Chrysler had always been considered a bold and risk-taking company. It had brought itself back from the edge of bankruptcy four times since the Second World War. Chrysler was a strong player on the US market only. Its passenger cars were not a success on the market. Increasing Chrysler's share on the international market required major investments: neither did the corporation have plants abroad, nor did it have a sufficient dealer network. To conclude, Chrysler needed a financially strong partner, with a significant international presence.
Daimler-Benz was financially stable; it was one of the largest German companies, which was a conglomerate of over 20 different businesses. However, 95% of its profit came from one division - Mercedes-Bens. That made the corporation less secure. The Mercedes division had a rather small share of the entire automotive market; besides, it was clear, that the market segment for luxury cars had reached its peek capacity and was no longer growing. Despite a booming U.S. economy, its luxury vehicles had captured less than 1% of the American market. [ï›] ï To ensure stable growth and stability in the near future, Daimler needed an outside partner to enter the new markets. It recognized that it could benefit from an economy of scale in this capital-intensive industry.
â…± The expected synergies
Exploring new markets worldwide
Daimler is an international company with biggest focus on European market and was eager to expand American markets while Chrysler is increasing its shares in American markets. This merger could create a company that would enable both companies to develop vehicles to be sold anywhere in the world.
Increasing market share
For Daimler, it had felt pressure to merge. By 1997, it ranked 15th largest automaker, only above Volvo & Porsche. And for Chrysler, since it lacks management depth, new products, and has small overseas market penetration, this merger was supposed to bring benefits of increasing market shares for both of them
Reducing cost
Chrysler could use Daimler parts, components and even vehicle architecture to sharply reduce the cost to produce future vehicles and could combine the Mercedes engineering with Chrysler's marketing and design savvy to develop a most popular vehicle worldwide.
Cope with the market
The marketplace was changing dramatically with the ever fast development of technology, such as the Internet. The merger of the two companies can share technologies which could make them more competitive in the market.
Complementation of culture
There was a common reason for the merger to be a success. The companies were almost meant to be partners: their product lines almost did not overlap; with German quality and attention to details and American low cost efficiency and innovativeness complementing each other.
â…² The realities after the merger
In contrast with the original thought, the result of the merger was nothing but disappointing. We can see the following data of DaimlerChrysler:
Market share fell from 16.2% to just 13.5% (1998-2001)
Chrysler CEO, Holden, fired after less than a year
Two-thirds of Chrysler's senior management was fired or resigned (executives did not get along with German colleagues)
In 2000, Chrysler's operating profit decreased 90%
DaimlerChrysler ranks only fifth among the seven largest automakers
Not-invented-here syndrome kept Chrysler and Mercedes from sharing ideas, parts [ï›] ï.
Originally, the plan was for Chrysler to use Daimler parts, components and even vehicle architecture to reduce the cost to produce future vehicles. But problems occurred when Daimler's Mercedes-Benz luxury division, whose components Chrysler would use, was averse to contribute to Chrysler. Eventually, all Chrysler got were some steering and suspension components, a transmission and a diesel engine and few packages. [ï›] ï
In return, Daimler had hoped that Chrysler would radically raise its standing in the North American auto market. But due to tough competition from Asian automakers, Chrysler fell short.
We can see clearly from the following charts from Yahoo, comparing the stock price of DaimlerChrysler (DCX) with General Motors (GM) and Ford (F) that how exactly did this merger work. The stock price of Daimler fell more than 50% during the year 2009 and 2003, obviously underperform than the two other motor giants.
B. Management slow to identify?
â…°The reasons of profit losses of Chrysler
Very different corporate cultures
If Chrysler was considered to be innovative, then Daimler-Benz was its complete opposite. The Germans embraced formality and hierarchy, from a well-structured decision-making process to the suit and tie dress code and respect for titles and proper names. Chrysler broke barriers and promoted cross-functional teams that favored open-collars, free-form discussions and casual names.
Different brand images
Chrysler's image was one of American excess, and its brand value lay in its assertiveness and risk-taking cowboy aura, all produced within a cost-controlled atmosphere. Mercedes-Benz, in contrast, represented disciplined German engineering coupled with uncompromising quality. These two sets of brands, were they ever to share platforms or features, would have lost their intrinsic value.
Products bias
Mercedes-Benz dealers, in particular, had proven averse to including Chrysler vehicles in their retail product offerings. The logic had been to protect the sanctity of the Mercedes brand as a hallmark of uncompromising quality. This had certainly hindered the Chrysler Group's market penetration in Europe, where market share remained stagnant at 2%. [ï›] 4ï Potentially profitable vehicles such as the Dodge Neon and the Jeep Grand Cherokee had been sidelined in favor of the less-cost-effective and troubled Mercedes A-Class compact and M-Class SUV, respectively.
Mismanagement
In autumn 2000, DaimlerChrysler CEO Jürgen Schrempp confessed that his intention was for Chrysler to become a subsidiary to Daimler-Benz. Knowing that, Chrysler's biggest shareholder filed a $9 billion lawsuit against DaimlerChrysler stating he never would have voted in favor of the merger if he had known that Daimler-Benz's intent was to reduce Chrysler to a mere division and fire all of Chrysler's top management. It is clear that the two CEOs did not follow a coordinated course of action in determining Chrysler's fate. During 1998-2001, Chrysler was neither taken over nor granted equal status. The managers who had built Chrysler's "cowboy" image were no more. Some remained on staff, feeling withdrawn, ineffective and eclipsed by the Germans in Stuttgart. Others left for a more promising future at G.M. or Ford. The American dynamism faded under subtle German pressure, but the Germans were not strong enough to impose their own managers.
As a result, Chrysler sat in apathy, waiting for Daimler's next move - a move which came too late - two years after the merger - when Schrempp installed a German management team on November 17, 2000.
â…±Management reactions to the problems
As talked above, DaimlerChrysler took little reactions to the problem emerged between Chrysler and Daimler not until end 2000. The main reason is the misjudgement of senior executives. They looked at Chrysler's past success and think there is no need smash these two companies together. They decided to let the Chrysler guys continue to run it because they have done a great job in the past. However, they did not take into account that prior to the merger or shortly thereafter, enough of the key members of that former Chrysler management team left which means Chrysler was actually out of strength to do it alone any more.
In 2001, knowing the ever huge operating losses (-5,281 million) occurred in Chrysler in the past ten years, the management team made the following efforts:
Share engines and commodity parts
As brand equity is concerned, Juergen Schrempp intends to have all brands share commodity parts. A plan to make a new four-cylinder gasoline engine for all Chrysler, Jeep, Dodge, and Mitsubishi cars was easily approved. By doing this, quality will be maximized in all cars and engineering costs will be cut by using more effective and efficient parts. With the Asian and European markets launching various new models aimed at Chrysler SUVs and minivans, sharing parts will be crucial to DaimlerChrysler's success against the rising competition.
Maintaining Mercedes' image
The Mercedes role in DaimlerChrysler's success is extremely substantial, contributing $2.1 billion in earnings during the first three quarters of 2001. Yet during the same time frame, Chrysler lost nearly that much, but sold almost twice as many vehicles. [ï›] 5ï In this case, Chrysler's lack of profitability reduced the advantages that Mercedes brought to the merger. To maintain Mercedes' image and high quality was extremely important to DaimlerChrysler.
Large management upheaval
Thomas Stallkamp, the former President of Chrysler retired at the end of 1999. In November 2000, Germans Dieter Zetsche and Wolfgang Bernhard replaced American executives at Chrysler in order to increase revenue, cut costs, and "save Chrysler." [ï›] 6ïThree months later in February 2001, Juergen Schrempp, CEO of DaimlerChrysler, went in search for global marketing talent. George Murphy, former General Marketing Manager of a Ford Division, and Jim Schroer from Ford were hired to reestablish DaimlerChrysler as an "aspirational carmaker." During the same time period in 2001, Dieter Zetsche recruited other executives from Ford, Toyota, and General Motors to improve Chrysler's quality and sharpen its dull brand images. The new management is all part of DaimlerChrysler's attempt to save the merger.
A three-year cost saving restructuring
Zetsche and Schrempp also made a three-year plan in February 2001 that included cutting 20% of the work force by 2003, reducing the cost of parts by 15%, and closing six plants. Suppliers were told to reduce prices by 5% immediately. Chrysler saved $100,000 by merely changing the design of the vapor tube on the PT Cruiser. Chrysler was, therefore, able to spend $600 less building each PT Cruiser in the end, which added up to an extra $180 million in profits. The goals are as follows for DaimlerChrysler's operating profit:
2001: Euro 1.2 billion - Euro 1.7 billion
2002: Euro 5.5 billion - Euro 6.5 billion
2003: Euro 8.5 billion - Euro 9.5 billion
Differentiate Chrysler and Mercedes
Management team created company's "brand bible" to distinguish components from Mercedes and Chrysler. DaimlerChrysler need to be very careful in maintaining brand differentiation, not only to protect Mercedes, but also to separate both car makers from other products in the overcrowded auto market.
Offering big incentives to attract buyers
Chrysler was spending up to $3,000 per vehicle on incentives in order to boost sales. Chief Operating Officer Wolfgang Bernhard had projected cost savings to be $900 million for 2001, which amounted to approximately $300 per car.
Implemented Innovation Awards
These honors are designed to spur technological innovation. They reward the engineers for all the work they do, which is extremely important. Issues such as manufacturing requirements, impact on suppliers, and dealers' servicing are all looked at for the Innovation Awards. With the new program, technology will be brought to the market faster, allowing the company to maintain its leadership in innovation. Dieter Zetsche did the smartest decision was having developed two series of hot models: 300C and Dodge Charger. These two hot models helped Chrysler gain 1534 million operating profit in 2005.
In conclusion, it is true that at the beginning of the merger, because of some mismanagement, DaimlerChrysler took a slow reaction on the problems occurred between them. But since 2000, they have made great efforts to help Chrysler walking out of the huge financial loss. Unfortunately, due to some unpredictable external issues which I will talk about in the next question, and together with its internal problems, they have to break up at the end.
C. Break up of Daimler and Chrysler
â…° Reasons of selling off Chrysler
We can see the graph below that from 2000, Chrysler had a continuous loss in operating profit. Although, with the popular sales of 300C and Dodge Charger, Chrysler gained large profit in 2005, it was also in the same year that Mercedes-Benz business fell into trouble and had deficit for the first time in the past ten years.
In 2006, Chrysler suffered from huge losses again, a negative 1,118 million euros in operating profit. At this time, the company cannot afford this huge loss any more, everybody in the company lost confidence totally in Chrysler, especially Daimler's shareholders. Finally in 2007, affiliate of Cerberus acquired 80.1% equity interest in new company Chrysler Holding LLC with DaimlerChrysler AG to retain the rest 19.9% which ended the era of the merger. The reason Daimler did not sell 100% of Chrysler is because Daimler still expected to gain profit from later sales of this 19.9% interests. However, with the continuous huge profit loss of Chrysler which has become a major burden of Daimler, this car industry giant no longer had any patience for him to recover. Eventually, Daimler sold the rest of Chrysler's stocks and totally got ride of him. The following table shows the global market share drop of Chrysler by 25% from 2007 to 2008. [ï›] 9ï
â…± Is it slow to sell?
According to the failure of this international marriage, we can not simply accuse Daimler or Chrysler, although there are many internal reasons like different cultures, different brand, mismanagement etc. which I have listed at the beginning of this paper. There are also reasons that were not predictable. I summarized the external effects below:
Consumption trend changes
Consumers are moving towards more environmentally friendly and fuel efficient automobiles. This is for a multitude of reasons including political tension in the Middle East, rising oil prices due to growing demand in the developing world (especially China), and increasing concern over global warming.
Competitions from Asian
Daimler's market-share in the emerging market is growing, but in a worst case scenario, Asian competitors would take over the growth markets. They would boost demand for commodities, thus increasing Daimler's operating costs, eroding the company's already slim margins.
Financial crisis
During the crisis crunch 2008, a lot of famous companies were badly influenced. Car industry was seriously hurt because people prefer to save their money and reduce expenditures due to large amount of lay-offs and salary reduction. Daimler certainly can not run out of this disaster since most of its profit comes from Mercedes-Benz who unfortunately is the symbol of luxury which would be the first thing people refuse to buy during the crisis.
All these external factors cannot be well predicted so that seldom any measures could be implemented to prevent from them. Without these sudden external effects, maybe Chrysler won't have had so many losses and maybe it would be profitable to hold Chrysler for a little longer. However, Daimler was not very lucky and together with its internal problems, this divorce seems not that surprising any more.
