AUTOMAKER DAIMLER-BENZ IS FAMOUS for crash testing its designs before they hit the market. Too bad the company could not crash test its strategic plans. In the mid-1980s, Europe's largest industrial group set out to transform itself into what then chief executive Edzard Reuter described as an "integrated-technology concern." Few were clear about what he meant, but the end result was a multibillion-dollar shopping spree. The company, which had built its name and fortune on luxury Mercedes-Benz cars, soon found itself in dozens of unfamiliar new businesses, from missiles to microwave ovens and computer chips to copiers.

But instead of launching the Stuttgart-based giant into the future, Reuter's strategy set Daimler-Benz on a collision course with financial calamity. Last week the crash came as Daimler announced a $4 billion loss for 1995, largely caused by its ailing acquisitions. To stanch the largest flow of red ink in German history, Daimler cut off financing to a subsidiary it acquired in 1993, the venerable Dutch aircraftmaker Fokker. Declared new Daimler boss Jurgen Schrempp, who inherited the unwieldy colossus just eight months ago and has been brutally dismantling it ever since: "The integrated-technology concern is dead."

The markets cheered Schrempp's move as the kind of tough step that was needed, sending Daimler's stock soaring. Yet many questions remain, not least for the 5,800 Fokker employees in the Netherlands who, along with an additional 1,200 German workers supplying Fokker from Daimler's aerospace division, DASA, may soon lose their jobs. The debacle raises doubts about the role of mighty Deutsche Bank, which owns 24.9% of Daimler, and the health of Germany's entire corporate system, dominated by a handful of traditionally risk-averse banks that are supposed to put a brake on extravagant business plans. It also served as a warning to Europe's struggling aerospace sector that all future flight plans must include ruthless cost cutting.

The hard-charging Schrempp has been openly derisive of Reuter's strategy, prompting the weekly Die Woche to opine that "seldom has the chief of a major German firm so rapidly and completely disavowed his sponsor." But Schrempp has no one except himself to blame for Daimler's Fokker fiasco since it was he who, as head of DASA under Reuter, enthusiastically pushed for the $466 million purchase of the respected Dutch firm in 1993, which he called his "love baby." Back then Fokker, one of the world's oldest airplanemakers, was already in trouble. Fierce competition in the overcrowded regional airplane market as well as damaging exchange-rate shifts augured ill for a turnaround despite Daimler's further $2 billion in investments. Soon Fokker became, as Schrempp put it with characteristic bluntness, "a hole down which money constantly disappears." Yet after he told Chancellor Helmut Kohl in person last week that Daimler would put no more money into Fokker, Schrempp insisted, in a memo to Daimler employees, that the acquisition had been "strategically correct."

It was just such blinkered concentration on strategy instead of profits that got Daimler into the mess in the first place. When he took over Daimler in 1986, the cerebral, eloquent Reuter, whose father was a cold-war hero as mayor of Berlin during the 1948-49 Soviet blockade, rejected the stick-to-the-basics approach of his car-minded predecessors and sought to build a high-tech powerhouse. He consolidated most of Germany's aerospace business under DASA, buying up Messerschmitt, small-aircraft manufacturer Dornier, enginemaker MTU and other firms along with Fokker.

In 1988, aided by Deutsche Bank, he bought AEG, one of Germany's oldest companies. Long known to housewives for washing machines and other home appliances, AEG had become a sprawling mish-mash of businesses, including electronics, rail equipment and power systems. Later, Daimler spent about $1 billion for a stake in French software producer Cap Gemini Sogeti; that investment has since lost half its value thanks to its own ill-managed expansion and falling market share.

Although Mercedes cars and trucks, which accounted for the largest chunk of Daimler's business, remained highly profitable, the acquisitions drained away funds and management attention. The strong German mark hurt overseas sales and profits, and big cuts in Western defense budgets after the cold war clobbered the aerospace order books. The stock price plummeted, and an outspoken shareholder activist, Ekkehard Wenger, was moved to describe Reuter as "the greatest destroyer of capital in German history." When Daimler became the first German company to get a listing on the New York Stock Exchange in 1993, stricter American accounting rules exposed more losses.

The supervisory board, headed by Deutsche Bank chairman Hilmar Kopper, continued to back Reuter, even giving him a three-year contract extension. Snorts Wenger: "For six years he [Kopper] sat and did nothing." But last year, with troubles mounting, even Kopper, who had overseen much of Reuter's expansion, was forced to seek the chief's early retirement. Last week powerful voices were calling for Reuter to be kicked off the supervisory board.

Schrempp, 51, known for his square glasses and volatile temper, took over with a reputation for shaking things up. He got a taste for American-style management techniques during a two-year stint running a Mercedes truck plant in the U.S. He snapped heads around when, as head of Daimler's South Africa business, he insisted on equal pay for blacks and whites. He never made much money heading DASA, but he recalled in a 1995 interview, "We merged companies, we dissolved companies, we cut layers of management, we cut the head office from 700, 800 people to 300 people."

In one of his first acts as chairman, Schrempp stunned the country by announcing that instead of the tidy profit Reuter had forecast for 1995, Daimler would turn in huge losses, a step apparently calculated to shock the unions and the government into reality. He fired 200 senior managers and sold off two of AEG's core operations, automation and energy systems. This month, lost amid the Fokker headlines, Daimler announced it would fold AEG's remaining units into other divisions and take a $1.1 billion write-off. "We cannot allow the profitable 80% to be burdened by the remaining 20%," said Schrempp, adding that Daimler's surviving 34 divisions would have to maintain high profitability or he would "dump 'em." That focus was good news to shareholders who have long been shortchanged by Germany's cozy corporate culture.

But that could mean more dumping. Though its defense business is finally profitable, "DASA is not out of the woods yet," warns analyst Chris Partridge of the London consulting firm Avmark International. Schrempp is already said to be looking to sell Dornier. Even the huge Mercedes division, which posted nearly $1 billion in profits in 1994, is reeling from the strong mark and high German wages. It has laid off 30,000 workers since 1992, opened foreign plants and introduced lower-cost models to stay competitive. If Schrempp has brought once high-flying Daimler-Benz back to earth, the road ahead is still rough.

--Reported by Bruce van Voorst/Bonn