of a proven engine family that is currently available in some Jeep vehicles outside North America.

Diesel is a readily available technology that can be a significant potential part of the solution for North America until technologies like fuel cells have mass-market availability.

We believe that regulators and consumers alike will recognize the fact that modern, clean diesel engines--with their electronic engine controls, sophisticated fuel-injection systems and dramatically improved emission-control devices--are totally different animals from the old diesels, on which most of the data and perceptions are based.

Diesels will help reduce greenhouse gases--but we'll need some help from Ottawa and the oil industry to address other issues such as particulate emissions. One thing that would help is for refiners to produce and distribute low-sulphur diesel fuels throughout North America.

In Europe, where some 35 per cent of all passenger cars are diesel-powered, diesel fuel is typically six times cleaner than North American diesel fuel. (The good news here is that in Canada you already have regulated clean diesel fuel for 2006.)

The only way to resolve the issues related to diesels is for automakers, refiners and government to make a commitment to resolve them together.

And that brings me to my fourth and final issue that would benefit from a formula of passion and science: sustaining the industry.

Ultimately, it's our ability as manufacturers to make products that inspire, and to achieve competitive costs and operational excellence, that allows us to compete and contribute to the economy. And, on all counts, I believe we do well here in Canada.

Our Dodge Caravan minivan, for example, has been the best-selling vehicle in Canada, car or truck, for three years in a row. And better than one out of every seven vehicles sold in Canada is a Chrysler, Jeep or Dodge product. (We see an opportunity to do even better on the strength of the new products I mentioned earlier.)

In addition to our major assembly plants here in Ontario--two in Windsor and another in Brampton--we also operate several component plants, as well as regional business and parts distribution centres from coast to coast.

Our combined total Canadian employment is more than 13,000 people, with an annual payroll approaching C$1 billion. We enjoy excellent relationships with Canadian suppliers (many of whom are represented here today) and we have a strong distribution network of 512 Chrysler, Jeep and Dodge dealers across the country, many of whom are with us here today.

A visible symbol of our commitment to Canada is our new 15-story headquarters building facing the Detroit River in Windsor.

We've also invested more than C$460 million in the Windsor Assembly Plant, where we will build our all-new 2004 Chrysler Pacifica on the same production line as our best-selling Dodge Grand Caravan and Chrysler Town and Country minivans.

These flexible manufacturing initiatives will save nearly C$165 million for the Pacifica launch, while simultaneously reducing tooling and facilities capital expenditures by approximately 40 per cent.

These are the types of operational improvements and cost savings that we will strive to achieve moving forward to ensure long-term competitiveness.

As most of you have heard, we are also building a business case to potentially open a "greenfield concept"

assembly plant in the Windsor area for a new generation of Chrysler Group vehicles. Doing so will involve unique new partnerships among the company, union, suppliers and government, with no single element taken in isolation.

We were only able to move this far ahead in these discussions thanks to the labour agreement we signed in October with the Canadian Auto Workers union.

In this context, I might add that we also appreciate Buzz Hargrove's boundless passion for representing the interests of our bargaining unit employees--the members of the CAW.

The recent labour agreement is representative of the kind of innovation necessary to compete in today's international auto industry.

For example, it foresees on-site suppliers who will take full responsibility for the body and paint shops--not just for their training, operation, or employment, but even for the capital investment. In other words, our supplier-partners would share in both the financial risks and rewards.

Should we move forward, it would be the first auto assembly plant in North America to be operated under these types of agreements. And it will be unique, innovative and forward-thinking partnerships among manufacturers, labour, suppliers and governments that will win the day in the global auto industry.

That's why we applaud the efforts of the Canadian Automotive Partnership Council--a new joint government/industry initiative--to help formulate an auto industry policy for Canada.

We know that creating a climate that is conducive to maintaining and growing a critical industry, beset by fierce global competition, is a difficult and complex task, but a worthy one.

That's why this council is taking on the difficult task of recommending to Ottawa an integrated approach to keeping Canada competitive in the automotive sector.

In that regard, Ontario provides a mature infrastructure, highly skilled workers, a good supplier base, and excellent distribution channels.

We are engaged in discussions with government representatives and prospective suppliers on the potential new plant in Windsor to finalize the business case. (And, since those discussions are ongoing, that's all we can say on this topic for now.)

However, l will tell you this: DaimmIerChrysler is here for the long term. Even before the proposed new Windsor project, we are investing more than C$2.6 billion in our operations in this country in the 2002-2005 timeframe--more than our two major competitors over this four-year period.

And throughout the Chrysler Group and DaimIerChrysler, we are using our extensive global resources and working with a formula of passion and science to create the auto industry's most innovative products, and deliver great value to our customers, shareholders, employees and to the countries and communities in which we live and work.

All of us at DaimIerChrysler are proud of our long history and citizenship here in Canada, and we look forward to building an even brighter future.

Thank you very much.

The appreciation of the meeting was expressed by John C. Koopman, Partner, Heidrick & Struggles and lst Vice-President, The Empire Club Of Canada.