When DaimlerChrysler was created one year ago, it boldly declared it would become the world's leading automotive company for the 21st century. A merger of equals. A perfect fit.
Not by a long shot, judging by the first year.
Merger savings were modest. Chrysler shareholders have gained money since the merger was announced in May 1999, but Daimler-Benz AG shareholders have lost ground.
Chairmen Juergen Schrempp and Robert Eaton set out to integrate the two proud companies quickly. But after much soul searching, the company decided in September that it was too painful. The two halves of the company retreated into their cultural comfort zones.
'The fact that they are living separately right now I think is probably recognition of the problem,' says E. Han Kim, a professor at the University of Michigan Business School and an expert on mergers and acquisitions.
For now, both sides of the Atlantic are at relative peace as separate operations. And the most recent earnings report suggests the merger is starting to bear financial fruit.
But this quiet period cannot last if the merger ever will live up to its rhetoric - and fully satisfy shareholders. The company must find meaningful and long-term ways to boost sales and save money, such as significant sharing of components and platforms.
Eventually, some significant overlap must occur between the two automotive businesses to achieve any real synergies, said John Casesa, an automotive analyst with Merrill Lynch in New York. Wall Street was the first to judge that the merger was falling short of its initial promises.
The stock plunged from a 52-week high of $108.63 in January to a low of $65.31 in mid-September. It closed at $71.75 on Friday, Nov. 12.
Jim Holden, president of DaimlerChrysler's North American operations, acknowledged that the merger savings of $1.4 billion this year has been realized from short-term projects.
'We've barely scratched the surface,' Holden said. 'The big synergies going forward, on the automotive side at least, we couldn't even begin to get at. So the $1.4 billion is just the tip of the iceberg.'
The Automotive Council, a panel of executives including Holden from the company's three separate automotive divisions, will be responsible for seeking ways to combine operations, he said.
The company could still find huge savings by looking at componentry that has not yet been engineered, Holden said.
The goal is to find common architecture and componentry between the two automotive divisions, and possibly across the commercial truck division as well, he said.
However, it is not clear how soon DaimlerChrysler will achieve these savings. By keeping its auto operations separate, it sent a clear signal it was in no hurry to force common platforms and components.
And trans-Atlantic cultural differences irk both sides. For example, one high-ranking manager in Stuttgart who asked not to be named said: 'It seems that the Germans are a lot more devoted to their work than the Americans. There's never a discussion if the Germans have to jump on a plane for a meeting on Friday afternoon in America, and it is self evident that they use Saturday or Sunday for the return flight.'
But some American managers balk at having to travel on the weekend, the manager said.
'This tight schedule in a trans-Atlantic company seems not to be acceptable for them,' the manager said.
Eaton has asked for patience. Further integration will fall mainly on the Automotive Council, a panel of executives representing the three automotive units, he said.
'A lot of the stuff that they are starting to work on, where we're sharing components and things going forward, take a considerable amount of time to develop,' Eaton said. 'That will be the primary way that we drive synergies going forward. You're seeing some now. The Grand Cherokee will start using the Mercedes diesel engine and automatic transmission. We're working on new vehicles like the Java that will benefit tremendously from the components and so forth that the new company has.'
Day One - Nov. 17, 1998 - opened on an optimistic and festive note as DaimlerChrysler's stock began trading on the New York Stock Exchange. A single class of DaimlerChrysler stock is traded on 19 exchanges around the world.
But soon after integration teams began an exhaustive search for synergies, that is, ways to combine operations and reduce costs, the perfect fit began to create friction.
A handful of high-profile executives from the company's Auburn Hills, Mich., headquarters, left the company to work for competitors or retired. Morale suffered in Auburn Hills from poor communication and uncertainty.
DaimlerChrysler was dropped from Standard and Poor's 500 stock index, a move that took the automaker off the shopping list of index funds and some mutual funds. After second-quarter earnings failed to meet Wall Street expectations, the stock price plunged.
And there was more turmoil to come. Tom Stallkamp, the well-regarded president of North American operations and the man in charge of integrating the company, was replaced by Holden in a Sept. 24 management shake-up. The automaker's board of management was reduced from 17 to 14 members, further diluting the American voice at the top of the company.
Then, as if acknowledging that its merger plans were too ambitious out of the gate, DaimlerChrysler announced a new structure that essentially left the old companies intact. Instead of a combined automotive division, DaimlerChrysler has three independent automotive divisions.
Mercedes-Benz remains an island, carefully kept at arm's length from the Chrysler, Plymouth, Jeep, and Dodge brands. The American brands form their own division to carry on much like the old Chrysler Corp. Commercial trucks are the third vehicle division.
Holden, who is head of the Chrysler-Plymouth-Jeep-Dodge Division, stressed that the separate automotive divisions should not be misconstrued as a retreat from integration.
DaimlerChrysler realized that it must have the ability to run relatively autonomous automotive divisions and not become an automotive conglomerate, Holden said.
'What I'm reaffirming to our folks is there's an awful lot of great things that came as a result of the merger, but it doesn't mean that everything changes,' Holden said. 'There's also a great obligation inside each of those business units, and for me, the Chrysler-Plymouth-Jeep-Dodge business, to keep our eye on the ball of what made Chrysler the great company that Chrysler was before.'
Holden wants to maintain characteristics of the old Chrysler that made it successful - in particular, its speed, innovation and cost consciousness.
Although Holden does not see morale as a critical problem, he said communicating effectively must be a priority.
'With effective communication comes improved morale,' Holden said. 'I think we lost a little bit of our ability to communicate regularly and informally with our troops.'
Throughout DaimlerChrysler's inaugural year there was one constant. Eaton and Schrempp never tired of plugging the work of the integration teams as they scoured the company for ways to combine operations.
Eaton said the automaker will achieve or slightly surpass its $1.4-billion goal this year. The $1.4 billion represents 1 percent of gross revenues. If the company achieves its $3 billion target, that will represent about 2 percent of gross revenues.
'I think that's excellent results,' Eaton said.
Credit Suisse First Boston, which advised Chrysler during its merger deliberations, studied a variety of mergers. It found that cost savings from synergies were at a level of about 2 percent of revenues in a majority of the mergers studied.
The $1.4 billion realized this year is only a part of the potential synergy from this merger in the long term, said Casesa of Merrill Lynch. It is a good start based mostly on short-term measures, he said.
'It represents the kind of savings that can be achieved very quickly, and those are mostly in purchasing,' Casesa said.
Initially, the $1.4 billion that the company promised to deliver during the first year was considered a significant bonus, said Stephen Reitman, a Merrill Lynch automotive analyst in London. Shareholders expected strong performances on both sides this year in the automotive operations, he said.
'So, broadly, people were relaxed,' Reitman said.
But then DaimlerChrysler radically scaled back its earnings growth expectations in July, he said. So the savings gleaned from synergies were no longer a bonus, but a necessity to offset some of the margin squeeze in the company's automotive operations, Reitman said.
'So the merger synergies have taken on a deeper significance in a sense,' Reitman said.
Kim, of the University of Michigan Business School, sees dramatic potential that goes far beyond annual cost savings. But he says the company must deal with its culture clash first.
'If they can somehow overcome this huge difference in corporate culture, which is the problem that they are really facing, they can achieve their full potential of synergistic gains,' Kim said. 'It's not only the savings, but greater revenue, increased perception in terms of quality, and growth in the product line. I think that could be perhaps as big, or bigger, than this savings in cost.'
Kim believes that the company's U.S. operations have lost good executives leery of a German takeover.
'I think most of those people are gone,' Kim said. 'I think that was in part due to this culture clash between the German style of management and the American style of management, or the dominance of the Germans. When we look at these companies, really the biggest asset they have are people, and if you lose the people, that's it.'
Holden called the turnover minimal but very visible. DaimlerChrysler competes in a world market, and that means the company will lose a few people, he said.
The former Chrysler Corp. has become part of a bigger enterprise, and it is time to move on, Holden said.
A bigger enterprise, yes. But the company still has to show it's a better enterprise.
Dorothee Ostle of Automotive News Europe contributed to this report.