In the Phantom Menace, Anakin Skywalker stands in front of the Jedi Council. Master Yoda senses that Skywalker’s fear of losing his mother is clouding his mind. “Fear is the path to the dark side,” Yoda pronounces. “Fear leads to anger. Anger leads to hate. Hate leads to suffering.” And there you have it: the story of the merger between Daimler-Benz and the Chrysler Corporation. Witnessing much suffering, we are.
Like Anakin, every Daimler-Benz CEO has been afraid of losing his metaphorical mother. In other words, they’ve been scared that Daimler-Benz will fall prey to a hostile takeover. In 1984, Daimler-Benz CFO (and later CEO) Edzard Reuter decided that the only way to keep Daimler-Benz independent was to grow to the point of indigestibility.
At the time, Daimler-Benz had huge cash reserves. They could have easily survived a complete failure of one or two new model lines. But Reuter believed that the market for Daimler-Benz products wasn’t big enough to accommodate poison pill-scale growth. So he decided to diversify.
Reuter mined Daimler-Benz’ cash mountain to buy numerous aerospace and technology corporations. Unfortunately, his acquisitions were bottomless pits. Reuter burned so much cash during his regency that Daimler-Benz’ 1995 stock price had fallen 12 percent since the fateful day he’d assumed control in 1987– despite a wildly successful Mercedes brand.
In 1995, Reuter floated away on his golden parachute, creating corporate lebensraum for his successor, Jürgen Schrempp.
Schrempp soon sold every major business that wasn’t part of traditional automaking. When he finished de-acquisitioning, Daimler-Benz was exactly where it was ten years earlier, only poorer.
By this time, the global car industry was in the throes of massive consolidation. BMW, GM and Ford were buying-up once storied marques. FIAT was on the ropes. Toyota’s epic growth was continuing. Industry analysts were predicting that the international automotive market could only sustain five independent car manufacturers by 2005.
And then Deutsche Bank, Daimler-Benz’ long-time majority shareholder, announced it was dumping its stake in the German automaker. If Yoda would have been present, he could easily have sensed the fear within Schrempp.
Schrempp decided that Daimler-Benz had act upon of the old Italian saying: il pesce grande mangia il più piccolo. Daimler-Benz had to eat someone else not to get eaten.
Honda topped the list. Still smarting from its ill-fated tie-up with Britain’s Rover Group, the Japanese automaker was deaf to Schrempp’s overtures. So Schrempp started negotiations with/for Chrysler.
At the same time, Ford approached Daimler-Benz about a possible tie-up. When the Ford family made it clear that a takeover (Ford over Daimler-Benz) was the only acceptable scenario, Schrempp pulled the plug on the negotiations. After all, Chrysler had announced “game on.”
Daimler-Benz paid $36b for the American automaker, called it a merger of equals (a.k.a. “a wedding in heaven”) and breathed a sigh of relief. They singularly failed to notice a disturbance in the force.
One year later, on March 10, 1999, it all started to go downhill. That was the day DCX’ Board of Directors rejected DaimlerChrysler’s plan to take over the world Nissan. Schrempp wanted it. Nissan wanted it. But Schrempp was too afraid unable to push his plans through the Jedi Council DCX’ Board of Directors.
Renault ended up buying Nissan. Under the leadership of Carlos “The Slasher” Ghosn, the two companies formed the most successful merger in recent automotive history. Schrempp was left shaking his head, knowing that Nissan could have provided Chrysler with the high quality small cars it needed for the U.S. market (a task now left to DaimlerChrysler’s less-practiced Chinese partners).
Still hungry for a Japanese partner, DaimlerChrysler bought Mitsubishi, a wounded manufacturer with plenty of production problems. This decision lead to the second important date in the history of DaimlerChrysler’s failure: April 22, 2004.
On this fateful day, Daimler-Chrysler’s Board of Directors decided to end any further financial help for its ailing Mitsubishi brand. Schrempp had staked his reputation on making Mitsubishi work. It needed a massive cash infusion. But the force was weak with that one.
After the Board’s rejection of his request, Schrempp’s days were numbered. By the end of 2005, he finally stepped down, taking with him the grand global “vision” that was supposed to fuel the Daimler Chrysler merger.
By the time this epic episode faded to black, DaimlerChrysler’s stock price stood at sub-‘95, (pre-Schrempp) levels. Now it’s Dieter Zetsche’s turn to clean up the mess that Schrempp left behind. And when he’s finished, Daimler-Benz will be where it was 10 years ago, only poorer.
According to the official numbers, CEO Reuter and Schrempp’s delusions of grandeur successful attempts to prevent a Daimler-Benz takeover burned through some $60b of Daimler-Benz’ money, although the unofficial estimate place the amount as high as $120b. And it ain’t over yet.
Let’s just hope Dr Z is not afraid.
Well written synopsis. I have not been a fan a Daimlers merger takeover of Chrysler. But I have also wondered what the result would have been if the two companies had worked together instead of the Germans acting like they were going to teach Chrysler, one of the worlds most successful (and profitable) automakers at the time how to make cars. If only they had recognized what each of their strengths were and applied them to the challenges they were facing.
That yoda always was a bit of an know-it-all ass. Of /course/ the kid is worried about his mom, it’s his /mom/ for goodness sake. Sure, it’s easy for him to be all “one with the universe” and sh-t but what about us average joes who are just trying to make it through the day?
“Taken For a Ride” was agreat book on the “merger of equals”. It laid bare the truth about the transaction.
It was written when Schrempp was at the hieght of his power, so he comes off as a conqueror.
I wonder what they’d write now.
Be where they were ten years ago, only poorer. Kind of sums up the story of the major carmakers. Sad.
The first major, major mistake happened on day one of the merger. In any business there can be only one boss. And what the Daimler forgot to take into account was since the top job was now off limits to all of the high flyer ambitious types high up at Chrysler the brain drain would be enormous. And many of those who stayed behind were no longer going to work quite as hard knowing the upper rung(s) were cut off of the ladder. Why should they? It’s like running a race and having the finish line in sight and then watching as it is pulled away and put on the other side of a canyon that can’t be jumped. Must have been wonderful for morale. What they should have done is keep the companies separate, create some kind of a Board of Super Directors, and kick an equal number of people from each side “upstairs”. As I recall it was Chrysler who made the profits at first when they “merged”. I have no sympathy for Daimler in this fiasco. After all it is their guy who brought back the “sales bank”. For that and that alone everyone at Daimler HQ ought to be tarred and feathered.
I wrote a paper on that merger, 5 years ago. It argued that the merger was potentially a grand idea, although an “airline-style” alliance made more sense: all the advantages without the drawbacks. It’s what Nissans and Renault did, with good success. Notably, since Ghosn took centralized control over both companies, there has been a marked slowdown.
As to DaimlerChrysler,well, we’ve all seen what poor management has accomplished.
Mergers look good on paper but seem to struggle to achieve the results stockholders desire.
Acquisitions on the other hand may dissappoint but I will bet their track record for increasing stockholder wealth out weighs the benefits produced by mergers.
Also if corporations would return some of the wealth they create to their owners, stockholders, instead of buying other companies with it there might not be so much to fear from egomaniac CEO’s with schemes that only line their pockets at the expense of others.
Ever notice that Warren Buffet doesn’t buy auto company stock. What does that tell you?
rjsasko: “what the Daimler forgot to take into account was since the top job was now off limits to all of the high flyer ambitious types high up at Chrysler the brain drain would be enormous. And many of those who stayed behind were no longer going to work quite as hard knowing the upper rung(s) were cut off of the ladder. Why should they? ”
I don’t know the high pay. The fact that its their job. If one can’t work hard because the top jobs are taken then its small wonder Chrysler is so bad off. Using your argument every automaker takeover is doomed because the top jobs will always primarily be with the buying company. Did the Jeep executives all leave or just quit working hard when Chrysler bought Jeep
I am looking forward to Magna taking operating control of Chrysler. Chrysler’s product lineup, while a punchline on many auto websites, is strong and getting stronger, as evidenced by last month’s sales figures. May, June, and July will all have between 5 and 20% sales increases over 2006, you heard it here first. BTW, I predicted a 5% increase in April and DCX outperformed even that. Remember this summer when I tell you “I told you so.”
They are well positioned in terms of product over the next 12 months and seem to be getting better about planning product for the long term.
If they can figure out a way to control their legacy costs they should be fine. Enter Magna, as they appear to be the only player that has UAW support.
This whole scenario smacks of mismanagement. I was never convinced of Schrempp’s prowess. He wanted to create a “Welt AG” and ended up with a dog’s breakfast. Evidence to suggest this was their foray with Mitsubishi. Under them, Mitsu posted huge losses and a product line which went nowhere. When DCX dumped on Mitsu, Mitsu went back to the rest of the Mitsubishi family and has since restructured and posted huge gains and are now back in the black. DCX on the other hand have gone the other way (A bit like that film “Sliding Doors”). As much as I dislike Nissan selling its soul to Renault at least Renault fostered a new Nissan; Nissan which could in turn take a controlling stake in Renault and both could work together, share platforms and costs and show the world how an alliance works.
Funnily enough, I reckon Chrysler can survive on its own and I hope it does, but it will need a manager who is mixture of Mr Ghosn and Mr Takeo Fukui. Mr Ghosn to restructure Chrysler and make it more efficient. This would involve stern meetings with the UAW which I believe Mr Ghosn would handle no problem. But once Chrysler has turned around, the reins should be handed to Mr Fukui so Chrysler can start making the company focused of cars. So in short, a bean counter for the short term and a car guy for the long term.
Mercedes can flourish but only if it remains focused to luxury cars. Since it didn’t want to share anything with Chrysler (i.e components and platforms) then maybe it can focus on itself. Remember, Mercedes’ reliability and build quality has been in the gutter for a while and is facing an assault in the luxury bracket from Lexus, Acura, BMW, Audi (which is storming in the United States) and Infiniti (Don’t laugh! It could happen!).
This wouldn’t help Mercedes’ fear of being taken over, but with it’s rich cash reserves I’m sure a company buy back some of its shares; this could leave more of the company in the company’s hands thus, leaving it less prone to a hostile takeover.
I think fear can be a good thing. With the fear Mercedes might be swallowed up might foster more impetus towards solving their quality and reliability problems and Chrysler’s fear of bankruptcy and noone to bail them out might get them up and running to work with the UAW and start making and selling cars people want! This will be especially true if a billionaire takes over Chrysler. Fear will want them to make Chrysler work as their will be no golden parachute if Chrysler fails and files chapter 11. After all, a billionaire doesn’t make their money by loosing their money, do they….?
Daimler’s errors are the result of misjudging the market and ego. Daimler bosses bought into the prevailing attitude that scale economies were necessary for survival in the auto industry.
Only half right. Scale economies of platforms are critical, but only in mainstream product. Niche and luxury makers don’t need scale, as evidenced by the high margins acheived by Ferrari, Porsche and BMW. This is where Mercedes belongs.
PS: I don’t know why we value the little green guy’s words so much. He got his butt kicked by the Emperor and even Count Duku, so he couldn’t have been all that forcefilled.
Not sure if people need to know the top job can be theirs, but it’s discouraging to know it can’t be.
Question: Is this a Chrysler death watch—-a Daimler Deathwatch or both. Interested what people think.
The meaning of the cute titles for the DCX, GM and Ford articles is irrelevant.
@ maxo: I think the title is in fact very much relevant, not for its own sake, but because of what it says about the fate of each company separately. That’s what umterp85 is asking, I think.
I think Daimler wanted to acquire not only platform-sharing and economies of scale, but also the relative resistance to economic cycles that a mass-market carmaker can bring. Sure Porsche, Ferrari, and other such independent luxury makers are very profitable, but their profitability is much more cyclical than a well-run mass-market maker, like Honda for example. The problem is that Daimler wanted the benefits of having mass-market brands withoutpaying the costs, which would be the investment of cash and technological/managerial know-how (including platform sharing) necessary to make Chrysler a well-run mass-market company. It looks like the DCX shareholders are learning that there’s no such thing as a free lunch.
While I have never met Carlos Ghosn, I did write Nissan Buzz for the defunct Sport Z magazine for five years; and still write for Nissan Sport, a magazine started in the ashes of the other, by three former editors.
That said, my impression is that if DamlierChrysler had acquired Nissan, things would have gone Mr. Ghosn’s way, or things would have come undone. He is a brilliant man and one who doesn’t tolerate what he considers fools wisely.
Given that with the German ownership, it has always been their way or the highway, as much as they could’ve benefitted from Carlos Ghosn, their loss is Nissan’s gain. Nissan’s 180-Program is something that business classes will likely be studying for years. Yes, much of it was based on grinding suppliers; but a lot of it was based on sharing platforms, which used the excellent 3.5 liter V6 that Ward’s has awarded a “best engine” award to, for 11 years running.
rjsasko:
May 3rd, 2007 at 1:51 pm
The first major, major mistake happened on day one of the merger. In any business there can be only one boss. And what the Daimler forgot to take into account was since the top job was now off limits to all of the high flyer ambitious types high up at Chrysler the brain drain would be enormous. And many of those who stayed behind were no longer going to work quite as hard knowing the upper rung(s) were cut off of the ladder…
Did anybody read the interview of Tom Gale in the last issue of Motor Trend? He’s an example of the above comment. I always thought he was the best CEO Chrysler never had.
——
Sherman Lin:
May 3rd, 2007 at 2:06 pm
“I don’t know the high pay. The fact that its their job. If one can’t work hard because the top jobs are taken then its small wonder Chrysler is so bad off. Using your argument every automaker takeover is doomed because the top jobs will always primarily be with the buying company. Did the Jeep executives all leave or just quit working hard when Chrysler bought Jeep ”
Actually many of the Jeep executives were promoted, such as Fancois (sp?) Caistang to vp of engineering. Some of the Chrysler employees wondered who had brought who. Also remember that Jeep was already a bought company by Renault and not a full line manufacturer so the American execs there had no illusions about becoming the top dog. Chrysler on the other hand was a full line manufacturer and one of the largest automakers in the world (still is, last years sales were larger than Peugeot-Citroen).
The Bramalea plant originally built the now-forgotten Renault (Eagle) Premier.
While a lot of press attention has been given to certain voices saying that Chrylser is “worthless” and has no value there has been plenty of others who think that the two firms should stay together and use each others strengths to their fullest potential. And Stugart has made pelnty of plans to develope engines and other components together. What many don’t realize is there is there has been a battle going on for the future of DaimlerChrylser. The battle is between two sides I will call the Romanticists and the Realists.
Romanticists battle cry is Mercedes uber alles. It is this group that stated that Chrysler is worthless, and is a hinderance to Mercedes rightful place at the top of the automotive food chain. To them Mercedes is a car “Built like no other” and no other lesser vehicle should touch or be touched by the brand. They along with outside allies in certain banks, union and government officials want Daimler to be divested of Chyrsler.
The Realists want to keep Daimler as a mass-market company so they can leverage the economies of scale necessary to compete with the likes of Lexus, Cadillac, Infinity, Audi, and even Jaguar if Ford could somehow figure out how to fix it. Each of these brands benefits from a large corporate parent with the notable exception of BMW, who has already dipped it’s toe in the mass-market waters with MINI. The realists believe that Mercedes cannot survive as an independent without Chrysler Group or some other mass market manufacturer.
If Daimler successfully divests itself of Chrysler, gone would be those economies of scale as well as Chryslers expertise in flexible manufacturing (currently 6 of CG’s 13 NA assembly plants are flex).
Some have reported that a Daimler divested of Chrysler would itself become a takeover target. The American International Automobile Dealers Association (AIADA) newsletter reported that experts (investment bankers?) told CNN that without Chrysler, the Daimler group could be an attractive takeover target for hedge funds and private equity groups.
@windswords:
DCX right now has no other choice but selling Chrysler. However, it is reported that Daimler will keep a minority in Chrysler and will continue to have a partnership with Chrysler. There will be future examples of shared parts like in the 300 or the next Generation of M/G-Class and future Jeeps.
The problem for Chrysler is the huge amount of legacy costs. That’s why DCX shares skyrocketed after the announcement that “all options are on the table”.
Investors seem to believe that DCX without Chrysler is worth more. It’s telling that Daimler could be the target for raiders as soon as Chrysler is gone, even though it’s more expensive. That’s how much they are afraid of having anything to do with Chrysler and its legacy costs.
If Chrysler doesn’t end up with Magna, I think they might even be the first of the Big 2.5 to file for Chapter 11, not because they are in the worst shape of the three, but because financial investors do what’s best for their investment. In this case, it would be to get rid of the legacy costs and Union contracts.
Thomas,
Good point about the BR. Chrylser would make a good “test case” for the other two to see how one would navigate a chp 11. But there is a huge danger that once that is done that sales would evaporate because buyers would be worried that the company might not exist at some point to cover their warranties and make replacement parts. That was one of the arguments that Lee made to Congress when he was pushing for the government backed loans, that there is no chp 11 for auto makers only chp 7.
ASC (formerly American Sunroof Company) announced going into Chapter 11 today. As reported in the Detroit News, going into Chapter 11 was a condition set by the investors who are buying the company.
What puzzles me is why anyone would want to buy Chrsyler. The brand is nearly irrelevant in the US market and almost non-existent elsewhere. I suppose that there is some residual value to the Jeep brand, but other than that this thing is toast.
GM and Ford both make better trucks than Dodge. Almost everyone makes better cars than the Chrysler/Dodge lineup.
So, what is the reason to be for this operation ???? Surely having a trademark on the name Hemi isn’t enough.
Many people love to talk about economies of scale, but they forget the lesson that there are also diseconomies of scale which are a counter-force. Building the E-class gains nothing at all from being associated with the Neon. Where there are common parts they can be sourced from third party suppliers without the need to control both end products. Perhaps there are small parts like spark plugs or fuel injectors which can be shared by the Neon and the E-class. Those parts are going to be made by Bosch, Denso or another supplier and there isn’t really a productivity advantage to them all being bought by one customer vs. two. On the other hand, the larger the company the more difficult it is, especially with a centralized structure, to get the things done which urgently need doing. Endless meetings, conferences and internal political battles are all value wasters, not value adders.
Time to turn off the lights. The Daimler-Benz loyalists have this one right.
jthorner:
May 4th, 2007 at 5:30 pm
“What puzzles me is why anyone would want to buy Chrsyler. The brand is nearly irrelevant in the US market and almost non-existent elsewhere…”
Here’s a classified ad:
For Sale: One automobile company. Last years sales 2 million 7 hundred thousand units, including 4 hundred thousand overseas. With 30 some facilities in the US, Canada, Mexico, Europe, and a joint venture in China (Beijing Jeep); including 2 proving grounds, a billion plus dollar technical center with a pilot manufacturing center, computer aided design facilities, and a test track right next to it. Dealer network of 3,700 stores. Flex assembly plants. 80 plus years of history and heritage. More sales than Honda in N.A. More sales than Peugeot in Europe. More sales worldwide than Mercedes, Porsche, BMW, Subaru, Suzuki, Mitsubishi, Mazda, Volvo, Saab, Alpha Romeo and who else knows.
Now some see an irrelevant brand. Others see an opportunity. Saab is irrelevant to me. But that doesn’t mean it’s irrelevant to others.
… including 2 proving grounds, a billion plus dollar technical center with a pilot manufacturing center, computer aided design facilities, and a test track right next to it. ….
And from this we have gotten the Commander, Compass and Sebring? How is it that the wonderful assets described have been so completely wasted? How is it that the Ram pickup trucks consistently come in last in comparison tests no matter who is doing the testing?
Chrysler may have outsold Honda US in total, but Honda kicks the pants off Chrsyler in the retail market where it counts. There is no glory or profit in stuffing the rental fleets with your factory output.
“Now some see an irrelevant brand. Others see an opportunity.”
That’s the point. The assets are there. The talent is there. But the (German) leadership has not been. Supply the right leaders and the hidden potential comes out. When Chrysler was in the hands of Lutz, Gale, Stallcamp, Caistang, and Pawley they were the most profitable automaker on the planet, something that Porsche claims now. They produced a compact midsize for 1.5 billion. Ford spent 6 billion doing the same thing, but their car wasn’t 4 times better. Most magazines at the time rated them even. So they made a profit on it. Ford I don’t think ever did. All Daimler did when they took over was to impose their cost structure on Chrylser. That’s great if you avg transaction price is over 50 grand, but that doesn’t fly with a mass market maker. Chrysler was wildly profitiable selling about the same number of cars because they kept their cost down: manufacturing, design, engineering, etc. They were the first of the big 3 to stamp out waste ala the Japanese model. With the right leadership they can do this again. Enough of the people who did this before are still alive (and even still working there) so it’s no mystery how it was done.
“How is it that the Ram pickup trucks consistently come in last in comparison tests no matter who is doing the testing?”
Ram is at the end of it’s product cycle. All the other trucks are newer. The next Ram is coming out next year. Let’s wait and see how they do. Minivans – same thing. New ones this fall I believe. So far what I’m hearing about them is pretty good.
The new Ram really could bring back some profitability, if it can cope with the competition from GM, Ford and now Toyota, but the biggest problem that I see is the new Sebring. It just came out but it is already a disaster in terms of design as well as technology.
This is the segment where most of the competition make their money and Chrysler has to live with the Sebring for at least another 5 years.
The potential is there, but they just wasted a big opportunity with the Sebring.
I wouldn’t blame the Germans though. Their major mistake was to give Chrysler too much freedom. Something like the Sebring should have never happened. Stuttgart should have pulled the plug on the car and go the 300 way: Use some essential parts from the C-Class and thereby save costs and improve quality.
Daimler didn’t want to water down Mercedes. That’s what hurt Chrysler and that’s what the Germans can be accused of. But even though I believe that this was the wrong decision by Daimler, I can certainly see why they did it.
Thomas,
If you knew the half of what Daimler did, you would be shaking your head in disbelief. Even thier quality control processes they instituted resulted in less quality. Chrysler already had a quality control system in place based on the Japanese approach of empowered work teams on the factory floor. Daimler instituted a “top down” inspection process like what they do in Germany resultin in less quality. Chrysler has consistently had better quality ranking on JDP than Mercedes before and after the takeover.
Now the Sebring is a problem. But there is pecedence for taking a just introduced model and “fixing” it. Two examples are the Chevy Caprice and the Buick Riviera. When the “Shamoo” Caprice was introduced GM had to come out with a redesign of the rear wheel openings due to criticism. Back in the 80’s the new Riviera was introduced with a chopped off trunk to almost universal dismay. They quickly redesigned a softer, flowing trunk design that I though looked quite nice. I don’t know what they could do to the Sebring, and they may not be able to change it from a turd to a beauty queen but there is always something that can be done. Maybe getting rid of the creases in the hood would be a good start.
My point is that of brand perception in the eye of the customer. Thanks to the DCX years there is very little customer goodwill or interest in Chrysler products. Everyone who gets stuck with a Sebring rental is going to be similarly unimpressed.
Speaking of which, the last time I rented a car they wanted a premium of $5 more per day to “upgrade” from a Ford Five Hundred to a Toyota Camry. I said no thank you and was surprised at what a competent long distance runner the Ford was. I put about 800 miles on it over the course of a week and it was comfortable, decent handling, gave good fuel economy and had a trunk large enough to put a Mini Cooper in :). The Five Hundred/Taurus may be the sleeper value in family cars right now.
Then there was the times I got stuck with Chrysler made rental cars, every one of which was a real disappointment.
Customer perception is a problem even more serious than the new Sebrings design. It’s still not an insurmountable problem. Look at what Hyundai has done. I remember my first Hyundai, my fiance’s car. I’d like to forget it. So it can be done but it will take focus and effort by the folks involved, they have to believe in the company. I don’t know if Chysler’s new owners will have that. Daimler cetainly doesn’t anymore, if they ever did.
Three things saved Hyundai.
1) Lowest priced offerings in each class.
2) Longest warranty in the business so that customers would be less worried about reliability issues.
3) Steady quality improvements, due in part to the fact that Hyundai was on the hook for mid-life reliability problems while GM, Ford and Chrysler routinely duck these with sorry, out of warranty, you are stuck attitudes.
Now the industry is more competitive than ever and even Hyundai is kind of stuck in neutral. I would love to see Chrysler turn around, but there is no way I would bet my cash or my time on it. Better to sell it off in pieces that can be put to better use by others. Maybe Honda wants to pick up a nice lightly used technical center and test track ….
I firmly believe that any company which is going to succeed in the long term needs a compelling reason to be from the point of view of the marketplace. Toyota has made itself the company a customer can count on getting a good product at a good price across the spectrum. Honda is in many ways an engineering and value leader. Hyundai gets you what you need a little cheaper. GM and Ford are the two go-to places for large trucks. What exactly does Chrysler bring to the table uniquely? Way back when Chrysler was often an engineering leader. Today it is a confused me-too company.
Now 3 yrs later, if Daimler had bought Nissan u think what kind of outcome would have been predicted?