Daimler-Benz and Chrysler's merger and dissolution: strategic failures

Daimler-Chrysler Financial Debacle

In The Merger And Dissolution Of Daimler-Benz And Chrysler

History of the Participants: Differences and Similarities

Daimler-Benz

Chrysler History

Prior to the Merger Discussions

Daimler-Benz becoming a global conglomerate

Chrysler's growth and success in the 1990s

First error: from-the-top decisions

The early merger announcements: opportunities missed

Chrysler: What Eaton could have done better

Shortcomings on Daimler-Benz's side

HISTORY of the PARTICIPANTS: DIFFERENCES and SIMILARITIES

DAIMLER-BENZ

If you travel to Stuttgart, you'll find the three-pointed star everywhere, from the main train station to the engine works in Unterturkheim on the Neckar River. Long the largest employer in the Stuttgart region, Daimler-Benz was started by two brothers in 1886 to produce independent, gasoline-engined vehicles in small numbers. From the very beginning, the Daimler brothers created new technologies, such as planetary gearboxes, which advanced the overall auto industry, and were adopted by many of the major automobile manufacturers. As early as 1903, Daimler-Benz produced a lightweight, 35-hp car which could travel 55 miles per hour, which gave rise to an early participation in auto racing (Cyber, 2007). Merged in 1921, Daimler-Benz continued to be a small manufacturer with high technology and excellent engineering: in 1927, DB sold fewer than 8,000 automobiles. The 1928 introduction of the Mercedes SS introduced the mark to the entire world of the wealthy: models of the SS and SSK of the 1930s now sell for millions of dollars, and are among the most valuable collectible automobiles of all time.

Mercedes' preeminence in automobile technology allowed it to emerge after World War II as a fully-integrated automobile and truck manufacturer and one of the leaders in Germany's post-war "Wirtschaftswunder," or economic miracle.

Unlike BMW, Audi and Volkswagen, Daimler-Benz positioned itself as a luxury brand, known for high-end engineering, quality and durability. DB cars were sold in Germany on a waiting-list basis -- Germans would frequently order their next car when taking delivery on their current one, with waiting lists of as much as two years. Rather than increase production, Daimler maintained an air of exclusivity through controlling demand and insisting that their cars meet stringent quality standards before leaving the factory

Daimler-Benz was the premier producer of high-end autos without parallel, as BMW was a niche player with smaller autos and Audi was rescued from bankruptcy by Volkswagen in the 1960s. Daimler used its image as a high-end manufacturer to power its exports throughout the world. Even before the 1999 merger, Daimler-Benz was the largest company in Germany, based on sales and market capitalization (MercedesBenzUSA, 2007).

CHRYSLER HISTORY

As at Daimler-Benz, Chrysler was founded by an engineer. Walter P. Chrysler was a penultimate engineer who introduced a number of innovations in the U.S. automobile scene. Chrysler was a railroad engineer who made a name at General Motors in the early days by rescuing the Buick Division. He took over Maxwell and purchased the Dodge Brothers' company in 1925 in order to form the Chrysler Corporation.

Unlike Daimler-Benz, Chrysler was a scrappy upstart in a U.S. auto industry where the two giants, General Motors and Ford, dominated the U.S. auto market based on model niche coverage (GM) and low-cost mass automobiles (Ford).

Chrysler's first moves in 1925 were to phase out the Maxwell and create the first Chryslers, based on new four-cylinder technology. Over the next ten years, Chrysler introduced the first automatic transmission, an innovative straight-eight engine and a number of engine and drive train innovations that cemented Chrysler, the "third leg" of the "Big 3" as the engineer's automobile.

According to Redgap:

Engineering held sway at Chrysler at the time. Walter P. Chrysler had gotten his start with a car that was designed and built by three engineers who had been working for Studebaker. Fred Zeder, O.R. Skelton, and Carl Breer made it possible for Walter Chrysler to be able to introduce the first true high compression in line 6 cylinder flathead engine in his 1924 Chrysler car. They also saw to it that the Chrysler had the new Lockheed hydraulic brakes on all four wheels (Redgap, 2004).

During World War II, Chrysler was known for its innovative engines, including a massive 30-cylinder tank engine and a 2,500 horsepower engine for the P-47 Thunderbolt. Unlike Daimler-Benz, Chrysler was not destroyed during World War II. Its manufacturing lines were converted to production of war materiel, and Chrysler emerged a strong competitor after the war. Unlike today, the U.S. auto manufacturing sector had a number of competitors with significant market share after the War, including Packard, Studebaker and Hudson. Although Ford and GM's future was secure, Chrysler was forced to fight with a number of other brands for its #3 position. The company continued its engineering leadership with the Torqueflite automatic transmission and the 1955 introduction of the Hemi (hemispherical combustion chambers) in the iconic C-300, which introduced the first 300 horsepower V-8 for a passenger vehicle (Redgap, 2004).

Unlike Daimler-Benz, Chrysler underwent a brush with near-bankruptcy. Chrysler Motors had drifted since the 1960's, the victim of imports' gains in the low- to medium-priced segments where Chrysler had been dominant. It had lost market share, and been relegated to price-sensitive parts of the market where it lost money for a number of years, despite its high-volume manufacturing plants. After several years of losses, Lee Iacocca, a former Ford manager, was brought in to 'save' Chrysler after the then-CEO, John Riccardo, admitted that the company was in dire straits. Chrysler at that time owed $4 billion in debt, and had lost $207 million in the second quarter of 1979 alone (Anastakis, 2007), and $1.2 billion for the year. Lee Iacocca went to Congress to secure a loan guaranty for $1.5 billion, which was matched by further private risk of $1.5 billion.

Iacocca brought back Chrysler in the same way that he pioneered the Mustang at Ford, through marketing. Taking the K-class platform, Iacocca turned it into an array of products from a Mercedes-Benz lookalike (the 600) to a minivan. By 1983, Chrysler famously paid off its federally-backed loans, 7 years ahead of schedule. Iacocca then brought in a series of "car guys," and reformed the doddering company by introducing market-led designs in the car, truck and minivan sectors. He and his successors worked to reduce design-to-introduction time, breaking down barriers and matching the Japanese with a total design cycle of less than 3 years by the mid-1990s.

PRIOR to the MERGER DISCUSSIONS

DAIMLER-BENZ BECOMING a GLOBAL CONGLOMERATE

Prior to Schrempp attaining the helm of Daimler-Benz, the company was headed by Edzard Reutter, a Berliner with political and global pretensions. He had led DB's diversification from auto, truck and bus manufacturing to a bewildering array of transportation- and data-based acquisitions. Based on strong continuing cash flow from the car business, Reutter acquired major stakes in aircraft industries, including a dominant share in DASA, the German participant in Airbus, aircraft engines (MTU) and even data and finance (debis). Reutter redefined Daimler-Benz from 'vehicle manufacturer' to an 'integrated technology group,' increasing investment in HQ R&D as well as acquiring a number of R&D-based organizations -- at DB they were called 'R&T,' or 'Research and Technology.' Like Chrysler in its history, DB regarded engineering as the source of its competitive strength. Unlike Chrysler at the time of the mid-1990s, DB felt that it could apply industrial engineering expertise among a large number of unrelated enterprises (Ngassa, 2000).

The predictable result of this conglomerate-chasing was that (1) DB's financial results begun to deteriorate during the 1990s as corporate spending grew out of hand, and (2) DB began to falter in its core auto "Modellpolitik," or model flow in comparison with its key competitors, Audi and BMW. What concerned many employees and DB watchers was that Mercedes' once-vaunted quality was beginning to slip.

Enter Jurgen Schrempp in 1995. The hyperactive manager came to the Chairman position from DASA, which was Daimler-Benz' aircraft division in Munich. He was hailed as "a doer, not a thinker. A power player, not a philosopher (Economist, 1995)." He was hailed as the opposite of Reutter, who was regarded as a big spender and not able to get his hands dirty in the operational details. Schrempp had come from successful stints running DB's car manufacturing in South Africa and managing DASA, which was the largest division outside of vehicle manufacturing. Schrempp was regarded in 1995 as active, operational and willing to make the tough decisions needed to merge, demerge and consolidate Reutter's previous mistakes.

Schrempp brought a new world view to DB's helm. Rather than reinforce DB's stance as the largest German company, Schrempp worried about DB being relegated to the sidelines, pushed out of the top 10 automakers in the world as Volkswagen, the Japanese and Ford and GM moved from acquisition to acquisition. Although he was able to stop the losses and sell off non-core divisions, Schrempp was looking for a move that would both propel DB to the top ranks of the global automobile industry and identify him as a builder, not a destroyer. His early move to bring Daimler-Benz to the New York Stock Exchange signaled his desire to broaden DB's capital ownership base as Deutsche Bank, a long-term holder of DB stock, announced that it would sell its Daimler shares. 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.

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 advised to keep Tom Stallkamp oriented to operations, working on the next-generation minivans, pick-up trucks and other large-selling vehicles that were under competitive threat. Stallkamp did a good job with the tools he had and the assignment he was given. Absent top management counterparts in Daimler-Benz in Stuttgart, Stallkamp worked with the next level of management to create a 14-point transition plan, thinking of everything from parts and subcomponents sharing to acculturation (Fitzgibbon, 2002).

SHORTCOMINGS on DAIMLER-BENZ'S SIDE

There was a good deal of resistance to the merger in Stuttgart. Many in Mercedes-Benz management regarded Chrysler as a mass market producer of low-quality automobiles. They saw little advantage for Daimler-Benz, but saw many downsides:

Chrysler's poor quality image would bring down the overall Mercedes image for quality

Chrysler would clearly need access to Daimler's parts and subassemblies, which would blur the two brands to the detriment of Daimler

There would be a further degree of inattention to Daimler-Benz core auto business, which was the major source of profits for the whole group.

In particular, Schrempp had entered into the negotiations with little support from the home team. In addition to firing Werner, he fired 75% of the head-office staff. Although a 31-year veteran of Daimler-Benz, he had managed to stay away from headquarters in all his jobs. According to a manager who worked with him, "He displayed contempt for tribal wars and the small German mind-set," says an adviser who first met him then. So Schrempp has cultivated a circle of friends unrelated to Daimler's world (Miller, 1998)."While this helped Schrempp to take an independent view of happenings at the company, it meant that he had little inside support from the managers in his employ.

Schrempp had further alienated employees at the proud company by wielding a big broom. Prior to his announcement of the potential merger, Schrempp had pulled the Daimler organization through a wrenching series of changes:

First, he streamlined head-office hierarchy, cutting staff by more than 75%. "You have to sweep the stairs from the top down," he says. Then he examined each business unit, grilling frightened managers nearly to tears and setting a 12% return-on-capital target for each unit. When the dust had settled, Daimler was down to 23 units from 35 and carried 63,000 fewer people on the payroll (Miller, 1998).

Many in Stuttgart saw Schrempp's new ways as uniquely international, even American. As much as the workers at Chrysler, they were a proud group who felt that they had pulled Mercedes-Benz from difficulty in the past, and that their unique car culture allowed them to create superior automobiles. There was a good deal of resistance to "dumbing down," or diluting, Mercedes' image as the best automobiles in the world.

Unlike Tom Eaton, Tom Stallkamp and Bob Lutz, the leaders of Chrysler, Schrempp was regarded as an outsider in three ways: he wasn't from Stuttgart, he wasn't from the car business, and he was bringing foreign (read "American") management techniques to a very German management culture. Unlike the American managers, Schrempp had no reservoir of goodwill or trust from his management team or workers.

Schrempp's problems were compounded by his inability or unwillingness to communicate with his employees, investors or the worried Chrysler workers. Part of the reason for this unwillingness may have been cultural: like Reuter before him, Schrempp was a "grand thinker," who was insulated by several layers of management from the floor of the manufacturing operations. The recent move to the "hill," removed from Daimler's traditional headquarters, helped to reinforce this feeling of separation.

Beginning of the End: Zetsche Announces the Sale

Dieter Zetsche found when he returned to Stuttgart that the "mother ship" needed to be righted. Faced with growing problems at Daimler, and a significant loss due to slowing sales in Auburn Hills, Zetsche came to his Board and announced that Chrysler would be sold. The public announcement was that DCX would be "exploring its options," but the message was clear: Chrysler was for sale.

The subsequent "auction" was a fire sale. Faced with an upcoming strike and the apparent unwillingness of the UAW to consider major concessions, Daimler finally agreed to sell its subsidiary to Cerberus Capital. Once agreeing in late 2006, Cerberus entered into secret negotiations with the suppliers and auto unions. Although the details of their agreements are not fully known, Cerberus felt comfortable enough to complete the deal in May, 2007(Isodore). The final deal was a complete write-down of Daimler's $38 billion investment; in fact, Daimler offered $650 million to Cerberus to seal the deal. While Cerberus paid $7.4 billion, the majority of the funds that they invested were debt instruments. Daimler retained a 19.9% interest in the resulting company, which helped to reduce Cerberus' capital exposure. Daimler, which had already recorded some decline in the value of their Chrysler assets, may report another $4-$5 billion write-down in 2007 results as a finish to the transaction.

SOURCE: DAIMLER BENZ INVESTOR RELATIONS

The stock market's reaction to the divestiture was positive, as seen in the following graph: