Daimler-Chrysler Financial Debacle in the Term Paper

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Many on Wall Street expected Schrempp to use his new-found liquidity to make an acquisition.

It is worth noting that Schrempp always saw auto manufacturing as a global business. In addition to establishing an important beachhead in the U.S., he wanted to do the same in Japan. Shortly before the Chrysler merger he concluded a deal with Mitsubishi to acquire a significant minority stake in their stock. Schrempp must have realized that Chrysler's earlier cooperation with Mitsubishi would pave the way to a three-way auto colossus, led by Daimler Benz.

CHRYSLER'S GROWTH and SUCCESS in the 1990S

Merger was the furthest thing from peoples' minds at Chrysler in the 1990s. Based on the strong growth of market share in minivans and trucks, Chrysler had regained some of its market share losses and remained consistently profitable. Chrysler was particularly helped by changes in American taste: while all the Big Three were impacted in their automobile market share, all also benefitted from a change in tastes towards pick-up trucks and minivans. This move played to Chrysler's strengths and improved their balance sheets: import tariffs of 25% kept pick-up prices high, while net margins of 15% kept Chrysler plants humming (Economist, 1997). Chrysler continued to dominate the minivan market that it created in the U.S.

Chrysler was regarded as the technology leader amongst the Big 3. A special symbol of this leadership was their new, Auburn Hills Technology Center, which brought together 10,000 Chrysler employees to work together to design automobiles. Chrysler in 1996 enjoyed its best year ever, selling 3 million vehicles, a 50% increase over the previous decade. Its market share had risen from 13.4% in 1992 to 16.1% at the end of 1996 (AllPar, 2007). Pretax earnings of $6.1 billion were the best ever, and led the U.S. manufacturers with a 10% net profit margin. In 1996, Chrysler's $61 billion in sales was only 2/3rds those of Daimler-Benz, but it was more profitable than the larger company. Chrysler was named "1996 Company of the Year" by Forbes Magazine, and Bob Eaton (CEO) and Bob Lutz (Vice Chairman) voted among the top managers of the year.

Despite record high sales and profits, Chrysler faced storm clouds in the mid-1990s. Toyota, Nissan and the German companies began to develop products that could compete in the Big 3's truck and minivan franchise. Many began to produce U.S.-focused models in U.S. plants; even Daimler-Benz created an SUV in 1998 which they produced in a new, $600 million plant in Alabama. Toyota started a minivan, the Sienna, in its Kentucky plant. With no foreign sales to underpin its U.S. core products, Chrysler management was worried that it could fall under attack. This was in contrast to Ford and GM, which could rely on strong sales in Europe, Latin America and a (new effort) burgeoning China.

This competition did not yet make a dent on Chrysler's sales, but Bob Eaton recognized the need to broaden Chrysler's base from U.S.-only production and sales, and to diversify from their core minivan and pick-up truck business.

FIRST ERROR: FROM-the-TOP DECISIONS

Both Bob Eaton and Jurgen Schrempp made the decision to initiate discussions. Neither involved their top management teams, investors or the unions. It is difficult to know who made the first contact, but the industry believed that Eaton approached Schrempp. Regardless of who approached whom, both kept the negotiations close to their Office of the Chairman.

Both Schrempp and Eaton echoed the same sentiments: Schrempp said that both companies had skilled and dedicated workforces, and he saw their strengths as complementary. Eaton said that both companies had "world class products," and that there was a "perfect fit of two market leaders for future market growth (Fitzgibbon, 2002)."

The initial reaction within Chrysler and the U.S. was quite positive. On May 7th, 1998, Bob Eaton announced that Chrysler and Daimler were planning to merge. He appointed Tom Stallkamp, Chrysler's President, to head an integration committee. Stallkamp first used the "merger of equals" metaphor to describe the future Daimler Chrysler combination. Eaton and Stallkamp met with UAW officials and managers, and with employees during 'town hall' meetings in May, 1998. The Town Hall structure had emerged from Chrysler's brush with bankruptcy in the 1980s, and was a hallowed tradition with Chrysler line workers and managers.

Tellingly, Schrempp spoke with the press but left it to his underlings to talk to the divisions. Daimler-Benz had entrusted its Mercedes car division to a widely-respected "car man," Helmut Werner. Werner resisted the divisional structure that Schrempp proposed on entering the company. After months of strife, Werner retired from the company in January, 1997. As a result, Schrempp, who was never a "car person," was left with an alienated car group (Schmid, 1997) and a disaffected management team.

Members of both the Daimler and Chrysler management teams were left to wonder what Schrempp's and Daimler's intentions were. Daimler's PR office in Stuttgart remained quiet, claiming that the 'quiet period' before the merger meant that they could not communicate much about the merger. In the meantime, the Chrysler group worked with its stakeholders to insure that they were comfortable with the coming transition. From May 7 to December of that year, there were few communications outside of the two companies, and communications within Daimler remained limited.

Three events took place during this period which caused some concern amongst the U.S. participants in the DCX case: (1) there was a scandal which revealed that Daimler-Benz used slave labor during World War II, (2) it was revealed that Tom Eaton in particular would receive a significant bonus for concluding the transaction -- perhaps as much as $100 million, and (3) Schrempp was able to merge his old aerospace division with France's Matra. In retrospect, the last element, which was completed in late November, probably took more of Schrempp's time than the DCX merger (Fitzgibbon, 2002).

At the same time, the employees of Daimler were left in the dark. Initiated by Schrempp's predecessor, Daimler-Benz moved its headquarters from the site of its engine manufacturing plant in the Neckar River valley to the heights of a suburb of Stuttgart, Mhringen. The move signified a good deal to Mercedes' employees. They knew that Daimler-Benz made all of its profits in automobiles, and that all other divisions were money-losers. By moving headquarters away from the traditional engineering center, DB demonstrated that it regarded car manufacturing as one more division in a multi-divisional company. By letting go of their strongest ally, Werner, the employees felt particularly abandoned.

One can therefore "score" the early outcome of the merger announcement as fairly positive in the U.S., but fairly negative in Germany. Chrysler had worked hard since the 1980's to develop an atmosphere of trust with its stakeholders. A key concern for the workers and managers was that Chrysler would be subsumed in a larger Daimler organization. Stallkamp assured workers during Town Hall meetings that each company would retain its personality and culture, and that there would be no single "world headquarters." Rather, the Chairmen of each respective company had planned to keep the headquarters in Auburn Hills, Michigan and Stuttgart, and each company would retain its own Chairman and management team. Eaton and Schrempp would fly back and forth between the two headquarters, and top management would be gradually mixed. This impression was reinforced in Chrysler's annual Shareholder's Meeting of August, 1998, when Stallkamp announced that Chrysler shareholders would have "an opportunity to participate in a leading global automotive company (Executive Committee, 1998)."

The merger ultimately took place after the necessary shareholder and regulatory approvals were made. Daimler and Chrysler announced the merger as DaimlerChrysler (DCX) in January, 1999. Tellingly, Bob Eaton announced that he would be leaving in the following six months. Tom Stallkamp was left to manage the U.S. part of DaimlerChrysler.

THE EARLY MERGER ANNOUNCEMENTS: OPPORTUNITIES MISSED

CHRYSLER: WHAT EATON COULD HAVE DONE BETTER

Bob Eaton was a car man through-and-through. He was hand-picked by Lee Iacocca to succeed him, and Eaton demonstrated his ability to continue the politics of open dialogue, breaking down silos and assuring investors that they were one the right path. While Eaton's strategic evaluations may have been correct -- particularly when viewed in terms of the global strategic imperatives in the auto industry -- his implementation vision was faulty. Perhaps knowing that he was leaving Chrysler shortly after the merger, Eaton felt that he could leave the merger details in the hands of his competent management team.

What Eaton did not count on, nor did his top managers, were the extreme differences with culture in Europe. Chrysler was a profoundly U.S. company, and its employees justifiably regarded themselves as successful. While they were open to the merger, they did not want to see their culture go away.

Eaton would have been better…[continue]

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