The Failure of Daimler and Chrysler – A Paper Merger - What next?

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October 31, 2007

February 14th, 2007, Dieter Zetsche, Daimler Chrysler CEO stated publicly all options were on the table when it came to Chrysler Group's future. This came as part of a planned announcement to outline a restructuring of the division. On August 3rd, Cerberus Capital Management formally took over 80.1% of Chrysler. What began as a “merger of equal” was unwound and after a decade long drama finally concluded. What went wrong?

It can be argued that it all started back in 1979 when the government bailed out the near bankrupt Chrysler Corporation. Instead of letting the market economy work, the government stepped in and guaranteed loans to Chrysler. In no time, the rollercoaster ride began with Chrysler inventing the minivan, subsequent purchase of AMC (Jeep) and starting the SUV craze resulting in record profits. Then, in the late 1980’s Chrysler faced another brush with death only to find "style" with a string of successful, forward looking vehicle and again becoming the worlds lowest cost, highest profit auto maker. Chrysler had become the darling of Wall Street and also in the eyes of Jurgen Schremp, the CEO of Daimler-Benz who was looking to create a global transportaion giant.

Schremp had a vision, that of creating through acquisitions a truly global automotive company. Chrysler would be the first addition to his envisioned empire and in 1998, Chrysler agreed, resulting in the largest industrial merger at the time. The stock ticket symbol DCX was born with Schremp, hoping to make the X mean something more.

Therefore, looking at the situation, DCX’s integrations of Chrysler failed because Schremp’s strategy and vision for the new company fell apart before it was begun. In the end, Schremp was forced out and Chrysler is once again a stand alone entity under private ownership.

What happened or did not happen can be second guessed forever. But, the important things to consider are, Chrysler then as now is a US dependent company with all but no market share in the rest of the world. It seemed very early on in the merger, a decision was made to keep Auburn Hill, MI based Chrysler Group separate from the Stuttgart based Mercedes Group post merger. Therefore, to maximize Chrysler and cover the Asian, European and emerging markets, DaimlerChrysler needed to ally with other regional players.

During this period, Schremp wanted to align with Japanese Honda to cover the globe. Honda was not interested. At this time Nissan was teetering on bankruptcy and a candidate but Schremp was vetoed by his managers. Hence, DCX settled on minority equity stakes in Hyundai and Mitubishi.

Early in this decade the relationships with Hyundai and Mitsubishi began to unravel. This is important because the proper partner for Chrysler to rationalize economics of scale and scope never fully materialized. It seemed a wholesale integration of Chrysler with Mercedes Benz was not an option. Subsequently, with limited partnerships, Chrysler Group was continued to be run and operated as a separate organization within Daimler and being highly dependent on the US market. Chrysler was in practice, an independent financial entity and could continue to operate if there was no Daimler parent.

Chrysler began to fail in spite of the merger, not because of it. Chrysler’s financial deterioration began soon after, leading into their financial collapse in 2000-2001. There are some who have blamed the merger and German management on the failure of Chrysler. At this time the only real merger between the two organizations was the name on the front of buildings.

Continuing, Chrysler Group earned a $5B operating profit in 1999, a subsequent $500M profit in 2000 culminating in $5B loss in 2001 and another $5B loss in 2002. These losses reflect Chrysler Group not controlling their inventories and growing the company beyond their place in the market with excess plants and head count. And as a result Chrysler was forced to heavily incentivise and rely on low to no profit rental fleets to sell their product. Chrysler Group’s cash flow position vaporized in that time to fund the buyouts, other restructuring charges and to put into place new product programs in the hope of growing out of their problems.

Fast forward 5- 6 years and Chrysler has completely refreshed their product offerings including entering into new markets and yet the financial picture had deteriorated because of lack of inventory control, lack of retail demand and a heavy reliance on fleet sales to prop up their sales numbers. This resulted in a year operating loss of $1.5B for 2006. In the years prior to the recent financial problems, Chryslers operating profits have been meager ranging from a $500M loss in 2003 to $1.5B profit in 2004 and 2005. Chrysler Groups profits have been so meager; they have not refilled their liquidity position that was initially used to fund the earlier restructuring and product development. In the best of years in the 1990s Chrysler was making $5-6B a year in profits.

Even though Chrysler spent heavily on new product programs, the issue Zetsche had to grapple with earlier this year was the new product had not been successfully received in the market and Chrysler needed to be restructured, yet again. Also, 2007 was a contract year with the UAW and Chrysler Group needed to come to terms with their escalating labor and healthcare burden.

During earlier restructurings under Daimler, Chrysler never recovered from their pre-merger highs as the financial results show. Chrysler Group also continued to operate as a separate entity within DCX. Therefore, Chrysler’s financial problems since the merger have been of their own making. The problems at Chrysler since the merger can be generalized as Chrysler's problems. Chrysler was so separated from the Mercedes Group and the parent organization, an employee of Chrysler once told me, DCX could use a spoon to cut the umbilical cord attaching the Chrysler Group to the rest of DCX.

With the recent purchase of Chrysler by Cerberus Financial, that is exactly what did happen. It is my contention that Cerberus has purchased the same old Chrysler with the same old problems prior to the 1979 government bail out. Little has changed and Chrysler as an organization continues to lack internal discipline, a lack of focus on the customer with relevant product and global efficiency.

Recently, I have read some old documents related to the 1979 government bail out and the above issues were cited as problems with Chrysler. That was almost 30 years ago. Finally, Daimler for whatever reason did not instill systemic change in Chrysler, instead choosing to maintain the status quo.

With that, Chrysler is still the same old Chrysler that had a good run, if it be an inconsistent run in the 1990s, leading into the company being sold to Daimler and then Daimler selling to Cerberus. With Chrysler’s financial problems, diminishing retail sales and relevance in their only market, their fate is very uncertain.

In closing, I am reminded of BMW’s foray with the mass market manufacturer British Rover in the late 1990s. After a number of tumultuous years this resulted in the firing of their CEO and subsequent sale of Rover to a private equity firm. I have to ask, where is Rover now?

Updated January 18, 2009 to add the following two resources on the DaimlerChrysler merger:

The DaimlerChrysler Merger, Dartmouth, 2002

Daimler and Chrysler: What the Deal Could Mean, Business Week, May 7, 1998

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