STUTTGART - Whenever Juergen Schrempp and other DaimlerChrysler executives talk about their recovery plan, they try to avoid giving any impression of similarities between the BMW-Rover disaster and the situation they now face.
But they can't. It is clear that if Rover was BMW's 'English Patient,' then the Chrysler group is DaimlerChrysler's 'American Patient.'
Now pressure is mounting on Schrempp to take the kind of drastic measures BMW took a year ago when it discarded Rover Group.
The similarities are striking.
Euphoria: Both the Daimler-Benz-Chrysler deal in 1998 and BMW's acquisition of Rover in 1994 were greeted with euphoria. Problems were glossed over.
BMW wanted to expand into the mass market without compromising its brand identity. So then-BMW boss Bernd Pischetsrieder and supervisory board Chairman Eberhard von Kuenheim bought Rover. BMW insiders who questioned whether Rover was the right vehicle for the strategy - such as former board member Wolfgang Reitzle - were ignored.
Daimler-Benz wanted to become a global player in all segments. So Schrempp and chief strategist Eckhard Cordes, now board member in charge of heavy trucks, bought Chrysler and later a controlling stake in Mitsubishi Motors. Those insiders who suggested strategic alliances - without capital ties and transatlantic legal complexities - went unheard.
No due diligence: Decisions were based on visions, not facts. Indeed, there was no due diligence process before either deal. The acquisition of Rover Group by BMW was handled without the support of an investment bank. Daimler-Benz apparently sought the advice of Goldman Sachs, but only to make the deal happen, not to research its implications formally.
'There was no due diligence,' said Juergen Hubbert, DaimlerChrysler board member for Mercedes-Benz and Smart in a recent interview with Automotive News Europe.
Chrysler CEO Dieter Zetsche said: 'There is no merger that includes due diligence.'
In a document given to shareholders in September 1998 - before the Daimler-Benz-Chrysler deal was final - the two companies made extremely optimistic earnings forecasts. The report forecast 2000 pre-tax profits of $6.26 billion for the Chrysler side of the business. But the numbers simply were put together from what then-Chrysler executives Robert Eaton, Tom Stallkamp and Jim Holden had told Schrempp. Nobody, not even Goldman Sachs, checked the figures for their plausibility. In fact, the Chrysler unit posted an operating loss of $1.7 billion for the second half of last year.
Signs of imminent disaster unnoticed: Since it failed to go through the screening process, the new owners didn't notice the signs of imminent disaster. At Rover, BMW found run-down production plants, overstaffing, low productivity, poor quality and increasing costs as the British pound rose in value. Rover's weak brand image and lack of future product plans were not grasped fully until years after the acquisition.
Daimler-Benz management was blinded by Chrysler's profits. They overlooked the poor timing of model changes, excessive inventories, steadily rising incentives and the declining attractiveness of the Chrysler brand in an increasingly competitive American market.
'We didn't see these signs because of the big numbers,' Hubbert said. 'It is so easy to have a $5.1 billion operating profit when you sell 3.2 million cars with a margin of $1,600 (per unit). But this might not be enough if you come into critical times. We didn't see that, we just said, `wonderful, $5.1 billion, fantastic.''
Slow reaction: Both German headquarters were slow to react to the problems. BMW took a hands-off approach at Rover - relying on the same management team that had led the company into losses. BMW finally dispatched a turnaround team to England in late 1998. The team was led by former BMW board member Wolfgang Ziebart, now CEO of Continental Automotive Systems in Frankfurt.
Ziebart addressed quality, productivity and cost problems. He began billing suppliers in euros instead of pounds and shifted parts sourcing from local suppliers to those on the Continent.
He also delayed the launch of the badly needed Rover 75 for six months to ensure a quality level close to BMW standards.
At DaimlerChrysler, Juergen Schrempp last November sent Zetsche and Wolfgang Bernhard as COO to Auburn Hills. They quickly put in place a restructuring program, addressing the mismanagement of their American predecessors. The Americans had run the company virtually independently, away from Stuttgart headquarters.
Zetsche and Bernhard took measures to reduce overcapacity and overstaffing. Six plants will be closed and 26,000 jobs cut. Suppliers are being asked to contribute a 5 percent price reduction per year until 2003.
Need for growth in mass market: Both BMW and Daimler-Benz had felt the need to grow in the mass market. But BMW Chairman Joachim Milberg said recently: 'The approach of a premium car manufacturer does not fit with one of a mass-production manufacturer.
'We had to learn it the hard way,' he said. 'When BMW realized this principal problem, the company tried to change the brand image of Rover. We were trying to position Rover as higher, more classy, to justify BMW development, production and quality standards and to receive higher margins. But this attempt failed due to the weak brand image of Rover.'
In Chrysler, Daimler-Benz bought an established mass-market brand that should have become the base for the group's small-car strategy. But only a year after the acquisition, DaimlerChrysler executives knew that the strategy would fail. The problem: Chrysler's image does not fit with subcompact or micro cars. Now Chrysler's strategy has changed from mass to class. It will aim for more profitable niches, as with the hot-selling PT Cruiser. The role of the mass producer will be assumed by Mitsubishi.
Imperfect matches: Though the BMW-Rover and Daimler-Benz-Chrysler deals were praised for their complementary product portfolios, neither were perfect matches. Because their different drive concepts are regarded as essential brand values (BMW and Mercedes-Benz use rear-wheel drive, Rover and Chrysler front-wheel drive), component sharing was limited and platform sharing was almost impossible. Synergies were gained mainly by merging the purchasing power.
Meanwhile, the BMW X5, though meant to attract different customers, hurt Land Rover Discovery and Range Rover sales. The BMW 3 series and Rover 75 were perceived as competitors. The Mercedes-Benz M class collided with the Jeep Grand Cherokee, seriously hitting one of Chrysler's most profitable product lines.
Zetsche says Chrysler will share platforms and components with Mitsubishi to cut costs. Though both companies are direct competitors in various product lines, this approach makes more sense since both use front-wheel drive. But Mitsubishi must also be turned around first -financially and in terms of quality. Nothing would harm Chrysler's image more than teaming up with a low-quality producer.
n Shareholders lost patience: The main shareholders of both companies lost patience as the stock price depreciated. The management and strategic changes at BMW were initiated by former supervisory board chairman Eberhard von Kuenheim and current chairman Volker Doppelfeld. Before the Quandt family - which owns almost 50 percent of BMW - increased the pressure, they decided that Pischetsrieder should be fired. One year later, Milberg led the separation from Rover and Land Rover.
There also is pressure from DaimlerChrysler's big stakeholders. Kirk Kerkorian, the American who is a major DaimlerChrysler shareholder, filed a lawsuit after Schrempp told the Financial Times that the 'merger of equals' was intended to be a takeover.
Sources at Deutsche Bank - DaimlerChrysler's lead shareholder with almost 13 percent of the company - say bank CEO Rolf Breuer and his designated successor Josef Ackermann are fed up with waiting for their shares to rise. They took action in December, ordering that a strategy paper be prepared. According to the sources, one of the alternative strategies spelled out is to spin off Chrysler, replace Schrempp with a manager with a strong reputation in the financial community, and replace Hilmar Kopper, chairman of the DaimlerChrysler supervisory board.
At the World Economic Forum in Davos, Switzerland in February, Breuer threatened to sell the bank's DaimlerChrysler stock. He also confirmed that Deutsche Bank and J.P. Morgan are working together to prepare a defense of the company against a possible unfriendly takeover.
Spinoffs: Financial markets rewarded BMW's disposal of Rover and Land Rover shares. BMW management and engineering resources now can be used for what BMW does best - to develop and market sporty and desirable premium cars.
Now the pressure mounts on Schrempp to spin off Chrysler. Last November, Schrempp told Automotive News Europe: 'Spinning off Chrysler would be the ultimate in stupidity.'
But things have changed plenty since then.