Big Losses, Little Synergy at DaimlerChrysler
S T U T T G A R T, Germany, Dec. 28, 2000 -- Chrysler designer Kevin Verduyn had aproblem back in 1998: he didn’t have an engine small enough to fitthe Java concept car, his sweet new model aimed at the Europeanmarket.
Things started looking up, however, when German auto giantDaimler-Benz AG completed its $36 billion takeover of the Americancarmaker that same year. Verduyn grabbed the engine and suspensionfrom the Mercedes A-series compact, stuck them into the Javaprototype and wowed auto buffs at the 1999 Frankfurt Auto Show.
“That’s where we were in luck with the merger,” said Verduyn, who works at DaimlerChrysler’s advanced design center in Carlsbad, Calif.
It seemed an auspicious beginning for a merger sold to investorsas combining the best of both companies and at the same time saving$3 billion a year. But earlier this year the Java was shelved,reportedly in part because it would compete against the existingMercedes A-series for buyers.
Road BlocksSo instead of blazing a trail to integration, the Java — theonly car to date that combined parts from both Daimler and Chrysler— stands as testimony to the merger’s wasted potential.
Failed synergies are a flashpoint in a merger plagued withproblems — a brain drain of Chrysler’s executive talent, culturalclashes between German and American management, and a battle forfinancial control over the loss-making U.S. division.
Skeptical shareholders bailed out, driving DaimlerChrysler’sstock price to less than half its post-merger high of $101 pershare, making the combined company worth less today thanDaimler-Benz alone before the deal.
The Man Behind the PlanThe backlash has focused on DaimlerChrysler Chief ExecutiveJuergen Schrempp. The charismatic German masterminded the mergerwith promises of greater shareholder value, but is currently heresiding over one of history’s biggest losses in that category.
A driving force behind the deal was Daimler’s need to get moremileage out of Mercedes’ massive research and development spending.The company spends up to a quarter of its budget on new technology,and plans to fork out an additional $45 billion by 2003.
The hope remains to find additional uses for the combinedcompany’s long list of inventions — among them, ceramic brakes,onboard navigation systems and safety features such as Distroniccruise control, a system that automatically slows a car when itgets too close to cars ahead of it.
“We cannot stay alone. We need economies of scale,” Mercedeschief Juergen Hubbert admitted at his division’s 100th birthdaybash earlier this month.
Technical DifficultiesIn the merger’s first year, DaimlerChrysler delivered more than$1 billion in savings by combining such things as purchasing andback office functions. But problems erupted this year when thecompany shifted into Phase 2 — the sharing of parts and components.
The company has unveiled limited cooperation plans this year,including a goal to outfit Jeep Cherokees and Chrysler’shot-selling PT Cruiser with Mercedes diesel engines, and to buildMercedes transmissions for Chrysler at a plant in Indiana. Butthere is no timeline for the engine swap, and the Mercedestransmissions won’t be produced until 2004.
Part of the problem is sharing technology can take as long as 10years, and analysts say real part-sharing synergies shouldn’t beexpected until 2005 or 2006.
“They’re not just going to pull out Chrysler models and throwin Mercedes parts,” said Thomas Aney, an auto analyst withDresdner Kleinwort Benson. “It has to be phased in, engineered in.It takes time.”
Shareholders waiting at least for concrete plans that morecooperation was in the pipeline instead got the converse — openfretting that sharing Mercedes parts with downscale Chrysler wouldsully the Mercedes image.
Management in Stuttgart loves its flagship brand so much thatthe Mercedes three-prong star is the only company logo crowning thejoint company’s sprawling world headquarters. DaimlerChrysler evenforbids even selling Mercedes and Chryslers on the same lot inGermany in order to preserve the Mercedes mystique.
At the same time, Chrysler at times rejected Mercedes technologybecause it would drive up price tags with luxury features thatcost-conscience U.S. consumers don’t care about.
Unhappy ShareholdersAs the year winds down, DaimlerChrysler executives are hustlingto cash in on more cooperation — largely in response to a wave ofrecent analyst downgrades and investor lawsuits. Most notable amongthe legal actions was a $9 billion lawsuit filed in November by thecompany’s third largest shareholder, U.S. financier Kirk Kerkorian,that accuses Schrempp of falsely telling Chrysler shareholders thatthe deal was a “merger of equals.”
One cooperative avenue being used involves the company’s 34percent stake in Japanese mass automaker Mitsubishi Motors, acompany the former Chrysler had a history of working with.
In a Dec. 18 letter that warned investors of huge fourth-quarterlosses at Chrysler, Schrempp said, “Our Asian partners will bemodernizing their products in coordination with us. ŋ Differentbrands will develop different models for different regions, butwhere appropriate share components and systems.”
Analysts expect DaimlerChrysler’s share price to languish andits bottom line to suffer in the near future as Schrempp tries torevive the Chrysler division, which posted a $512 million loss inthe third quarter and warned of $1.2 billion in red ink for thefourth quarter.
Necessary SacrificesSchrempp has proven that he knows how to make tough decisions toprotect the bottom line.
In 1995, he was boss of Daimler-Benz’s aerospace unit, whichchalked up large losses mainly due to a Schrempp-driven takeover oftroubled Netherlands-based aircraft maker Fokker.
Despite calling the aircraft subsidiary “my love baby” at thetime of the merger, Schrempp admitted he had made a mistake as heturned his back on the money-draining partner, cutting it loose in1996 while absorbing a $4.1 billion loss.
“Profit comes before business volume,” Schrempp said at thetime, adding that he owned it to shareholders not to let Fokkerdrag his company down.