Among the various industries, the auto industry has seen a spate of mergers and acquisitions in the past few decades. Some of them have been successful, like Chrysler-Jeep in 1987 or Renault-Nissan in 1999 but most of them have ended in failures. In such a scenario, a merger took place which was supposed to be the "best prepared and best executed merger". Daimler Benz AG of Stuttgart, Germany and the Chrysler Corporation of Auburn Hills, Michigan announced their "merger of equals made in heaven" at a press conference in London on May 7, 1998. The combined entity would have an equity value of $36 billion, revenues of $132 billion, annual sales of 4 million vehicles and 421,000 employees, making it the fifth largest automobile manufacturer in the world in vehicle sales and the third largest in revenues. This merger was expected to redesign the entire automotive industry and all the automobile players were expected to reposition themselves in reaction to Daimler Chrysler. Both the companies had done screening of targets, financial due diligence and negotiations before the deal was executed rapidly over a four month period. Before discussing the individual strategies of the company for the merger, we need to understand the auto industry scenario and the economic situation at that point of time. Some of the key points that highlight the same are mentioned below. They convey an atmosphere of tension which made it seem that consolidation/mergers were inevitable.
Japanese and Korean carmakers had gained substantial share in the US market
The worldwide automobile capacity exceeded the annual demand by at least 15- 20 million vehicles and forming mergers, acquisitions or alliances was the key to survive
Competition in certain segments like premium segments was intensifying dramatically as new players entered the market
Market was developing new segments like SUVs, minivans and facing the reintroduction of old top brands like Bugatti, Lamborghini etc
Globalization was increasing rapidly which provided unique challenges to the manufacturers and suppliers; example - outsourcing, consolidation
Internet companies were becoming a significant competitor for traditional distributing channels
MOTIVE OF THE MERGER
It has been said that an organization's ultimate purpose is the constant pursuit of perfecting its dynamic capabilities by increasing and modifying its resource base. The organization can do this by two broad means: work within its boundaries to create new goods/services or modify and change processes or reach outside its boundaries in pursuit of fresh opportunities for the same. Both Daimler Benz and Chrysler faced unique challenges that promoted them to adopt the latter method of seeking opportunities externally. The specific issues regarding the same that ultimately led to the merger are discussed below.
Daimler Benz AG - The Growth Challenge
In spite of the strong brand name of Mercedes Benz, various competitors had successfully launched luxury brands at much more competitive prices while, by the late 1990s, archrival BMW had surpassed Mercedes in unit sales. To achieve rapid growth, the company focused on cutting costs and entering the fast growing Asia Pacific and Latin America markets. But for entering the high growth emerging markets with small and compact cars, Mercedes required capabilities which were lacking in its traditional portfolio. The management tried to develop those skills internally but failed miserably because of high R&D costs, poor management, small production volume etc.
The management feared that the broad based ownership structure of Daimler Benz would make it a likely acquisition target in the upscale auto market as other companies like Porsche and BMW had large family shareholdings making it difficult to acquire them. Moreover, the management was particularly concerned about FORD MOTORS which had been focusing on an aggressive acquisition spree.
The company realized that their stronghold in the premium car market would not permit the growth they sought as the premium car market had a share of only 12 percent in the entire passenger car market. Thus they analyzed and screened the mass market auto manufacturers for potential merger using three criteria:
The partner must be profitable
Its products and geographical markets should complement those of Mercedes
Daimler Benz would not be junior member of any partnership
Chrysler Corporation - The Growth Challenge
The company became the worldwide benchmark for lean engineering as the engineering expenses were only 2.9 percent of revenues. The SCORE program had chopped $3.7 billion in costs from the company's cost structure. In spite of all this, the various problems faced by Chrysler were:
The company's target of 15 percent of overseas sales was unachievable as it failed to establish greater geographic expansion outside North America. Its internationalization strategy concentrated on Latin America and involved little European activity. Thus, its overall market share in Europe was a meager 0.7 percent in 1997.
The internationalization of its major component suppliers was also slow in developing.
The threat of surviving only as a volume brand in another company's portfolio was on the mind of all the management executives.
ACQUISITION ABILITY
If an organization intends to follow the route of merger/acquisition as a process to gain superior dynamic capabilities, the decision to do so includes three elements:
Acquisition selection ability b) Acquisition identification capability c) Acquisition reconfiguration capability
In this part of the study, we will cover only the first two elements. Both Daimler Benz and Chrysler successfully covered these two elements.
Acquisition selection ability
Daimler Benz wished to expand its dealership and manufacturing operations in the USA, enter the pickup truck segment and look for cost reduction at product development, production and supply stages. Chrysler on the other hand wanted to increase its presence in Europe and climb to the premier position in its specialized segments, setup a manufacturing base in Europe to help the same and improve technical capabilities.
Acquisition identification ability
Both Daimler Benz and Chrysler sought potential targets which would help them acquire the defined capabilities and in the process, they found each other to be the perfect match and entered negotiations effectively.
RESOURCES AT CHRYSLER CORPORATION BEFORE THE MERGER
Chrysler Corporation had made a remarkable recovery in the 1980s with the help of $ 1.5 billion in federal loan guarantees and under the leadership of legendary Lee Iacocca. The company focused on strengthening its core activities and increasing its productivity. Some of the major resources which helped the company in its endeavor were:
COST EFFICIENCY
In the mid 1990's, Chrysler became one of the most productive and profitable car manufacturers in USA. Chrysler achieved high productivity through 'target costing' and cost efficiencies.
The R&D cost per Chrysler car was approximately one fourth of that of a Mercedes Benz car.
SUPPLIER EFFICIENCY
Chrysler pioneered the concept of SCORE (Supplier Cost Reduction Effort) under which the company decreased the number of suppliers from 2500 to 1140 suppliers.
SYSTEMS AND PROCESSES
Chrysler dissolved most of its functional groups and redesigned the entire structure in form of 'platform teams'. These teams were autonomous groups containing all the employees who were required to design and manufacture a car. These platforms could be easily shared across different models and brands.
It had reduced the development time of its new models from 60 months to 24 months in a span of just 8 years.
SEGMENTATION STRATEGY
Chrysler was the least diversified of all the major car makers by the 1980s and it was focused exclusively on the manufacture and sale of automobiles and light trucks. The company was much less vertically integrated than its competitors. Example - It produced only 25 percent (by value) of the components it used, outsourcing the remainder.
INNOVATION AND FOCUS ON R&D
The company focused on new model introductions which gave them an advantage over the competitors.
CASH RESERVES
Chrysler's huge profitability in the early 1990s had made it a cash rich company.
PRODUCT PORTFOLIO
Chrysler Corporation had four different brand names namely Chrysler, Dodge, Plymouth and Jeep. The Chrysler marquee was the only upscale brand remaining in their portfolio.
RESOURCES AT DAIMLER BENZ BEFORE THE MERGER
Daimler Benz was the product of a merger between two German carmakers, Daimler AG and Benz AG. After the Second World War, it became one of the world's topmost luxury car makers. The organisation was at the apex of automotive luxury and quality. After Jurgen Schrempp became chairman of Daimler Benz in 1995, the company was divided in to five divisions:-
Passenger cars
Commercial Vehicles
Aerospace
Services
Directly managed businesses
BRAND VALUE
Mercedes Benz AG accounted for more than 70 percent of the sales and 90 percent of the profits of the whole group. The brand was always known for high quality luxury vehicles.
TECHNOLOGY AND HUMAN RESOURCES
The company culture was largely driven by engineers, who developed cutting edge technological features and won widespread acclaim for their craft. Thus, Mercedes Benz AG produced a new platform for each of its new models, unlike its competitors, to protect the brand value.
INEFFICIENT SYSTEMS AND PROCESSES
The company reduced the percentage of total car components that were manufactured in house to 40 percent. This was done to reduce costs but even after this measure was taken, Mercedes Benz's costs were too high. The company had outmoded and inefficient production methods and one of the highest labor costs in the world. It took between 60 and 80 man-hours to build a Mercedes but the Japanese counterparts were building a Lexus in only 20 hours.
SALES AND DISTRIBUTION NETWORK
Mercedes Benz had a huge sales network, covering North America (655 dealers), South America (468 dealers), Asia (931 dealers) and Africa (272 dealers). But even then 63 percent of the total sales came from its 3435 European dealers.
RESOURCES OF THE COMBINED ENTITY
WIDE PRODUCT PORTFOLIO
Figure 1 - Production volume (in thousands) of Daimler Benz and Chrysler vehicles in various segments in the year 1997
As we can see from the above bar graph, Daimler Benz and Chrysler had production capabilities in different areas (apart from the common passenger car segment). Chrysler was very strong in Minivans, Pickup trucks and SUV's whereas Daimler Benz had an almost negligible presence in these segments. On the other hand, Daimler Benz had a strong foothold in the trucks segment where Chrysler was lagging behind by a huge number. Thus, the new merged entity would have a widespread presence in the market as they have complementary products.
The following table gives a detailed comparison of the positioning of the different products of the two companies in the market. We can see that Daimler Benz is majorly present in the higher price band of the market whereas Chrysler has a strong grip in the medium and lower price bands. The merged entity would be able to cater to all segments of the market and increase the total revenues. Moreover, technological knowhow can be exchanged between the companies if they want to venture into new, unchartered territories.
MARKET SEGMENT
Price Level
Compact
Medium
Upper Level
Luxury
Pickup
Minivan
High
DB
DB
DB
DB
Medium
CH
CH
CH
CH
CH
CH
Low
CH
CH
DB
CH
CH
DB - Daimler Benz Cars; CH - Chrysler Cars
Figure 2 - Market segmentation of different products of Chrysler and Daimler Benz
GEOGRAPHICAL EXPANSION
Figure 3 - Geographic spread in sales (%) of Chrysler and Daimler Benz in 1997
Chrysler had a majority presence in NAFTA region and its overseas expansion plans had failed miserably. Daimler Benz had an overwhelming presence in the European region but little presence elsewhere. The merged entity would have a significant presence worldwide resulting in more sales and revenues.
OTHER BENEFITS TO EACH OF THE COMPANIES AND MERGED ENTITY
BENEFITS TO CHRYSLER
SHARED BENEFITS
BENEFITS TO DAIMLER BENZ
Boost nonexistent position in Europe
Purchasing power
Expand manufacturing and dealership operations in USA
Give a European manufacturing base
Treasury consolidation
Create opportunity for joint development at lower costs
Might gain from luster of Mercedes nameplate
Better capacity utilization
Combine with pickup trucks, the lighter lines from Chrysler
Broaden line to luxury end
Technology transfer
Hold aligned cost structures
Improve technical capability, lower warranty costs, quality
Shared R&D for a small car in developing countries
Jeep (urban and rugged) may add to the image for SUV
Improved safety features available
Borrow creative styling
FINANCIAL NUMBERS OF THE COMBINED ENTITY
DAIMLER CHRYSLER
Revenue
Net Income
Fully Diluted EPS
Vehicle Sales (millions)
Employees
Revenue per employee
INTEGRATION OF THE RESOURCES
Post merger there was a need for integrating the different resources used for the various processes of the organization. A failure to integrate the resources would cause their inadequate utilization which in turn would lead to purpose of the merger being unfulfilled. However in the Daimler - Chrysler merger, it was observed that the required synergy of resources was not observed due to which the organization as a combined entity could not move forward.
BRAND IMAGE
The brand of Daimler Benz is a much larger brand than Chrysler is in all aspects such as luxury, safety, service, design etc. Thus merging the two brands would have let to severe brand dilution for Daimler -Benz and the merged entity decided that the two brands will always remain separate. They also did not allow for common dealerships of Daimler Benz and Chrysler in Europe.
MANUFACTURING
On the manufacturing front also, not much of integration happened and for most part the two fragments remained separate entities. In order to keep their brand separate and safe, the Daimler fragment prevented any kind of synergy of the manufacturing related resources. As a result, the financial savings and efficiencies that was the purpose of the merger could not be successfully established. An example can be the making of M- class SUV of Mercedes which could be done at the Austrian plant, where Chrysler's Jeep Grand Cherokee was being manufactured. The cost of addition of another line at the Alabama plant of Mercedes was about a $100 million as opposed to making some modifications in the existing jeep line of a Chrysler plant in Austria which would have been $30 million. Also considering that the M- class SUV and the jeep had some process overlap and some 7-10% share parts, this would have been the sensible choice as the resource utilization would have been optimal. However, as Daimler did not wish to affect the Mercedes brand by manufacturing it in the Chrysler plant, this step could not be taken. Thus the financial savings of $70 million could not be brought about.
Chrysler also wanted to make an entry into the luxury car segment. It was one of the motivations for the merger strategy. However, this could not be done post merger.
PROCUREMENT
The merger brought about an increase in the volume of purchase on behalf of Daimler - Chrysler; they had a better steed before the suppliers which ensured that they could have the negotiations on better terms. This led to procurement savings of DM 900 million for Daimler Chrysler. However, they did not make any significant changes in their procurement policy.
INFORMATION TECHNOLOGY
The entire IT system of Daimler- Benz and Chrysler was brought under a single IT Department. This department was to be headed by a Chrysler executive who was to report to a Daimler senior executive. There was a synergy in the software programs of both the organizations that were combined to form a single, effective system for the merged entity. The net savings expected from this synergy was around $180 million. The savings were mainly due to the consolidation of the infrastructure, harmonizing the varied networks, probability of obtaining hardware from suppliers at cheaper rates and also the usage of digital mock- up system for car development. The systems used belonged to both Daimler and Chrysler and the sharing of information and combination of the systems throughout the organization to enormous savings for the organization. Thus in the case of IT systems, resource utilization was done at the best level.
HUMAN RESOURCES
The top management of Daimler and Chrysler were an important asset for the combined merger as their leadership skills were considered to be a special resource. However, post merger some of these prominent executives either retired or were poached by Ford and other competitors. A Mc Kinsey report suggested in 5 years since the merger, the combined entity lost around 70% of their top executives.
Executive Name
Designation
Robert Lutz - Chrysler
Vice- Chairman
Retired
Pawley - Chrysler
Vice- President
Retired
Stephen Harris
Vice - President, Corporate Communications
Moved to GM
Chris Theodore - Chrysler
Senior Vice - President, Platform Engineering
Moved to Ford
Kurt Lauk - Daimler Benz
Head, Commercial Vehicles
Retired
Grube - Daimler Benz
Head, Corporate Strategy
Started real estate venture
Peter - Hans Keilbach - Daimler Benz
Chief legal Counsel
Retired
Knowledge management implies the usage of the inherent knowledge and skills of the work force as a resource, which if utilized well can be of competitive advantage. This aspect deals with knowledge sharing in the organization such that it can lead to efficient practices and continuous improvement. At Daimler Benz, the knowledge management was done by external consultants who prepared a list of learnings from their different vehicle programs. They also established a Daimler Corporate University to aid the training of their executives in strategic thinking, innovation culture etc.
At Chrysler, "tech clubs" had been established wherein engineers, designers and employees from other functionalities came together to communicate and collaborate on different ideas and means of improving their working. This led to the development of various best practices as well as formed the basis of innovation in technology etc.
Post merger, the "tech clubs" of Chrysler were well received as a concept and platforms for fostering knowledge sharing and innovation were developed at Daimler Chrysler. But this was adopted in pockets and not throughout the organization. Also, most of the R & D and operations management were conducted separately, thus at many levels the knowledge sharing remained inadequate.
SWOT ANALYSIS OF THE COMBINED ENTITY
Strengths
The merged company was well diversified into a lot of sectors other than automobiles
The new entity had access to the outstanding Daimler brand and the cost-effective processes of Chrysler
The new entity had record revenues and opportunities to increase market share further
The merged company had no capital constraints
The merged company possessed a robust budget for research of $ 47 Billion
Weaknesses
The merger combined two very different cultures - European and American which caused numerous issues
The merged entity was truly massive in its proportions and would be difficult to inspire, and manage
There was a lot of uncertainty among the employees of both sides leading to massive attrition
The ego clashes between the employees of the "up-scale" brand Daimler and the "blue-collar" Chrysler led to numerous in areas as diverse as marketing and branding and production ultimately leading to gross inefficiencies in the processes of the merged entity
The synergies visualized before the merger were never really pursued because of the clashes between both the organizations
Opportunities
The merged entity could be able to expand to high-growth emerging markets, particularly into Asia .and BRIC countries
The stress on R&D and innovation would eventually lead to new products
Advances in the area of electric and hybrid automobiles are a source of competitive advantage
The merged entity owns more than 38% of the world's best automotive brands
Threats
Lack of clear corporate communications could lead to further attrition of key personnel
The culture/ego clashes are a threat to the smooth/efficient running of organizational processes and prove to be very costly in terms of wastages, inefficient decisions etc.
Lack of focus on the softer aspects (human resource/cultural) of the merger could jeopardise an attempt to successfully integrate both the organizations
CONCLUSION
Two of the biggest names in the auto-industry sought to use the acquisition route to improve/develop new capabilities. This was famously called "the merger made in heaven" and was supposed to redefine the auto-sector. Both Daimler Benz and Chrysler had followed the rules of pre-merger process and found many synergies that would make the merged entity a powerhouse. Yet, in this case like so many others, the softer issues of the merger were ignored. Though there was an integration team setup and numerous culture building and team-building interventions were used, both entities were simply unable to overcome their cultural differences. In mid 2007 after nearly eight years of the merger announcement, Daimler Benz and Chrysler decided to go their separate ways.
