Why did Daimler AG– already involved in aerospace, a French limousine company, synthetic fuel and (God help them) Chrysler– purchase 22 percent of Tognum AG? The German carmaker claims its €585 million investment in the fabricator of engines for agricultural threshers, military tanks and ships– makes good business sense 'cause Tognum is a major supply-chain partner. Hey, it's new tech! New markets! But wait, there's more! Under the prosaic project name "Business Innovation," CEO Dieter "no corporate diet" Zetsche has charged several high-ranking managers with finding new targets for synergy (a.k.a. whatever). Automobilwoche agrees with analysts and investors who find this acquisition strategy deeply worrisome. "There can only be one reason for Zetsche to be interested in unrelated businesses: apparently Daimler does not see enough growth prospects in its core business of making cars." The news that Daimler is getting back into its old conglomerate habit "should be alarming to any investor," says the German magazine. Looks like Daimler's ability to keep to the old adage "stick to the knitting" is coming undone.
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The only thing which brought DaimlerChrysler down was Corporate arrogance, German style.
Their continual refusal to share current platforms with Chrysler and give them redundant cast-offs meant any meaningful cost savings were lost. They merged for synergy, and created anything but synergy!
Now they’re on their own, Daimler has a better flow of cash, but doesn’t know what to do with it. Any attempts at taking over another car company, will be met with derision, so what can they spend it on?
The cynic in me says they could spend some of it on Research and Development, but what do I know……?
I suppose one could don a tinfoil hat and play conspiracy theorist with the investment into Tognum AG.
I kid, I kid.
KatiePuckrik is right. They have a fair bit of cash that needs to go somewhere to earn a return. Trying to buy another car company will earn senior executive a security-escorted trip out the door complete with a symbolic boot print on their derrière. Investing all the money in the current automotive business, especially with the US in recession, probably won’t earn the necessary returns they have come to expect. The alternative is to invest in other, fast growing industries. This might work for them provided they invest in silence and let the business they invest in get on with making money. Unfortunately, senior executives with big egos often can’t resist meddling in businesses they know little about.
They have a fair bit of cash that needs to go somewhere to earn a return
Gee… haven’t they ever heard of DIVIDENDS?
I never understand why companies feel they have to waste their profits on non-core ventures. They need to give it back to the owners, who can then spend/invest it as they see fit.
God forbid they would hand the money back to the shareholders…
If Daimler doesn’t think it can get enough returns in their core business sector, they should just pay out the cash. As a Daimler investor, I bought a share in an automotive stock. I might be interested to invest in the defense sector, however that’s a decision I myself want to make. I trust Daimler in building cars. Sector allocation, not so much. Remember AEG, Dornier, etc. etc. etc….?
Daimler is a loser. They’ve lost their automotive mojo to uber-competitor BMW. They’ve p!ssed away opportunities at Chrysler and with Mitsubishi and Hyundai which could have meant the company retaining something resembling relevance in their chosen industry (automotive). The “quality” levels of their vehicles is below Kia and GMDaewoo. Literally.
Needless to say, selling sub-quality cars in their chosen price-range is a recipe for disaster which other companies found ended in oblivion and closure.
Anyone who knows the history of Packard can tell you that when Chrysler bought Briggs Body out in late 1953, and left Packard in the position of needing to build their own bodies (which they had foolishly farmed out to Briggs in 1940), the quality of their automobiles suffered greatly. This was the era of Cadillac prestige rising to the level of what was a Packard exclusive in the US, and with the quality woes of the cramped new Conner Avenue factory that Packard leased from Chrysler to not only build bodies, but also move assembly from their huge East Grand home plant a few miles away, along with toothing problems with a new automatic transmission and all new V8, made for evaporating sales numbers. And soon enough, Packard was no more.
Interestingly enough, Studebaker-Packard tried to diversify as it lay prostrate and dying, as well.
High irony; one of the things it diversified into was the importation of Mercedes-Benz automobiles into the US from 1958 through 1965!
“So, CEO “the Dieter” Zetsche has charged several high-ranking managers with finding new targets for diversification, synergy, whatever under the project name “Business Innovation.”
Should read:
So, CEO “the Dieter” Zetsche has charged several high-ranking managers with finding new victims for devouring, stealing, sucking the life out of, whatever under the project name “Business Raping.”
I’m sorry but I think that Daimler needs to refocus on their supposed primary mission: maker of luxury cars. After being in some of the recent and current generation S and E class Benzes, I have to say that Lexus, Audi, Volvo, Porsche, and in most cases, even VW have better quality (feel) interior components than the supposed king of German luxury. Once they get their steering wheels feeling like they belong in a car that costs $80K, then maybe they can waste some cash on other things.
If Daimler doesn’t think it can get enough returns in their core business sector, they should just pay out the cash.
No can do. That just leaves them vulnerable to takeover. They may not talk about it, but I am certain that Daimler management must worry about being a takeover target. They would rather be the fish that is doing the eating than the fish that gets eaten.
If Daimler can’t grow their automotive business in Asia and Eastern Europe, then they need to acquire and/or diversify in some other way. Obviously, the acquisition/horizontal integration thing didn’t work out so well for them (yes, we’re talking about Chrysler here), so trying another path might make some sense.
But they’ll need the right managers to get there. I doubt that they have them now, otherwise they could have made Chrysler a winner.
Diversification is good as long as you stick with your core strength. Look at Honda. Diverse products (cars, aircraft, home power equipment) all strong on engine technology.
@menno:The “quality” levels of their vehicles is below Kia and GMDaewoo. Literally.
No it’s not. They had their rough patch, but are back on top again.
They’ve lost their automotive mojo to uber-competitor BMW.
No they haven’t. In fact they are drinking BMW’s milkshake in terms of sales growth and profitability. (even in the US).
Ranting is fine. But it should be based on recently assembled facts, not gut feeling or hearsay.
KatiePuckrik, I agree with the principal of your argument, but it does not apply to Daimler with Chrysler.
The “hand-me-down” E-Class basis for the Chrysler 300 could not have been better for Chrysler. That is an excellent product.
The problem swith the merger were elsewhere…
Pch101: I doubt that Daimler would be a takeover target if it increased its dividend or issued a special dividend. Cash-rich, undervalued conglomerates are candidates for takeover (and partition), but not efficient operations.
Who would be able to buy Daimler? Who would want to? Apart from a leveraged buy-out by Russian or oil interests (which the German gov would not allow), I see nobody.
Incidentally, Daimler has a pretty good yield already at 4.6%; at current prices the expected yield for 2009 would be 5.2%.
Kman
I wasn’t questioning the technology of the hand-me-downs, it was the economics of it I was querying.
In this case, instead of DaimlerChrysler producing, say, 1,000,000 of that E-class platform for both companies, they were producing 500,000 of the OLD platform for Chrysler and producing 500,000 of the NEW platform for Mercedes-Benz. That’s not cost efficient.
Had they shared platforms and components, then more cost synergies would have been found.
Toyota and Lexus do it, VW and Audi do it and Nissan and Infiniti do it. Why couldn’t DaimlerChrysler….?
Incidentally, why couldn’t Daimler use some of that money to buy back shares, thus, leaving it less prone to a takeover….?
Cash-rich, undervalued conglomerates are candidates for takeover (and partition), but not efficient operations.
Sure they are. They become targets for leveraged buyouts, because the assets of the target can be levered upward to facilitate the purchase. As of Dec 31, Daimler has $23 billion in the bank, while its current market cap is about $78 billion, so there could be something for an outsider to exploit and ratchet up.
Daimler has an appealing brand to go with that cash in the bank. If Daimler doesn’t reduce its cash position and/or load itself up with more debt, it could be attractive to a private equity firm, an automotive firm like Magna or a foreign concern (read: Chinese or Indian manufacturing conglomerate.)
If the goal is to stay focused and avoid diversifying, then instead of paying a dividend, Daimler would be much better off buying back stock. Handing out free cash to existing shareholders in a one-time payoff may be great for the shareholders, but that would provide no benefit at all to the company.
Buying back stock isn’t the cheapest option, but it should increase its value and make it harder for a raider to buy in. The investors should win, too, because they end up with higher valuations.
I wasn’t actually ranting, Vega.
Have you bothered to look at the Consumer Reports magazine, automotive edition, for the past – oh – decade or so?
It kind of consistently has been showing Land Rover and Mercedes Benz as tail-end charlies in the quality stakes.
So I wasn’t just making stuff up out of whole cloth. Though I admit that just quickly looking online for info tells me I exaggerated a bit. A five year average of Kia shows them less reliable than Mercedes.
http://www.autooninfo.net/ReliabilityPercentrankAverages.htm
Mercedes ranked 0.24 (F as in grade F – failure)
Toyota ranked 0.89 (excellent – top marks)
Honda ranked 0.84
Subaru 0.77
Nissan 0.70
Mitsubishi 0.70
Mazda 0.66
Suzuki (some of which are Daewoos) 0.59
Porsche 0.58
BMW 0.45
Hyundai 0.41 (last 3 years of the sample were 0.60, 0.56 and 0.66 so they were improving dramatically)
As for the BMW eating their lunch thing, well, I was more thinking of the desirability of their cars vs. Mercedes in the eyes of pretty much anyone younger than 50 who has a hankering for a sports sedan with German nameplate and rear wheel drive…. sorry, I should have been more specific, I guess.
I don’t “hate on Daimler” I just think they should pull their heads out of their anal orifices in Stuttgart and re-learn how to build cars with quality befitting their price, and with reliability and “gotta-have-it” mojo.
Kind of like the Detroit 2.8 and Volkswagen, really.
menno, I’m familiar with that site. They use a lot of generalizations and blank statements (What does CR say?) instead of cold, hard data.
I’ve always believed that the success of a given vehicle can be measured by two criterion.
1) How many years the first owner kept the car.
2) How many miles were driven by that first owner.
I actually studied Carmax’s trade-in’s for several weeks. They get a bit over 4000 each week and they really do run the proverbial gamut of vehicles. What I found was the following.
A) Toyota/Lexus, Honda/Acura, Subaru, Jeep (except the Wrangler), and Subaru had the highest percentage of vehicles traded in with over 150k.
B) Kia, Saab, Land Rover, Jaguar, Suzuki, and VW/Audi had the lowest percentage of vehicles with over 150k. Kia was the worst. VW was particularly bad. In one sample they had 84 trade-in’s with less than 100k and only 4 with more than 150k. That equates to a lot of unsatisfied customers and terrible quality
C) Subaru appears to be the most ‘driven’ brand. Only 20% of their trade-in’s were less than 100k.
D) Mercedes, Buick, Cadillac, and Volvo had the oldest trade-in’s. All of these brands had over 25% of their trade-in’s being at least 10 years old. Surprisingly Lincoln was not a strong player.
E) Finally, the difference between domestic cars and trucks (SUV’s, minivans, and pickups) is astounding. For Ford alone, the ratio of trucks with over 200k vs. cars was 6 to 1. Looking at the 150k measurement brought it down to a 3 to 1 ratio. For GM, the GMC brand was the most successful in keeping people for the long haul, Saab and Saturn were the worst.
And the mother of all surprises in the 16,000+ vehicle study?
The Honda Accord had more trade-in’s with over 150k than all the European manufacturers…. combined. BMW, Mercedes, Audi, VW, Saab, Land Rover and Jaguar could not equal one Honda model even though they had more than six times as many trade-in’s.
I would love to publish the results on a weekly basis. Let me know if there’s an interest.
Steven: highly interesting stuff. Please follow up.
One question though. When you say, “I’ve always believed that the success of a given vehicle can be measured by two criterion.”: How do you define “success”?
I dragged out of bed this morning, remembered this post and dug out my Consumer Reports just for Vega. So, I’m going to take back my take-back about Kia vs. Mercedes Benz.
Latest Consumer Reports stats (from a very large, long running sampling – imperfect as it may be, before anyone starts in about it, at least it is a comparison).
“How makes compare” shows KIA’s worst showing to be actually higher than Mercedes Benz’s mean average.
Averages:
Mercedes -57% of average
Only manufacturers worse? Cadillac, Hummer, Land Rover (the booby prize -153%)
Best? Honda, 48% above average, followed by Acura 44%, Scion 43%, Subaru 38%, Toyota 38% (yep, they are slipping a bit), Lexus 34% (Lexus too), Infiniti 31%, Mitsubishi 30%, and the top rated European Porsche at 30% above average.
BMW is 3% above average, still significantly better than Mercedes.
Kia is at -9%, Hyundai at 12% above, so the corporate gap is still pretty big (I think both makes are improving, but Kia is letting the side down).
Now the, for those of you who say “ok that’s just someone’s opinion” (even though those “someones” just laid out big money for a new car), how about this instead?
Parker’s Car Chooser, Feb-Mar 2005 issue (British). Article: “The UK’s 20 most reliable cars”. “Parkers combined the results from the UK’s three largest car surveys into a reliablity league table. The FN50 (Fleet News – 600,000 cars in 2003), the Which? car survey (33,000 responses in 2003), and JD Powers (29,000 responses in 2003). In the interest of brevity, here are the 10 ten most reliable car lines:
Top marks: Honda (Euro) Accord (sold in the US as the smallest Acura)
#2 Lexus IS200
#3 Toyota Yaris
#4 Toyota Corolla
#5 BMW 3 series
#6 Toyota Avensis (4 door version of Scion Tc)
#7 SMART car (Mercedes CAN do quality cars…)
#8 Ford (Euro) Focus
#9 BMW 5 series
#10 Toyota Rav4
The ONLY showing in the top 20 cars by Mercedes was the SMART car.
The vast majority of these stats come from Fleet owners. Fleet owners (remember: in the UK over 50% of the new car market is for company-perk cars for employees) are pretty hard boiled and don’t put up with unreliable cars in their fleets for very long.
So, by all means anyone out there should feel free to challenge my “generalization statements” but also be aware, I’m not going to make statements without having info to back my position up!
BTW Steven, your info is highly interesting. I’d be interested in some kind of yearly review, maybe through TTAC? Robert?
BTW the Parker’s info is slightly skewed in one sense. Most Hyundai and Kia cars sold in the UK are sold to people spending their own money, not someone elses (i.e. they don’t show up in the fleet news stats).
A company that makes 40% of its revenues from commercial vehicles makes a small (defensive?) investment in an enginemaker? I don’t see that as an unrelated business or a problem. If Zetsche wasn’t looking for opportunities for investment would he be doing his job?
It’s not like the shareholders want the money back anyway – they’d rather talk about how long the stock as been in the family.
For what it’s worth, Mercedes has really started to climb in JD Power’s initial quality survey. The E-class gets five stars and receives JDP’s award in the Midsize Premium class, and the S-class tied with the A8 for both 5 stars and JDP’s Large Premium award.
The rest of the vehicles aren’t there yet, but Daimler is making an effort to respond to the quality complaints. And whether the initial quality improvements translate into long-term results obviously remains to be seen.
hal and pch101, good posts. You’re both right.
Mercedes has effectively opted out of offering vehicles in the sub-30k segment in the North American market. At least under their own name. The quality issues were a big role in that decision along with the struggle for sales.
I’ve driven the C-Class, and it really represents what is the core strength of the Mercedes brand. Solid, strong, durable cars with a slight sporting pretension.
“One question though. When you say, “I’ve always believed that the success of a given vehicle can be measured by two criterion.”: How do you define “success”?”
A ‘successful’ car, on average, will be a keeper for the owner. Paul Niedermeyer’s Chrysler minivan (kept for 14 years), and my Toyota Camry (kept for 12 years) are two good examples.
All things being equal a poorly designed vehicle will have a shorter duration of ownership, and fewer miles, than a well built one. That’s why in the Carmax sample over a third of the Camry’s and Accord’s had 150k and were over 10 years old vs. less than 5% for the Ford Taurus.