Daimler Acquires Chrysler—Anatomy of a Cross-Border Transaction

question 23

Essay

Daimler Acquires Chrysler—Anatomy of a Cross-Border Transaction

The combination of Chrysler and Daimler created the third largest auto manufacturer in the world, with more than 428,000 employees worldwide. Conceptually, the strategic fit seemed obvious. German engineering in the automotive industry was highly regarded and could be used to help Chrysler upgrade both its product quality and production process. In contrast, Chrysler had a much better track record than Daimler in getting products to market rapidly. Daimler’s distribution network in Europe would give Chrysler products better access to European markets; Chrysler could provide parts and service support for Mercedes-Benz in the United States. With greater financial strength, the combined companies would be better able to make inroads into Asian and South American markets.

Daimler’s product markets were viewed as mature, and Chrysler was under pressure from escalating R&D costs and retooling demands in the wake of rapidly changing technology. Both companies watched with concern the growing excess capacity of the worldwide automotive manufacturing industry. Daimler and Chrysler had been in discussions about doing something together for some time. They initiated discussions about creating a joint venture to expand into Asian and South American markets, where both companies had a limited presence. Despite the termination of these discussions as a result of disagreement over responsibilities, talks were renewed in February 1998. Both companies shared the same sense of urgency about their vulnerability to companies such as Toyota and Volkswagen. The transaction was completed in April 1998 for $36 billion.

Enjoying a robust auto market, starry-eyed executives were touting how the two firms were going to save billions by using common parts in future cars and trucks and by sharing research and technology. In a press conference to announce the merger, Jurgen Schrempp, CEO of DaimlerChrysler, described the merger as highly complementary in terms of product offerings and the geographic location of many of the firms’ manufacturing operations. It also was described to the press as a merger of equals (Tierney, 2000). On the surface, it all looked so easy.

The limitations of cultural differences became apparent during efforts to integrate the two companies. Daimler had been run as a conglomerate, in contrast to Chrysler’s highly centralized operations. Daimler managers were accustomed to lengthy reports and meetings to review the reports. Under Schrempp’s direction, many top management positions in Chrysler went to Germans. Only a few former Chrysler executives reported directly to Schrempp. Made rich by the merger, the potential for a loss of American managers within Chrysler was high. Chrysler managers were accustomed to a higher degree of independence than their German counterparts. Mercedes dealers in the United States balked at the thought of Chrysler’s trucks still sporting the old Mopar logo delivering parts to their dealerships. All the trucks had to be repainted.

Charged with the task of finding cost savings, the integration team identified a list of hundreds of opportunities, offering billions of dollars in savings. For example, Mercedes dropped its plans to develop a battery-powered car in favor of Chrysler’s electric minivan. The finance and purchasing departments were combined worldwide. This would enable the combined company to take advantage of savings on bulk purchases of commodity products such as steel, aluminum, and glass. In addition, inventories could be managed more efficiently, because surplus components purchased in one area could be shipped to other facilities in need of such parts. Long-term supply contracts and the dispersal of much of the purchasing operations to the plant level meant that it could take as long as 5 years to fully integrate the purchasing department.

The time required to integrate the manufacturing operations could be significantly longer, because both Daimler and Chrysler had designed their operations differently and are subject to different union work rules. Changing manufacturing processes required renegotiating union agreements as the multiyear contracts expired. All of that had to take place without causing product quality to suffer. To facilitate this process, Mercedes issued very specific guidelines for each car brand pertaining to R&D, purchasing, manufacturing, and marketing.

Although certainly not all of DaimlerChrysler’s woes can be blamed on the merger, it clearly accentuated problems associated with the cyclical economic slowdown during 2001 and the stiffened competition from Japanese automakers. The firm’s top management has reacted, perhaps somewhat belatedly to the downturn, by slashing production and eliminating unsuccessful models. Moreover, the firm has pared its product development budget from $48 billion to $36 billion and eliminated more than 26,000 jobs, or 20% of the firm’s workforce, by early 2002. Six plants in Detroit, Mexico, Argentina, and Brazil were closed by the end of 2002. The firm also cut sharply the number of Chrysler. car dealerships. Despite the aggressive cost cutting, Chrysler reported a $2 billion operating loss in 2003 and a $400 million loss in 2004.

While Schrempp had promised a swift integration and a world-spanning company that would dominate the industry, five years later new products have failed to pull Chrysler out of a tailspin. Moreover, DaimlerChrysler’s domination has not extended beyond the luxury car market, a market they dominated before the acquisition. The market capitalization of DaimlerChrysler, at $38 billion at the end of 2004, was well below the German auto maker’s $47 billion market cap before the transaction.

With the benefit of hindsight, it is possible to note a number of missteps DaimlerChrysler has made that are likely to haunt the firm for years to come. These include paying too much for some parts, not updating some vehicle models sooner, falling to offer more high-margin vehicles that could help ease current financial strains, not developing enough interesting vehicles for future production, and failing to be completely honest with Chrysler employees. Although Daimler managed to take costs out, it also managed to alienate the workforce.
-What are the major cultural differences between Daimler and Chrysler?

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Definitions:

Army Officers

Military personnel who hold positions of authority and command within an army, responsible for leading and managing soldiers.

Three Skill Model

A leadership model suggesting that effective leaders require a combination of technical, human, and conceptual skills.

Leadership

The act of guiding or managing a group of people or an organization.

Katz

Refers to a model developed by Robert Katz that identifies three essential managerial skills: technical, human, and conceptual.