The Daimler-Chrysler merger was announced May 7, 1998 and was announced as the largest trans-Atlantic merger ever. The combined company was supposed to be a giant in the auto industry. When the merger was announced, Chrysler was the most efficient of America's "Big Three" car producers with very strong positions in the SUV and minivan market. Chrysler's high profitability was achieved by relatively low research and development expenses and a comparatively older product portfolio with many popular, well-established models generating high profits. In 1998, Chrysler sold a record three million cars and trucks; the bottom of their price range was represented by the Dodge Neon, selling for $12,000. After a long history of financial difficulties (including a Government backed loan in 1979,) Chrysler had finally become the world leader in "low-cost, high-volume auto production." More than 90% of Chrysler's 120,000 employees worked in the USA and earned $22 per hour on average. Chrysler was characterized by automobile analysts as daring, diverse, and creative.
Only a few years before the merger announcement, in the mid-1990s, Chrysler was very close to bankruptcy and survived a failed hostile buy-out attempt launched by Kirk Kerkorian, a corporate raider who had a big stake in Chrysler at this time. Chrysler's advisers saw a need for the company to merge with another automobile maker in order to survive in the cutthroat car industry.
Daimler-Benz was the world's most profitable car maker in 1998, owning a brand with high international reputation, Mercedes, known for its high quality, state-of-the-art engineering. Daimler-Benz sold about 920,000 cars in the year of the merger. The prices for Daimler's cars ranged from $31,000 for the C230 model to $135,000 for the company's top model, the S600. Daimler-Benz had some of the highest production costs in the industry, partly caused by the high labor costs in Germany, where the average salary was $28 per hour. Daimler- Benz had a work force of 320,000 employees, many of them in Daimler's non-auto operations, like the aviation business and financial services. Daimler-Benz was described by automobile analysts as conservative, efficient and safe.
At the time, automobile analysts were expecting only 10 of the 30 existing car makers would survive in the increasing competitive global market and that companies either had to seek for a merger partner or would become an acquisition target in the long run. According to analysts, sales of at least 4 million cars would be necessary to become one of the future top players in the automobile business.
The merger was creating a company with more than 440,000 employees, a market capitalization of $92 billion and annual revenues of about $130 billion. Most importantly, DaimlerChrysler's projected sales were greater than the four million car threshold analysts set. The companies projected $1.4 billion in synergies in 1999 and $3.5 billion a year within two to three years. [1]
Synergies were expected from combining purchasing and other operations, like distribution (selling Mercedes products through Chrysler dealerships) sharing the R&D costs over a larger production base; and reducing total R&D by jointly developing mid-sized cars. Daimler's growth was slowing because of a saturated luxury market, and they viewed Chrysler's growth as very attractive. The cost reductions would improve DaimlerChrysler's competitive position relative to competitors, and strengthen the company's financial position. They also believed that a larger, more stable, multinational company would find cheaper financing and more stable exchange rates. Finally, Daimler's market share in Europe was three times more than the US, while Chrysler sold almost all their volume within the United States. The analysts predicted that combining Daimler's European strength with Chrysler's US sales would create a truly global company. [2]
More cynically, we can also view the merger through agent theory and note that Daimler and Chrysler management had large personal incentives to complete the deal. Chrysler management contracts contained a clause where their stock options vested upon an acquisition. Daimler executives were paid significantly less than their American counterparts (CEO pay was $14 million versus $2 million,) and their pay was likely to increase with the addition of a large, American division. [3]
Although the merger was considered a bold strategic move and the biggest merger up to that moment (it was a model for the Renault-Nissan alliance), the integration of the two companies was not as smooth as anticipated. Many advantages were touted for the combined company, but their cultural fit was completely wrong. Daimler was a luxury manufacturer who leveraged only two models for sales volume, while Chrysler was a mass producer who sold more that 20 types in many different categories. German executives analyzed issues to death, "they aimed so much they forgot the shooting;" while Chrysler executives were used to synthesizing data and making quick decisions. Decisions were also muddied by Co-CEO's and confusions over who was ultimately in-charge. Executives predicted shared components would provide savings, but in reality the companies purchasing had no overlap. Mercedes components were high cost/high quality, while Chrysler required lower cost/lower quality parts. For similar reasons, their distribution channels couldn't be integrated, either. High-end Mercedes customers won't go to a mass-market Chrysler dealership, nor vice versa.
Complications also arose from listing the stock in Germany, the S&P 500 dropped DaimlerChryler from the index and many US investors didn't want to hold a stock listed in Germany causing a drop in the premium enjoyed by Chrysler. German shareholders also found US pay packages unacceptable. Eventually establishing the headquarters to Germany and emerging with one, German CEO made DaimlerChrysler priorities clear, Mercedes was most important.
Expected R&D synergies were also unobtainable, Daimler had expertise in diesel engines that are not popular in the US. Car platforms were also technologically different and Daimler executives said "never will a Mercedes-Benz platform be shared with Chrysler or other brands." [4]
After their large payout (almost $17 million each) American executives became disinterested in the company, ""they stopped working as hard and if you called on Friday afternoon they were out golfing. By 2000, they would complain if we scheduled a meeting after 5pm." [5] Chrysler problems surfaced quickly: low productivity levels, high fixed costs, inefficient purchasing systems, and constant quality issues and inefficient investments (which accounted for 10% of the sales figure). German executives stepped in: closed factories, laid off approximately 45.000 workers, cut budgets and tried to develop new models in a more efficient manner. For a short period of time Chrysler seemed to recover, and even made a "shy" step into Europe with the newly developed 300C model.
In 2006, Mercedes lost market share and Daimler experienced heavy losses with the Smart brand in Europe. DaimlerChrysler executives recognized Mercedes needed to undergo important structural changes, and diverted funds and attention away from Chrysler. This pushed Chrysler into a downward spiral, that was hastened by surging oil prices that made US customers lose their appetite for the gas guzzling cars that made up an important part of Chrysler's sales.
The merger was a bitter experience for both parties. It demonstrated that just by adding two companies under a single corporate umbrella, value is not created. In this case value was destroyed, since the market cap of DaimlerChrysler was lower than the two companies' separate pre-merger values. Even though small synergies were achieved by integrating parts sourcing and shipping in US, and corporate financing, other objectives like sharing R&D costs and investments related to new products proved unrealistic since high end technology and low costs cannot be achieved simultaneously. In fact the R&D costs of Mercedes and Chrysler actually were separated in the annual income statements.
Organizationally they actually were two independent entities with different goals, directions and most important, cultures. Daimler-Benz is an efficient and safe company, while Chrysler is a dynamic and innovative company with strong marketing. Looking back, one might wonder if the merger was not only triggered by the need to create a global company in a consolidating market, but also by personal interest of the parties involved, such as top level executives and the consulting firms involved.
Fiat and Chrysler in 2009
Fiat CEO Marchioni has stated he believes that the automotive industry will experience consolidation over the next decade, where manufacturers will require volumes greater than six million cars, worldwide, per year to survive. To obtain these volumes, he was searching for a way to allay Fiat with another manufacturer (or group of manufacturers) to ensure it's survival.
The financial crisis decimated Chrysler. After the failed marriage with Daimler, Chrysler was taken over by Cerberus Capital. Cerberus never seemed to gain traction with the investment and even claimed that Diamler misled them during the initial purchase. [6] Private equity firms are not required to disclose performance, but it's rumored Chrysler burned over $1 billion of cash per month under Cerberus management. [7] During the financial crisis, US auto sales dropped dramatically from 16.1 million cars in 2007 to 13.4 million in 2008, and 11 million in 2009 (Fiat presentation Flims.) An already weakened Crysler couldn't survive, weighed down by high fixed costs and $18.6 billion pension liabilities. [8]
The US government was forced to step in and give a politically unpopular loan to Chrysler in December 2008. Chrysler continued to falter throughout the spring, and in April 2009 the US government finally pushed them to declare bankruptcy and merge with Fiat. The US government wouldn't accept a licencing, JV, or other non-ownership market solution between Chrysler and another manufacturer. The US has strong separation of public and private enterprise, and the US population would not accept long-term government ownership of Chrysler. This climate gave Fiat two choices: accept some Chrysler ownership under extremely favorable conditions or miss-out on the opportunity altogether.
Given the extremely favorable terms and US government insistence that any deal include ownership, Marchioni and Fiat accepted the deal. Under this structure, however, Fiat-Chrysler are under high political pressure to achieve these milestones and relieve the US government of their ownership stake.
Chrysler has a reputation in the USA of an innovative designer who aren't afraid to take risks. They were the first company to introduce the mini-van, and consistently pushed design limits launching the PT Cruiser, Prowler, Crossfire, and Viper. Chrysler is probably the only US manufacturer who can credibly borrow Italian designs from Fiat, Maserati, and Alfa Romeo. Further, their history of performance cars fits well with Alfa Romeo and Maserati. They're also an excellent marketing company, providing a character and strong position for their cars. Chrysler's weaknesses are in international markets and manufacturing efficiency.
Fiat positions Maserati and Alfa Romeo as cars born from high performance racing, especially F1. Fiat says their mission is "to build cars with attractive styling and exciting engines, cars that are accessible and improve the quality of everyday life." (Company website) Fiat has also rapidly improved their perception of quality and popularity within Europe.
As we can see from their positioning, Chrysler and Fiat evoke the same imagery - passion, speed, aggression, and a proud history. Their brands are also fairly complementary - Jeep, Ram, and Lancia all target different groups. Only Chrysler-Fiat (Panda-PT Cruiser) and Alfa Romeo/Maserati-Dodge may see some overlap.
Products
Chrysler Products:
The Company engages the supply of passenger cars, SUVs, sports tourers, minivans, pickups, and also been experimenting with a Hybrid Diesel truck for military applications. Products are oriented towards lifestyle.
Dodge: capability and lifestyle. Durability, precision, safety and security (some models: Challenger, Grand Caravan, Journey, Viper and Nitro).
Jeep: 4X4, ruggedly refined. Capability to master any terrain. It represents peace of mind and confidence. (Some models: Commander, Compass, Grand Cherokee, Liberty, Patriot and Wrangle).
Chrysler: Car and minivan design. (Some models Chrysler 300, Chrysler PT Cruiser Classic, Chrysler Sebring Sedan, Chrysler Sebring Convertible and Chrysler Town & Country)
Ram: Trucks with turbo diesel. Safety for working and lifestyle (Some models: Dakota, Ram 1500, Ram 2500 & 3500 and Ram Chassis Cab 3500/4500/5500).
Mopar: Original equipment parts and accessories for the millions of Dodge, Jeep® and Chrysler vehicles.
GEM: Global Electric Motorcars (GEM) is a environmentally friendly alternative transportation.
Fiat Products: Fiat make cars with Italian design amd . Fiat make too trucks, tractors, agricultural machinery, construction equipment, motor vehicle engines and components.
Fiat: Practical and affordable technological solutions and Italian design. Environmental and technological innovation.
Alfa Romeo: Style sportiness, technology, comfort and elegance . Italian design, agility, spirit and charm.
Lancia: Class and exclusiveness. Elegance lifestyle and Italian designe. Innovative concept, stylish and affordable:
Abarth: sporting emotion and grit. Performance inspired by the world of motor racing
Fiat Professional: commercial vehicles (to partner small and large companies in growing their businesses). Productivity, ease of use and fuel efficiency.
Maserati: Technological derived from the world of competitive racing.
Ferrari: exclusive cars. Linked by Formula 1 without equal.
Agricultural and Construction equipment: Diversified businesses, 6 brands: IH, New Holland and Stey
Iveco: Trucks and commercial vehicules.
Components and production systems: FPT Powertrain Technologies, Magneti Marelli, Teksid and Comau.
Markets
Fiat is strong in Europe, while Chrysler is almost exclusively North American.
Fiat and Chrysler Core Competencies
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Conclusion
