5 reasons the DCX merger has been a debacle
1. Not enough preliminary homework
2. Synergies haven't materialized
3. Cultural differences
4, Misunderstanding of U.S. volume market
5. No shareholder confidence
The Nov. 12, 1998, union of Germany's Mercedes-Benz with the former Chrysler Corp. and, subsequently, with Mitsubishi Motors Corp. of Japan, is foundering on nearly every front:
What happened to the great vision? Simply put, many industry observers agree, DaimlerChrysler isn't working because it was not founded on a solid business case to begin with.
"This merger has been in trouble since Day One," said Peter Schmidt, principal of AID, an automotive forecasting and consulting firm in London.
"From the outset, they failed to identify Chrysler's vulnerability, its almost total dependence on the U.S. light-truck market. Chrysler was earning almost all of its profits in light trucks and neglected its presence in the passenger-car market."
As new competition ate away Chrysler's lead in minivans and Jeeps in the U.S. market and its margins fell, its uncompetitive cost structure became apparent.
"The problems were as clear as daylight," Schmidt said.
To be sure, many of the problems facing DaimlerChrysler have been caused by factors beyond its control.
And there are glimmers of hope. Plans to share vehicle platforms between Mitsubishi and Chrysler have the potential to yield huge savings, but that fix is several years away. Mitsubishi and Chrysler's cost-cutting programs also are reported to be yielding higher than expected savings.
At the same time, though, few could argue that the union has lived up to the goal of its architects. Here are five reasons why:
1. Not enough preliminary homeworkIn the mid- to late 1990s, many automotive executives accepted the theory that only multinational companies with sales of at least 4 million units a year would survive in this century. Against that backdrop, Daimler-Benz Chairman Juergen Schrempp thought he saw gold in Chrysler's design abilities, reported purchasing skills, profitability and apparent do-mi-nance in some sectors of the U.S. market.
Chrysler was to be complemented by almost any Japanese maker, creating the Asian leg for his three-legged global automotive stool.
The result: The DaimlerChrysler deal was signed at lightning speed, leaving little time for an examination of the financials and understanding of Chrysler as a U.S. volume maker.
Schrempp hit on Robert Eaton, former chairman of Chrysler, at the Detroit auto show in January 1998. A deal was signed only four months later, in May, and the new company was born in November.
"If they had a business plan, we have to assume it was a bad one," said John Lawson, senior analyst with Salomon Smith Barney in London. "The process didn't involve a lot of detailed work, but was built on instinct of what could work. "
The fix: As Chrysler's operating profits plunged from $5.1 billion in 1999 to $499 million last year, Schrempp parachuted two veteran Mercedes executives - Dieter Zetsche and Wolfgang Bernhard - into Detroit, ending any pretense of Chrysler being equal to Mercedes-Benz in the DaimlerChrysler stable.
On Feb. 26, the German executives started a three-year turnaround plan that cuts 26,000 workers, closes six plants and eliminates shifts. It also calls for suppliers to cough up 15 percent price reductions by the end of 2002.
Stephen Reitman, who follows the industry for Merrill Lynch International in London, says the program has made "good progress" in cutting costs.
"But the easiest steps probably have now been taken," he said. He said he doubts Chrysler will meet its savings goals next year without further - and perhaps dramatic - action.
2. Synergies haven't materializedThe Mercedes-Chrysler merger promised huge savings by combining purchasing and other behind-the-scenes operations.
Daimler also saw the acquisition as a way to amortize the cost of expensive technologies over a larger base and as a way to persuade suppliers to keep their technology exclusive to the group by offering them larger volumes.
But there could be no dilution of the Mercedes-Benz brand by sharing platforms or even engines and transmissions with the volume maker, Chrysler.
The result: The cost savings ran out of steam after the first year because they were limited by the inability to share major parts purchases. Engineers pointed out that it is almost impossible to adapt expensive components from rear-drive Mercedes-Benz cars to front-drive Chrysler vehicles, especially because U.S. buyers won't pay for the features on a mass-market vehicle.
"From an engineering perspective, the merger has been slow to mature," Lawson says. "It was only when Chrysler was in a real mess that it has been possible to pry the Mercedes-Benz technology door open."
The fix: Pushed into action by the Chrysler financial crisis, Stuttgart has agreed to create a common electronic architecture for all future Chrysler, Mercedes-Benz and Mitsubishi vehicles, allowing common components to be used.
Mercedes-Benz engines are being used on the PT Cruiser and Jeep vehicles in Europe. The rear-drive LX Chrysler cars will share major components with the new Mercedes-Benz E class due in Europe in the spring. The Chrysler Crossfire will use a platform with components from the Mercedes-Benz SL and CLK as well as transmissions, axles and other parts.
But Schmidt argues that this limited sharing isn't enough to save Chrysler from further decline.
"It is not in Mercedes' interest to share with Chrysler," he said. "And it can be argued that passing on that hardware and engineering to Mercedes-Benz standards would make Chrysler vehicles so expensive that buyers would not be prepared to pay the price."
Joint development of Chrysler and Mitsubishi small and mid-sized cars offers the potential for greater savings. The vehicles will share platforms and most likely assembly plants.
The strategy will shift responsibility for cars to Mitsubishi, allowing Chry-sler to concentrate on light trucks.
There are obstacles. Mitsubishi and Chrysler share only 10 percent of their supply base, so there is little overlap. Mitsubishi already is two years into developing the Galant and Eclipse replacements scheduled to share a platform with the Dodge Stratus and Chrysler Sebring.
By sharing small- and medium-sized car platforms, Chrysler and Mitsubishi should be able to realize the cost savings that have largely eluded the Chrysler and Mercedes-Benz sides of the German company.
Also, Mitsubishi is shifting more of its purchasing outside of Japan to reduce its exposure to currency swings. That could allow Chrysler to mollify some of the suppliers it has offended with its heavy-handed demands for lower prices, by helping them sell more parts to Mitsubishi in Japan.
3. Cultural differences"There was indeed a cultural problem with this merger," Manfred Gentz, CFO of DaimlerChrysler, has admitted in published reports.
Management styles were different, language problems hampered communication, and the Germans began exerting control early - even if no one wanted to admit it publicly for nearly two years.
The result: Morale plummeted, and all 12 members of Chrysler's so-called "dream-team," the senior executives who had turned the company into a hot property by the mid-1990s, left. Scores of others followed, voluntarily and otherwise. Schrempp fired then-President Jim Holden for advocating what Schrempp's new lieutenants are doing today.
The fix: Zetsche is working hard to boost morale. He speaks fluent English and is an ardent admirer of the United States. He has resisted bringing his own managers and created and empowered American managers as his lieutenants. He has even won over the UAW.
Analysts are impressed with Zetsche. After an Oct. 30 presentation to the New York bank JPMorgan Chase, the firm's analysts lauded Zetsche, Bernhard and George Murphy, head of marketing, in a report to clients.
"This is a high-quality management team whose determination, we believe, is not being fully appreciated," they wrote.
4. Misunderstanding of U.S. volume marketZetsche and Schrempp have beaten the drum often about weaning Chrysler from incentives, saying they would rather give up market share than sacrifice profits by giving vehicles away.
The stance reflects a basic lack of understanding about the U.S. market: Americans demand rebates, low financing and other discount tricks as part of purchasing vehicles.
In contrast, German management is accustomed to ruling the distribution chain at home with an iron fist. Last month DaimlerChrysler was fined $66.5 million by the European Commission for prohibiting Mercedes dealers in Belgium, Germany and Spain from selling to people who did not live in those countries.
The result: Soon after Zetsche and Bernhard assumed their new posts, Chrysler took back $500 per vehicle in dealer incentives and subsidies. Once heralded for having superior relations with its dealers, Chrysler faced a revolt. It backpedaled and has revised the program several times.
The fix: Zetsche has tried to wean Chrysler from incentives by adopting a Mercedes-Benz strategy - cut prices across the board and reduce dealer margins. Both strategies allow little wiggle room in negotiating - a tactic that has allowed Mercedes-Benz to sell at close to list price with nearly no incentives.
Chrysler's 2002-model prices have been cut an average 0.9 percent and as much as $2,000 on some models to reflect transaction prices.
But Chrysler has been forced to follow General Motors and Ford Motor Co. in offering 0 percent financing. When 0 percent didn't yield high enough sales, Chrysler launched a seven-year/100,000 powertrain warranty on vehicles purchased by Dec. 31.
Susan Jacobs, whose New Jersey consulting firm, Jacobs & Associates, tracks the luxury segment, doubts Chrysler's ability to get off the incentives merry-go-round.
"They are trying to price Chrysler volume products like a Mercedes-Benz, and it's not likely to work in this market," she said.
5. No shareholder confidencePerhaps most damning, Schrempp's vision has failed to produce the most basic promise of a merger: an increase in shareholder value. In fact, it has erased it.
The new company's stock price zoomed to a high of $108.62 per share in January 1999, but has fallen steadily. It hit a low of $25.60 in September before recovering to its present trading range in the mid-$30s.
The result: DaimlerChrysler today is worth about $74 billion less than it was before the merger. Shareholders have filed several lawsuits in Germany, and the U.S. mainstream brokerage houses have taken the stock off their buy lists.
The fix: None is in sight.
Schmidt recommends DaimlerChrysler follow the example of BMW AG, which dumped the ailing Rover Group after owning it for only six years.
"Chrysler has turned into a millstone around the neck of Mercedes-Benz," he said. "Were it not for Chrysler, Mercedes-Benz would be rolling in money. Look at BMW: Their profitability is now obscene. It is a money-printing machine."
Staff Reporter James B. Treece in Tokyo contributed to this report