In 1998, after Germany’s Daimler-Benz acquired Chrysler, the third largest U.S. automobile manufacturer, to form DaimlerChrysler, many observers thought that Chrysler would break away from its troubled U.S. brethren, Ford and General Motors, and join ranks with the Japanese au- tomobile makers.
The strategic plan was to emphasize bold design, better product quality, and higher produc- tivity by sharing designs and parts between the two com- panies. Jurgen Schrempp, the CEO of the combined com- panies, told shareholders to “expect the extraordinary and went on to say that DaimlerChrysler “has the size, profitability and reach to take on everyone.”
Eight years later, the grand scheme has proved extraor- dinary, but for all of the wrong reasons. In 2006, Chrysler saw its market share fall to 10.6%, and the company an- nounced that it would lose $1.26 billion in 2006. This shocked shareholders, who had been told a few months earlier that the Chrysler unit would break even in 2006.
What went wrong? First, Schrempp and his planners may have overestimated Chrysler’s competitiveness prior to the merger. Chrysler was the most profitable of the three U.S. auto companies in the late 1990s, but the U.S. economy was very strong and the company’s core offer- ing of pickup trucks, sport utility vehicles (SUVs), and minivans were the right product for a time of low gas prices. After the merger, the Germans discovered that Chrysler’s factories were in worse shape than they had thought, and product quality was poor.
Second, sharing design and engineering resources, and parts, between Daimler’s Mercedez-Benz models and Chrysler proved to be very difficult. Mercedez was a luxury car maker, Chrysler a mass-market manufacturer, and it would take years to redesign Chrysler cars so that they could use Daimler parts and benefit from Daimler engineering. Nor did Daimler’s engineers and managers seem enthusiastic about helping Chrysler, which many saw as a black hole into which a profitable Mercedes-Benz line would pour billions of euros. To be fair, the new cars that Chrysler did produce, in- cluding the 300C sedan and the PT Cruiser, garnered good reviews.
Sales of the 300C were strong, but not strong enough to shift the balance of Chrysler’s business away from the small-truck segment. Despite several years of financial struggle, by 2004, it looked as if things might finally be turning round at Chrysler. In 2004 and then again in 2005, the company made good money. The company actually gained market share in 2005. Dieter Zetsche, Chrysler’s German CEO, hoped to capitalize on this with the introduction of a new SUV, the seven-seat Jeep Commander. Launched in mid-2005, the timing of the Commander could not have been worse.
In 2005, the price of oil surged dramatically as strong demand from developed nations and China combined with tight supplies (which were made worse by supply disruptions caused by Hurricane Katrina). By mid-2006 oil had reached $70 a barrel, up from half that just eighteen months earlier, and gas prices hit $3 a gallon. To make matters worse, Ford and General Motors, who themselves were hemorrhaging red ink, were engage in an aggressive price war, offering deep incentives to move their own excess inventory, and Chrysler was forced to match prices or lose much share.
Meanwhile, Japanese manufacturers, particularly Toyota and Honda, who had been expanding their U.S. production facilities for fifteen years, were gaining share with their smaller fuel-efficient offerings and popular hybrids. In September 2006, Chrysler announced that due to a buildup of inventory on dealers’ lots, it would cut produc- tion by 16%, double the planned figure announced in June 2006. In addition to slumping sales, Thomas LaSorda revealed that the company was facing sharply higher costs for its raw materials and parts, some of which were up as much as 60%.
Chrysler was also suffering from high health care costs and pension liabilities to its unionized work force. Scrambling to fill the gap in its product line, Chrysler announced that it might enter into a partnership with China’s Chery Motors to produce small fuel-efficient cars in China, which would then be imported into the United States. 57 Case Discussion Questions 1. What was the planned strategy at Daimler-Benz for Chrysler in 1988? 2. In retrospect, Daimler-Benz’s plans for Chrysler seemed overoptimistic.
What decision-making errors might Daimler-Benz have made in its evaluation of Chrysler? How might those errors have been avoided? 3. What opportunities and threats was Chrysler facing in 2005 and 2006? What were Chrysler’s strengths and weaknesses? Did its product strategy make sense given these considerations? 4. Why did Chrysler get its forecasts for product sales and earnings so wrong in 2006? What does this teach you about the nature of planning? 5. What must Chrysler do now if it is to regain its footing in this industry?