WHEN, two years ago, Daimler-Benz, Germany’s most profitable car company, and owner of the world-beating Mercedes marque, revealed that it was merging with Chrysler, the smallest but most efficient of America’s Big Three car producers, the two companies embarked on a cross-border deal based on what seemed to be impeccable industrial logic. Cross-border mergers are notoriously tricky.
For DaimlerChrysler to succeed requires cohesion not just between two headquarters, in Stuttgart and Auburn Hills, Michigan, but also between a host of offices and factories with different national and corporate cultures. To overcome such differences, the merged company took an unusual approach. In its pre-merger planning Daimler put little weight on the fact that the deal would be a cross-border one.
Apparently, it assumed that this would create no special problems. According to Eckhard Cordes, one of three Daimler managers to take part in the pre-merger discussions with Chrysler (the others were Jürgen Schrempp, the group’s chairman, and Jürgen Hubbert, a board member responsible for Daimler’s Mercedes-Benz car division), questions raised by the deal’s cross-border nature were not specifically asked until after its broad terms had been agreed.
Mr Cordes says that three big issues preoccupied the Daimler team. First, against a background of consolidation in the car industry, they were trying to put together two companies with strong and distinctive heritages, so how best could they do this?
Second, given that there was no precedent for such a merger, was the deal at all feasible? And third, were Daimler and Chrysler bold enough to manage the difficult task of post-merger integration successfully? None of these issues, says Mr Cordes, had an explicit cross-border element: they would have applied equally had the deal been between two German companies. The solution to post-merger integration, for instance, was to be ruthless over efficiency and planning, no matter where the deal.
At the same time, however, the questions were formulated in the knowledge that profound difficulties over differing locations and cultures would have to be tackled if the merger were to succeed. These difficulties were aggravated by a justifiable feeling among those on the American side that this was no merger of equals, but rather a deal in which Daimler was calling the principal shots.
Chrysler’s middle managers and engineers saw it as a sell-out to foreigners, and feared an invasion of rigid Teutonic working practices into their own rather freewheeling company. The potential clash of cultures was thus corporate as well as national: could a bunch of process-led German engineers work effectively with Chrysler’s hunch-inspired, risk-taking bosses?
Two cultures, one companyBy some measures, the fact that DaimlerChrysler has got as far as it has since 1998 has been nothing short of miraculous. Despite plenty of bumpy moments, the combination has held together. “We are absolutely happy with the development of the merger,” says Mr Hubbert. “We have a clear understanding: one company, one vision, one chairman, two cultures.”
DaimlerChrysler has surmounted barriers as simple but important as the time difference between Germany and America. Managers from both firms criss-cross the Atlantic in a stream of meetings and workshops, seeking ways to drive down expenses and share future development costs.
To reduce the wear-and-tear of constant travel, a specially converted aircraft helps them to catch up on sleep. In an ironic twist, DaimlerChrysler has leased space in New York’s Chrysler Building so that travel can be further reduced. Moreover, the new firm has continued to expand. On March 27th, for example, it announced a deal with loss-making Mitsubishi Motors of Japan, which should strengthen DaimlerChrysler’s plans for small cars. And on June 26th it spent $428m on a 10% stake in Hyundai of South Korea.
But by other measures, the merger has fallen far short of its designers’ vision. Until last autumn the companies were talking about maintaining two head offices, and the word “merger” was still in use. In fact, it is now acknowledged by people such as Mr Hubbert that Daimler, seeking to solve strategic problems of its own, had engineered a friendly takeover of America’s third car maker.
Two years on, problems abound. Some are financial. DaimlerChrysler has abandoned detailed discussion of the cost-saving targets it set for the new company, even though investors remain intensely interested. But the group has admitted that renewed and deep cost-cutting efforts have had to be undertaken to shore up the group’s operating results. On July 26th DaimlerChrysler duly announced second-quarter profits of $1.7 billion, slightly ahead of expectations.
But it also said that it was struggling to meet earlier projections of operating performance for the full financial year. And, tellingly, Mr Schrempp said the group urgently needed to improve its efforts to communicate its story to investors. This remark came after an abysmal period for the group’s share price, which has now fallen by more than 40% from a high of euro95.5 ($106) in 1999 (see chart). The stockmarket, at least, seems sceptical about the prospects for the merger.
Other problems are operational. Rumblings of discontent within the firm can still be heard. Competition in the car market is intensifying, especially in Chrysler’s home market and in the high-margin minivan sector that it has long dominated. As competitors such as Honda of Japan have produced their own vans, Chrysler’s efforts to hang on to market share have consisted largely of giving ever bigger discounts to dealers. But sales have stalled, and Chrysler recently began a new $2 billion cost-cutting programme to shore up its performance.
A few vehicles, notably the retro-styled PT Cruiser, have been successes, but the firm’s main roll-out of new models is still several months away. Even the deal with Mitsubishi is an admission that the transatlantic marriage was not enough: it united two complementary sets of products in America and Europe, but failed to remedy the weakness of both companies in the faster-growing Asian and Latin American markets. Eighteen months ago, Mr Schrempp wanted to invest in Nissan as an answer to Daimler’s Asian shortcomings. But he was overruled by his management board, which decided that Daimler could not digest two big acquisitions at once.
To the surprise of Renault, the rival bidder, Daimler walked away from a deal that would have made its reach global in a way that its takeover of Chrysler has not. Yet, despite these problems, it is too early to conclude that the merger has failed. Its true test will come in the next two or three years, when the first products developed entirely since the merger should start to roll off the production lines.
If DaimlerChrysler can show that it has translated operational efficiency into successful new cars and higher levels of profit, it will have proved that the deal’s underlying logic was sound. Even at this early stage, however, the merger offers some powerful lessons in the problems of combining firms in different countries.
Two sets of problemsThe business background to the deal shows why both companies were willing to take on such problems. By the mid-1990s Chrysler had survived near bankruptcy and a failed hostile buy-out launched by Kirk Kerkorian, a corporate raider who was its biggest single shareholder.
Chrysler was lean and had trendy designs, but where was it going? Its advisers, Credit Suisse First Boston, prepared a paper outlining six strategic options. According to a recent book by two Detroit News journalists, they all consisted of some form of alliance with the Germans (see article). Desultory talks had taken place between the two companies in 1995. But Bob Eaton, Chrysler’s chairman, believed that sooner or later he would have to throw in his lot with another car company. So when, in 1997, Mr Schrempp sought to reopen talks with Chrysler, he got a friendly reception.
Not that everything was friendly thereafter. In particular, Mr Eaton took plenty of personal flak after he announced that he intended to stand down as co-chief executive within three years. Yet, judging by DaimlerChrysler’s performance since the merger, Mr Eaton may deserve more credit for strategic insight than he has had. In return for accepting junior status in the merger, he obtained a big premium for Chrysler shareholders. Had it remained independent, Chrysler would be in a horrid position today.
Even so, the merger could have been better handled. By focusing on general issues rather than cross-border ones, the two companies underestimated a factor that would define, and could even scupper, the entire deal. Throughout the negotiations, even after integration began, cross-border problems surfaced, demanding attention. But top managers on both sides seemed to prefer sidling up to potential hurdles rather than meeting them head on. Consider, for instance, the task of melding two distinct ways of doing business. Old Daimler was bureacratic and formal.
A standard meeting of senior managers would generate thick wads of papers and lengthy minutes. After months of influence by the American’s more spontaneous behaviour, most presentations are now oral, and a one-page memo then summarises proceedings. Some barriers have been harder to overcome. At the time of the merger, senior Chrysler managers became rich, as share options suddenly became hugely valuable. That triggered concern in Germany that Daimler bosses might become greedy. But it also served to highlight deep-rooted differentials in pay.
Typically, the Americans were taking home two, three or even four times as much as their German equivalents. At the same time, the Americans were aghast at what they viewed as German profligacy over expenses. Some Daimler executives routinely travelled first class to get to meetings, or stayed at top-flight hotels over weekends. For these cultures to meet in the middle will take time and the acceptance by both sides of new approaches.
One thing that has made the merger easier is that neither company conformed entirely to the American or Teutonic stereotypes, particularly at the level of top management. By the time the two got talking, Chrysler was no longer the funky Detroit company that in the 1980s had come back from the dead through then chief executive Lee Iacocca’s sheer flair. Its chairman, Mr Eaton, was a cautious, reserved former GM manager with all the buttoned-down instincts of a GM engineer. Daimler-Benz, for its part, was under the spell of Mr Schrempp, who had spent the formative periods of his adult life in South Africa and who still goes there to relax.
He is a gutsy, earthy, wilful leader whose style is to listen before making up his mind and then dominate. Viewed from outside Detroit, the merger seems to have caused relatively few arguments. DaimlerChrysler has had some high-profile departures, most of which occurred at the time of the merger when senior jobs were allocated.
The exception was the controversial exit of Thomas Stallkamp, former president of Chrysler and a fervent believer in the importance of thoroughly integrating the two companies. He left last September, to be replaced by Jim Holden. Mr Stallkamp had been undermined by the Germans for weeks before Mr Schrempp gave Mr Eaton the order to fire him. There has, however, also been a slew of departures further down the ranks. At one stage last year, talented Chrysler designers were defecting in droves.
The flow has slowed to more of a trickle these days. Mr Hubbert says the Germans have learnt an important lesson: that they should not take workers’ loyalty for granted. But it is also possible that the departures have distracted top managers’ attention from the underlying problems in Chrysler’s business. The German dominance in the deal has also led to uncomfortable moments, such as when Mr Hubbert asserted last year that DaimlerChrysler would have a single headquarters in Stuttgart. But generally the Germans have been diplomatic, sensible even.
From the outset, Daimler tried to apply lessons learned from other troubled deals. Hence, for instance, the insistence on clarifying in advance which managers would occupy which slots. Hence, too, a determination to centralise and control decisions that might otherwise chip away at cohesion. To handle the hundreds of integration projects, DaimlerChrysler has formed a powerful automotive council of five senior managers to which all projects must report every four to six weeks. Mr Cordes, who sits on the council, says it has been critically important in helping the group to stay on course.
Cross-border conundrumIn the end, the lesson of DaimlerChrysler’s merger may be that cross-border deals are, in essence, the same as all other mergers, only with extra layers of difficulty. Mr Schrempp and his team have concentrated on the deal’s operational parts, downplaying cultural problems and management jockeying as inevitable but manageable. The trickiest problems seem to have been largely about the details of doing things effectively.
In May 1998, the merging companies forecast $1.4 billion of cost-savings during 1999, a figure they duly delivered. Having set internal goals for further cost synergies by 2000 and 2005, DaimlerChrysler then decided not to make these public. One reason was that, to management’s growing discomfort, investors and journalists alike were interested in little else. A second, more acceptable, reason was that defining a true synergy becomes ever harder the more time has passed since a merger. But another reason was more subtle.
As DaimlerChrysler has tried to produce workable and cost-efficient ways of doing business as a single entity, it has run into a level of difficulty that was not anticipated when the deal was struck.
Consider the apparently simple idea of component sharing. If Daimler and Chrysler have two similar vehicles, in theory they can save money by using the same component—an axle or fuel pump, say—in both. But what if one vehicle is scheduled for launch this year, the other not until next year? Should the product launches be co-ordinated to maximise efficiency? And how are development costs to be allocated? It is on these nitty-gritty details that the deal’s fate ultimately rests. If DaimlerChrysler gets it right, the merger might yet come to be seen as a masterstroke.
If it fails, doubtless some blame will be laid on cross-border differences such as language and culture. And that, perhaps, is the true lesson of such mergers: the cross-border angle comes to the fore only when other things are already going wrong.