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Stuttgart’s Strategic Lobotomy

By Evan M. Dudik

My friends in Detroit tell of a joke circulating in Motor City since the 1998 “merger of equals” between Daimler-Benz and Chrysler. Question: “How do you pronounce DaimlerChrysler in German ?” Answer: “The Chrysler is silent.”

Actually, it would perhaps be better if the Daimler were silent, or at least Daimler’s CEO Juergen E. Schrempp. Schrempp, you may recall, confessed in late 2000 to the Financial Times newspaper of London that the touted “merger of equals” was a total charade—that he and his mentor and protector Hilmar Kopper Chairman of Deutsche Bank, DaimlerChrysler’s biggest shareholder, never meant anything less than to make Chrysler a mere operating division of the DaimlerBenz empire.

For this confession, DaimlerChrysler is rightly being sued by corporate shakedown artist and apparent Financial Times reader Kirk Kerkorian to the tune of $90 million ? After all, the value of Kerkorian’s stake in the merged company, like mine, has dropped almost as fast as a a rock--by 61%. Only in his case he’s lost $2 billion in value. (My loss is of slightly smaller magnitude). In the last four quarters, Chrysler’s profit has dropped about $2.5 billion from a positive $1.2 billion in the first quarter of 2000 to an estimated loss of $1.2 billion in the last quarter.

Kerkorian is protesting that he woulda nevah evah voted in favor of the merger if he’d known that Daimler planned a takeover rather than a merger. (Legal experts say the suit has little chance of success. Kerkorian’s motivation, they say, is but a move by Kerkorian to push Daimler to either boost DaimlerChrysler’s share price—or buy him out).

Meanwhile, Schrempp has recently held meetings with Chrysler managers, pleading that he never really meant what he said so plainly.. The German management has pushed out the most outspoken, even brash Chrysler executives, the ones that made Chrysler nimble and profitable (and lucky). Instead Schrempp has installed Dieter Zetsche, a mustachioed executive credited with turning around Daimler’s purchase of truck maker Freightliner.

But, you say, “This is all 20-20 hindsight. There’s nothing wrong with the DaimlerChrysler merger as a strategic concept. At least there was nothing wrong in 1998 when it was proposed.”

As one of the small minority of Chrysler shareholders who voted against the merger, I beg to differ. Even without the benefit of 20-20 hindsight, it didn’t take a rocket scientist to see that the merger was a smart deal for Chrysler (and shareholders smart enough to bail out upon the merger’s completion—a group that did not include me or Kerkorian) but not for Daimler or shareholders who intended to hold on to stock in the combined company.

It was a smart deal because Chrysler executives knew that in the shrinking global economy, plagued by auto production over-capacity, Chrysler would have a hard go of it trying to survive independently. Chrysler was inevitably developing into a niche producer of light trucks, minivans, and sport-utility vehicles. Where once it could earn out-sized profits, in recent years the company has been experienced heightened competition in each of these segments: Honda, Toyota, Ford and GM are fielding worthy minivans; the Japanese and Europeans are fielding pick-ups and luxury sport-utilities. In coming years Chrysler would be too small with too narrow a product line-up to maintain a profitable slice of market share. So they merged the company at the top of the auto sales cycle and near the top of its worth.

It was a smart deal for Chrysler shareholders—essentially transferring wealth from Daimler shareowners to Chrysler’s. But there’s a difference between a good deal and a smart strategy. From the get-go, I saw few strategic synergies between the companies:

Item. No revenue synergies. Mercedes isn’t going to push Chrysler vehicles through Mercedes dealerships. And certainly not the reverse. Not unless Daimler is willing to torpedo its major competitive advantage, the Mercedes brand. At most Chrysler dealers might sell some of Daimler’s tiny SmartCars, fortunately Swatch, not Mercedes branded.

Item. Few production synergies. What would happen to the Mercedes reputation when word got out that Benz-mobiles were being assembled on the same lines as Dodges? Even Ford makes sure that Jaguars are assembled on Jag lines, even though Ford production experts cried in their Guinesss over the antedeluvian Jag production system. And remember the firestorm in the some years back when the public found out that Oldsmobiles were being sold with Chevy engines? The outcry forced Oldsmobiles to sell cars with warning stickers on their engines!

To give the devil its due, DaimlerChrysler might get away with combining some component manufacturing, for components well out of public sight. But even here the question is: are Daimler’s proud engineers really willing to let Chrysler production lines assemble Mercedes parts? Would they really allow Chrysler’s standards to prevail? Could Chrysler even gear itself to Mercedes’ lower volumes? And the DaimlerChrysler complex includes investments in scandal-plagued Mitsubishi and quality laggard Hyundai. Maybe Daimler can get these folks to make Chrysler’s smaller cars on the cheap or an imitation of Daimler’s high profile and probably low-profit SmartCar.

Then too, Chrysler’s profits have been built on the fact that it is the automotive outsourcing king. It’s the least integrated of the Big Three—something that accounts for its greater assembly-time per car. Is Daimler really willing to source parts from Chrysler suppliers over whom they have even less influence than Chrysler itself?

Item. Few purchasing synergies. What do the two companies purchase that is in common? I don’t think they can even purchase the same office supplies, never mind vehicle parts or computer systems. (Do you really want to try a change-over of information and or design systems at this fragile juncture in Chrysler’s product development cycle?). And if you could purchase parts in common, you’d have to reengineer the products to accept the common parts. How likely is this say in the next five years?

Item. Daimler claimed that the Chrysler could benefit from Daimler’s engineering know-how. Where and how, pray tell? Certainly, unless they were radically under-employed, Daimler’s engineers have enough to do keeping up with Daimler’s product line. Well, we didn’t mean that. We meant Chrysler could take over Daimler’s engineering concepts—stuff like emissions, engine and suspension design. Well—how much savings is that, really? Perhaps a few overlapping R&D projects might get eliminated. But that is at best small dollars. At worst, Daimler gets rid of Chrysler’s know-how about meeting U.S. emissions standards and road needs. At best, Daimler gets Chrysler’s alternative fuel vehicle knowledge.

Plus, it takes years to translate and incorporate new engineering concepts from one country and culture and company to the point where they show up on the dealer’s lot. Even a low volume producer like BMW has over 3,000 distinct engine varieties to meet the needs of every different

Further, it’s a safe guess that Daimler’s engineering programs—geared as they must be to their Mercedes luxury passenger cars and commercial trucks—have limited relevance to Chrysler’s minivans, Jeeps and pickup trucks. Chrysler’s luxury New Yorker volume is so low that it incorporating Daimler engineering would make very little difference to New Yorker market share. Same with the two company’s sport utility vehicles--even if Daimler were willing to take the doubtful step of diluting the Mercedes image by advertising that New Yorkers and Jeeps now had Mercedes engineering. Which bring us to…

Item. No marketing synergies. This is truly a no-brainer. It would be marketing suicide to sell Mercedes on the lots of Jeep, Dodge or even Chrysler dealer lots. Anyone who has been to Germany knows that Mercedes extracts a ridiculous premium for its sedans in the U.S. Putting them on Chrysler dealer’s lots would be a shot in the foot. Any other synergies—such as lower advertising costs due to higher volume TV time and magazine space are likely to be tiny.

Item. No product development synergies. With the possible exception that Chrysler could extend its amazing new technology development center to Daimler—something the German company’s engineering pride is unlikely to allow—it’s hard to see how the two companies can expect any product development synergies. It seems there can only be synergies if the same products—or parts of products—would be develop.

Item. Cultural hell. It doesn’t take a battalion of cultural psychologists to figure out that the Daimler cultures and the Chrysler cultures are utterly different. I won’t say forever incompatible. But of all the Big Three cultures, Chrysler’s is probably the most removed from Daimler’s. In successful companies, culture matches strategy. Suffice to say both companies have recently been very successful, but with very different strategies. And this doesn’t even take into account the underlying fact that German culture just is very different from American culture.

Schrempp has addressed this question—or been forced to address this question—by dumping many of Chrysler’s American executives. Those who remain must be Stuttgart loyalists. But culture runs much deeper than the upper ranks. It runs deep into engineering, marketing and especially production. Schrempp may be able to grudgingly Germanize American engineering, but he will never be able to Germanize American production. Or American dealers. The UAW, middle management, and dealers won’t stand to have anything rammed down their throats—no matter whether it is a “good idea” or not.

When American auto manufacturers started adopting Japanese manufacturing techniques, they created a fertile hybrid that worked in America’s unionized environment. It took almost fifteen years. They narrowed the quality gap—only to find in recent years that the bar has been raised—near –Japanese quality standards are only the ticket to admission to compete in today’s vehicle market.

This merger will only work if Schrempp is willing to do two unlikely things: (1) In its marketplace, let Chrysler be Chrysler—at the most, buying what it can best buy from Daimler and the Asian manufacturers, but managing its own business (2) let Chrysler managers rise to the top in DaimlerChrysler—even at the expense of German managers—and be seen to be doing so. In fact, for this merger to succeed it must be possible for an American to get Schrempp’s job. After all a Frenchman heads Nissan—and has been successful against high odds in turning it around. And an American leads Mazda. Right now, only two American’s are on Daimler’s supervisory board. And they are both procurement and supply experts.

In the meantime Zetsche appears to be focusing on not on the Elysian fields of strategic synergy but good-old cost cutting: closing plants, laying off white collar workers, bashing suppliers. It’s too soon to write the epitaph to DaimlerChrysler’s dream of synergy. But if it does emerge, it will be in far different form than imagined in 1998.

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