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Autos: The Global Six (int'l
edition)
Here's how the world auto industry will
likely shake out: New economies of scale
beef up the big boys, which gobble up less
efficient parochial players. So who will be
left?
It was a whirlwind first week on the job for Ford
Motor Co.'s new CEO, Jacques A. Nasser. It began
Sunday, Jan. 3, with rumors swirling in snowbound
Detroit that cash-flush Ford (FPr) was about to gobble
up one of the world's big auto makers. By Tuesday
morning, reporters were calling Nasser at home at 6
a.m. to inquire about a tantalizing but erroneous French
radio report that Ford was taking over Honda Motor
Co. ''By Tuesday evening, we were supposed to be
acquiring BMW, Honda (HMC), Volvo (VOLVY),
Nissan (NSANY)--and there was someone else that I
can't remember,'' quips Nasser.
By week's end, Nasser's every move was being
scrutinized for hints as to how he might spend Ford's
staggering $23 billion in cash. When he called a press
conference for Friday evening's black-tie gala at the
Detroit auto show, speculation was rife that he would
announce a megadeal to rival last November's $35
billion DaimlerChrysler merger. ''I'm not sure if I should
be speaking to you in German, Swedish, or Japanese,
the way the rumors have been flying,'' Nasser told a
packed audience of Detroit swells. ''I'm really pleased
we're so popular.'' Nasser's only news was that Ford
was bringing the Three Tenors to Detroit this summer.
No big deal--yet.
But the green flag is flying for motor merger mania, and
a dramatic shakeout is at hand. The industry's top
players are awash in cash and eager to buy, while the
weakest are drowning in debt and glutted with factory
capacity: The industry can produce 20 million more
cars and trucks a year than it sells, while global auto
sales could hit a cyclical downturn within three years.
What's more, consumers are demanding lower prices
and more high-tech gizmos on their cars, forcing
carmakers to squeeze costs. The result: Only a quarter
of the world's 40 auto makers are profitable. ''You're
going to see a much more consolidated auto industry
within the next five years,'' says Schroder & Co.
analyst John Casesa. ''The faster the global economy
turns down, the faster it will happen.''
Speeding the auto industry down the road to
megamergers is a group of hard-driving bosses, with
expansive egos and big appetites for acquisition.
Volkswagen's Ferdinand Piech has snapped up
European boutique players Rolls Royce and
Lamborghini and is believed to have eyes for BMW.
Denials aside, Ford's Nasser has at least investigated
acquiring Honda and Volvo and wouldn't mind picking
off BMW, too.
DAIMLER-NISSAN? Toyota's President Hiroshi
Okuda, a black belt in judo, is particularly aggressive
for a Japanese business leader and is already picking
up bargains among Japan's struggling second-tier auto
makers. And DaimlerChrysler Co-Chairman Jurgen
Schrempp, having engineered the giant
German-American merger, now says he might be
interested in hooking up with Japan's troubled No. 2
carmaker, Nissan. ''Who knows, eh?'' a smiling
Schrempp said, following a Jan. 10 speech in Detroit.
''We do not exclude the possibility of equity
participation'' in Nissan's car business. He's talking to
Nissan about its heavy-truck business, and a deal could
happen by the end of January.
This automotive mating dance is being triggered by the
triple threat of cost pressures, cutthroat pricing, and
overcapacity. ''The industry lately has been a giant
cotillion, with everybody looking for the best partner,''
says DaimlerChrysler Co-Chairman Robert J. Eaton,
who predicts a big European deal this winter, although
not involving his company. ''Companies will have to
rethink their ability to survive alone.''
Indeed, it was the stunning merger of Daimler-Benz and
Chrysler Corp. (C) that changed the rules of the road.
The two prosperous companies saw that by combining
they would have a better chance of growing in each
other's home markets as well as in Asia. To make it in
the high-cost, hypercompetitive, technology-intense
global auto business, carmakers need to have vast
resources and worldwide reach. And old national
identities are becoming obsolete in a brave new auto
world where size matters above all. ''The industry
landscape will need to change,'' says Nasser. ''For
global players to be really competitive, their sales
volumes will have to be over 5 million a year.'' Predicts
Toyota's Okuda: ''In the next century, there will be only
five or six auto makers.''
TWO FOR THE ROAD. Who will make it into the
elite five-million-plus club? So far, only General Motors
Corp. and Ford make that mark. But others are
knocking on the door. Many industry leaders believe it
will only take a decade for the world's 40 auto makers
to collapse into the Global Big Six. The shakeout is
sure to happen in stages, with profitable niche players
such as Porsche or national champions like Renault
holding out the longest. But by 2010, the thinking goes,
each major auto market will be left with two large,
home-based companies--GM (GM) and Ford in the
U.S., DaimlerChrysler and Volkswagen in Europe, and
Toyota (TOYOY) and Honda in Japan. Players such
as Nissan or Volvo may keep their brand names, but
someone else will be running the show.
Behind the urge to merge is an unprecedented mix of
factors that will benefit those that have size and scope
and punish the small and weak. Manufacturing, once
the cornerstone of the car business, is rapidly becoming
a commodity operation that can be farmed out to
whichever supplier offers the lowest price. For all but
the most high-tech content of a car, auto makers can
now assemble a vehicle by snapping together modular
components from suppliers--like so many Lego pieces.
And the biggest auto makers can leverage the best
deals from suppliers.
At the same time, consumer expectations are rising as
prices fall. Developing a new model from the ground up
costs about $3 billion. Consumers want the latest
technology--such as satellite navigation and
crash-avoidance radar--but don't wish to shell out for
it. J.D. Power & Associates Inc. predicts that U.S. car
prices will drop 2% this year, to about $20,580 on
average, continuing a three-year trend.
To make money in this unforgiving environment, auto
makers need to hedge their bets. They must spread the
requisite billions in vehicle development costs over a
wide variety of products. ''Everybody's products are
getting better, but there is no pricing power,'' says auto
analyst Nicholas Lobaccaro of Merrill Lynch & Co.
''It's hard to keep up with all the advances without the
economies of scale.''
As the industry reshapes itself, insiders expect the
giants to head in two directions: They will seek out
healthy but small brands in Europe, while picking up
distressed merchandise in Asia. For the top companies,
the goal is to establish an all-encompassing global
footprint. No auto maker in the world has that now.
The Americans and Europeans are mostly minor
players in Asia, while the Japanese need a stronger
presence in Europe. ''The key is finding the right
partner, who has complementary products, geography,
and a similar philosophy,'' says auto consultant
Christopher Cedergren of Nextrend Inc. in Thousand
Oaks, Calif.
Deals that lack those ingredients are destined to fail.
Indeed, overlapping combinations, such as linking two
big regional players like Renault and Peugeot, could
result in more trouble than gains. Simply combining to
cut costs, without a global expansion plan, is also not a
wise strategy. ''An acquisition should not be driven by
cost savings alone,'' says Nasser. ''If that was the view
of Jaguar, we never would have been able to make
sense of that acquisition'' in 1989.
VOLVO FOR SALE. Volvo could be the next
company to be scooped up. It put itself in play on Jan.
6 by hiring J.P. Morgan (JPM) to shop its car business.
Fiat admits it's talking to Volvo, and analysts say the
two Europeans could make a good fit. Fiat (FIA)
would gain access to the luxury segment and the U.S.
market, while Volvo, which sells fewer than 400,000
cars a year, would broaden its small base. Fiat needs a
boost. With car sales slumping in its two big markets,
Italy and Brazil, the Italian company's auto division lost
$38 million in the third quarter of 1998, vs. earnings of
$245 million the year before.
But even a Fiat-Volvo combination might not be strong
enough to survive longer term, analysts say. Eventually,
smaller players would need a big brother. Ford insiders
say they are talking to Volvo, but they scoff at the $6
billion price tag Volvo's bankers are suggesting for the
car business. Says one Ford insider: ''Their car business
is worth $3.5 billion, tops.''
Alongside Volvo, Nissan tops the list of rumored
takeover targets these days. Japan's once mighty No. 2
player is on the brink because sales have plunged,
owing to lackluster models and economic distress in
Japan. Nissan has been playing catch-up to Toyota and
Honda since the mid-1980s and now is so debilitated it
can no longer afford to make the same level of
investments as its rivals in technology, design, and
marketing. The auto maker is expected to lose as much
as $626 million for the fiscal year ending in March and
is burdened with $22 billion in debt. Competing auto
makers say Nissan could be had for about $30 billion.
Nissan's neighbor, Mitsubishi Motors Corp., is in even
worse shape, analysts say. Struggling with $18.5 billion
in debt, a bland product line, and recession in its home
market, Mitsubishi, like Nissan, needs a white knight.
Mitsubishi Motors President Katsuhiko Kawasoe
acknowledges he is talking to potential foreign partners,
although he declines to discuss them or the nature of
any strategic alliances.
All the big global players are considered prospective
suitors for Mitsubishi. But DaimlerChrysler heads the
list because Chrysler once had a 24% stake in the
company and still buys from it. Ford, too, is considered
a hot prospect, since it is looking to grow in Asia.
Kawasoe, who once boasted he was drawing up a
''shopping list'' of acquisitions, now admits to a painful
reassessment: ''I have made up my selling list,'' he says.
Others likely to fall quickly include the remaining
smaller players in Asia. GM recently increased its stake
in Isuzu from 37.5% to 49% and took a bigger chunk
of Suzuki--up from 3.3% to 10%. In beleaguered
Korea, meanwhile, Ford attempted to acquire bankrupt
Kia Motors Corp. last year but was outbid by Hyundai
Motor Co. Now Hyundai, which piled Kia's $8 billion
in debt on top of its own imposing $6.6 billion, is
looking for help. After cleaning up the company's
balance sheet, ''our management is interested in having
discussions with the big boys in Detroit or Europe,''
says Hyo Byung Lee, a general manager in the
Hyundai-Kia planning office of Hyundai Motor. But
Ford isn't interested in bailing out Hyundai. ''We're not
going to do that'' comments Henry D.G. Wallace,
Ford's group vice-president for Asia-Pacific
operations.
Over time, the biggest predators in Asia are likely to be
the Japanese giants. With $23 billion in cash, Toyota
has as much money to spend as Ford. But for now, the
company is preoccupied with Japan's recession and
with restructuring at home. It is considering creating a
holding company that would make it far easier to
streamline its vast operations--as well as merge with
other auto makers. Toyota already owns stakes in
Daihatsu and Hino.
While Honda lacks Toyota's cash, it is blessed with
strong growth--particularly in the U.S., where its 1998
sales topped 1 million vehicles for the first time ever. To
make it into the Global Big Six, Honda needs to double
its worldwide sales. Japan's No. 3 auto maker wants to
go it alone. But with profits of $2.4 billion on revenues
of $54 billion in 1998, Honda is well positioned to
target takeovers in the future.
Compared with Asian players, Europe's smaller auto
makers are likely to hold on more fiercely to their
independence. So while the industry remake may be
just as profound, the drama is not likely to unfold
overnight. That's true partly because of government
stakes in companies such as Renault and the opposition
to job cutbacks that could accompany mergers. ''You
would have to see Europe facing economic recession
or crisis before it merges volume-car manufacturers,
given all the political pain,'' says John Lawson, auto
analyst at Salomon Smith Barney in London.
Indeed, analysts believe Fiat can prolong its
independence if it can acquire Volvo without taking on
too much debt. And Renault is enjoying a renaissance
by developing breakthrough products such as the
Megane Scenic compact minivan, which was a hot
seller in Western Europe in 1998. CEO Louis
Schweitzer aims to double Renault's sales over the next
decade--a goal that could allow the company to survive
on its own.
But a reckoning in Europe could be not far down the
road. The emergence of a single currency is changing
the rules of competition. Under European Union plans
to liberalize its markets, foreign auto makers will gain
unfettered access to Europe at the end of this year. An
expected onslaught of Japanese competition could
highlight the inefficiencies of chronic overcapacity and
parochial distribution of Europe's smaller players.
''Europe will become a battleground,'' predicts Furman
Selz auto analyst Maryann Keller. ''The Japanese are
getting themselves ready to do in Europe what they did
in the United States.''
TARGET: BMW. Eventually, analysts believe, that
battle will force Europe's smaller players to succumb.
They won't be able to keep pace with growing
demands for investment in technology, distribution, and
marketing in the global marketplace. The weak will be
forced into the arms of stronger neighbors or those of
U.S. giants with a long European history. ''European
auto makers will seek a European solution,'' adds
Casesa. ''Two or three big monsters in Europe will
emerge.''
The juiciest European target for the likes of
Volkswagen or Ford would be BMW. The profitable
brand would help these mass marketers in their quest to
move upscale. BMW made $624 million last year but
sells only 1.2 million cars worldwide. The Munich
maker of luxury sedans is struggling to profit from its
$1.3 billion acquisition of Britain's Rover Group Ltd. in
1994. Now, it must determine whether it will invest the
billions needed to develop a new line of front-wheel
drive cars for Rover or whether it will seek a partner to
help.
Such a partnership--perhaps with Ford--could open
the door to acquisition, but only if the Quandt family,
which owns 47% of BMW, would give way to new
ownership. For now, there's no sign of that. On Jan.
11, Heinrich Heitmann, BMW's North America
chairman, declared in Detroit that his company will still
be standing alone in five years.
But going it alone will become increasingly expensive.
The biggest wheels in the auto industry have begun
playing by the costly new rules. Advances in
computer-aided design have enabled the richest auto
makers to develop vastly different models from one
basic chassis. GM is developing at least six models off
its new ''Delta'' platform, including a Chevrolet small
car, a Saturn sport utility, and a commercial vehicle for
Europe. ''Manufacturers don't want to reinvent the
wheel every time they bring out a new model,'' says
auto consultant Michael Robinet of CMS Forecasting
in Farmington Hills, Mich.
FAST-TECH. While sharing platforms once led to
lookalike cars, today's approach is anything but lowest
common denominator. Consider three of Ford's newest
models--the sexy $45,000 Jaguar S-type luxury car,
the staid $30,000 Lincoln LS sedan, and the retro,
reinvented Ford Thunderbird, which is expected to sell
for $35,000. Each is built off the same roughly $3
billion platform, code-named DEW98, but they
couldn't look more different. Thanks to new
developments in engineering and manufacturing
technology, hot models race to market in 14.5
months--one-third of what it took a few years ago.
Even the showroom is undergoing a costly overhaul.
GM and Ford are investing billions to overhaul their
antiquated distribution systems. In some cases, they are
buying up old dealerships and merging them into
automotive supermarkets that sell everything from a
$10,000 Ford Escort to a $70,000 Jaguar under one
roof. For auto makers who can gain efficiencies in the
showroom, the payoff is huge: Some 20% of a car's
cost is tied up in distribution. But to play in the new
distribution derby, it takes the deep pockets that only
the largest auto makers have.
For the strongest and richest auto makers, these are
giddy times. Amid the feeding frenzy of rumors at the
Detroit auto show, Ford's Nasser couldn't help but
sound like a man intent on building a global empire.
''We already have a Japanese brand and two very
British brands,'' said the Lebanese-born Nasser, who
was raised in Australia and speaks four languages.
''We've got the ability to absorb and really be quite
comfortable with a lot of different cultures.'' No doubt.
But the question is: Who will Ford, and the industry's
other big wheels, absorb next?
By Keith Naughton, with Karen Lowry Miller and
Joann Muller in Detroit, Emily Thornton in Tokyo,
Gail Edmondson in Paris, and bureau reports
The Likely Survivors
GENERAL MOTORS
1998 EARNINGS
$2.8 billion*
1998 REVENUE
$140 billion
WORLDWIDE VEHICLE SALES
7.5 million
CASH
$16.6 billion
STRATEGY
GM is getting its own house in order. But it has found
time to take a 49% stake in Japan's Isuzu and a 10%
stake in Suzuki. Some speculate GM will rescue South
Korea's Daewoo.
FORD MOTOR
1998 EARNINGS
$6.7 billion
1998 REVENUE
$118 billion
WORLDWIDE VEHICLE SALES
6.8 million
CASH
$23 billion
STRATEGY
With a mountain of cash to spend, Ford is the hottest
suitor on the global automotive scene. Predicted
targets: Volvo, Honda, BMW.
DAIMLERCHRYSLER
1998 EARNINGS
$6.47 billion**
1998 REVENUE
$147.3 billion**
WORLDWIDE VEHICLE SALES
4 million
CASH
$25 billion
STRATEGY
By merging, Daimler Benz and Chrysler have created a
global powerhouse. But it needs a presence in Asia and
is already talking to Nissan about a deal.
VOLKSWAGEN
1998 EARNINGS
$1.3 billion
1998 REVENUE
$75 billion
WORLDWIDE VEHICLE SALES
4.58 million
CASH
$12.4 billion
STRATEGY
VW has already acquired Rolls Royce, Bugatti, and
Lamborghini. Hard-driving Piech is often rumored to be
eyeing BMW and Volvo, which itself is in talks with
Fiat.
TOYOTA MOTOR
1998 EARNINGS
$4 billion
1998 REVENUE
$106 billion
WORLDWIDE VEHICLE SALES
4.45 million
CASH
$23 billion
STRATEGY
Toyota wants to strengthen its hold on Japanese auto
maker Daihatsu Motor, truckmaker Hino Motors, and
affiliated parts suppliers like Denso.
HONDA MOTOR
1998 EARNINGS
$2.4 billion
1998 REVENUE
$54 billion
WORLDWIDE VEHICLE SALES
2.34 million
CASH
$3 billion
STRATEGY
Honda must grow bigger if it is to make it into the Big
Six. Honda insists it wants to go it alone. But joining
forces with luxury carmaker BMW could result in a
dream team.
*Includes one-time charges for restructuring
**Estimates of Daimler Benz and Chrysler
combined results.
DATA: MERRILL LYNCH & CO., SCHRODER & CO.,
SALOMON SMITH BARNEY, J.P. MORGAN,
WASSERSTEIN PERELLA, COMPANY REPORTS
Forces Behind the Race to Merge
OVERCAPACITY
More than 20 million units of manufacturing
overcapacity, plus downward pressure on prices, are
forcing auto makers to slash costs and swallow rivals.
TECHNOLOGY
Auto giants want to amortize heavy research and
development investment in new high-tech features over
a greater number of cars.
CASH
The industry's biggest players have more than $100
billion in cash for deals, while smaller, less profitable
players are seeking suitors. Europeans and Americans
also have lofty share prices that allow them to swallow
up smaller companies.
CULTURE
Nationalism is declining in Europe as the new single
currency spurs companies to compete, while in Asia
economic crisis is compelling companies to consider
foreign partnerships as never before.
DATA: BUSINESS WEEK
Mmm, Taste That Merger Money
(int'l edition)
Nothing excites an investment banker more than a
struggling industry with lots of overcapacity. By that
measure, the auto industry comes near the top of the
list. With only a handful of the world's 40 auto makers
posting strong profits and the world's big six packing
more than $100 billion in cash, the motor industry looks
like an investment banker's dream. Indeed, bankers
smell big bucks in cars. ''Believe it or not, we get 5 to
10 [bank] proposals a week,'' says an executive at
Volvo, the subject of the hottest takeover rumors these
days.
Bankers are hoping that the long-awaited consolidation
of auto makers is finally going to happen. Despite the
undeniable logic, there have been relatively few auto
deals in recent years. But last year's $35 billion
DaimlerChrysler hookup may have been the
icebreaker. Now, the sale of Volvo or a Japanese
player, such as Nissan Motor Co., could accelerate the
trend, bankers say. ''There are five or six sizable deals
that make sense,'' says a London banker who
specializes in the industry.
A Volvo or Nissan deal would likely produce tens of
millions of dollars in investment banking fees. The sense
that a new wave of mergers is imminent has investment
bankers sidling up to key players. Goldman, Sachs &
Co. looks well-placed because one of its Frankfurt
partners, Alexander Dibelius, is close to Eckhard
Cordes, DaimlerChrysler's strategist. Goldman also has
good ties to Ford Motor Co., another
acquisitive-minded member of the big six, not the least
because newly named co-Chief Operating Officer John
L. Thornton is on Ford's board.
Other banks are angling for their share as well. They
include Morgan Stanley Dean Witter, which has healthy
ties to Fiat, and J.P. Morgan & Co., the firm advising
Volvo. Lazard Freres & Co. also can't be counted out
when major French players such as Renault and
Peugeot are in the mix.
UPROAR. But deals will have to be structured
creatively to preserve jobs and national and personal
prestige. The industry's high political profile and big
CEO egos at predator and target companies mean any
auto mergers will produce a lot of fireworks. At Volvo,
for example, Chief Executive Leif Johannson would
probably prefer to sell off the company's car division to
concentrate on trucks and other businesses. Whether
he will be able to is another question. Selling Volvo
''would create a tremendous uproar because Volvo
symbolizes Sweden,'' says Sten Westerberg, chairman
of Maizels, Westerberg & Co., a Stockholm
investment bank.
Still, the increasing costs of new-car development and
the widening gap between industry winners and losers
probably make deals inevitable. So be prepared to see
investment bankers--and auto CEOs--justifying
mergers of equals that amount to plain old takoevers.
By Stanley Reed in London
Here Comes The Road Test
THE DAIMLER-CHRYSLER DEAL The $40 billion merger of two legendary auto brands underlines the dramatic game of survival being played out among the world's carmakers
By BARRETT SEAMAN AND RON STODGHILL II
It was kind of cute, actually, how they came to be an item: following some small talk last year over a possible joint venture in Latin America or maybe Asia, Juergen Schrempp, 53, chairman of doughty Daimler-Benz, invited Chrysler chief Robert Eaton, 58, to spend some quiet time alone during the crowded Detroit Auto Show in January. Schrempp said he liked Chrysler a lot and suggested that maybe they should consider going all the way.
"I've been thinking about the same thing," replied Eaton, chairman of the once dented but lookin'-pretty-good-these-days American automaker. And so began a rapid courtship, replete with the secret rendezvous (London, Frankfurt) and code name (Operation Gamma) that lovers and business executives are wont to employ. The result, the largest industrial marriage in history, takes what had been the world's No. 6 car company, Chrysler, and stuffs it into the trunk of erstwhile No. 15 Daimler-Benz, to produce the planet's fifth biggest automobile concern. The new combine, valued at $40 billion, will generate $130 billion in sales and employ more than 400,000 people.
The merger is notable not only for its size and complexity (the fine print of labor law and trade policy will have the lawyers tied up for months) but also for its symbolism. The creation of DaimlerChrysler Akteingesellschaft represents a triumph of the global economy and the end of car companies as national emblems of industrial might. The car business is too capital and customer hungry to care about flags. Witness last week's other big news: Volkswagen's $713 million deal to buy Rolls-Royce, the once regal, now tarnished marque of British motoring. Ford also announced last week that it will consider increasing its 16.9% stake in Kia Motors Corp., South Korea's troubled No. 2 automaker, which filed for bankruptcy last summer. Audi is apparently considering purchasing Lamborghini. VW and Renault could be next.
Notably absent from this marriage-go-round are the Japanese, who, even if they weren't insular and risk averse, are operating in such a depressed economy that it's hard to see them making a bold move. No longer gunslinging international capitalists, Japanese managers prefer to build--and control--from the ground up.
Like love and marriage, the idea of creating a global car company is not new. Lee Iacocca, even as he scrambled to save Chrysler during the dark years of 1979-81, dreamed of creating what he called Global Motors, a fully integrated international car and truck builder and seller. Global Motors would be one of perhaps six to 12 similar consortiums that would be all that remained of the more than 30 car companies operating in 1980.
Specifically, Iacocca's Global Motors was to be an alliance of Chrysler and Volkswagen (or Fiat or Renault if VW didn't want to play), with American Motors thrown in to make trucks and utility vehicles. American-designed cars would run on German (or Italian) engines, and joint dealerships around the world would be able to match the market penetration that only GM and Ford had at the time. It was one of Iacocca's typically brash ideas.
Iacocca is long gone from the industry, now happily peddling electric bicycles in Southern California. But Global Motors lives again as DaimlerChrysler, and while the pieces are a little different, they certainly fit the scenario of a world in which the number of car companies can be counted on fingertips.
The industry has already undergone considerable consolidation. Along with its equity interest in Kia, Ford Motor Co. owns Jaguar PLC and a one-third stake in Mazda and is considering an alliance with Samsung Motors Inc. GM, still the world's largest automaker, owns Germany's Adam Opel AG, the U.K.'s Vauxhall Motor Cars Ltd., Holden's in Australia, 50% of Saab Automobile AB in Sweden and about a third of Isuzu. On top of that, GM operates a joint venture in Canada with Suzuki Motor Corp. and an assembly plant called NUMMI in California with Toyota.
Toyota Motor Co. has achieved world class another way, first through exporting from Japan and then by building foreign plants. In both cases it employs a unique production system that cuts costs through continuous improvement, yielding sharp reductions in product development and manufacturing lead times. The cornerstone of the system involves a "platform team" approach that unites managers in such disparate areas as engineering, design, purchasing and field service and even provides suppliers to shepherd a vehicle from blueprints into the customer's hands in 2 1/2 years instead of the typical four to six years most car manufacturers take.
The new DaimlerChrysler team aims to adopt a similar strategy. But this alliance will work on a different strategic level than do most other globalization efforts. First and foremost, the sheer size and scope of this merger all but assures mutual survival in ongoing global consolidation. Along with Ford, Toyota and GM, DaimlerChrysler will be a first-tier, all-world player.
Together, Daimler and Chrysler have a good product and market fit, filling in each other's weaknesses. Because of its dependence on North American sales, Chrysler needs greater international exposure for its products. And Daimler could stand to broaden its Mercedes product line with more mass appeal. But how that will play out beyond theory is still unclear.
Schrempp and Eaton boast of major cost-cutting opportunities. For example, the two companies combined spend $7 billion on R. and D. every year. Much of the money that goes into research on, say, safety or fuel-cell technology can be put under one umbrella for savings. Economies can also be extracted from joint purchases of raw materials. "Daimler and Chrysler will maximize the number of common parts they're using for their cars," says Christian Breitsprecher, a Dusseldorf-based industry analyst. "Engines, engine control systems, transmissions, door locks, seats--you name it." As Eaton insisted to TIME, "There's $100 million of savings the first year on current product."
And as odd as it sounds, given the stylistic differences between Mercedes and Chryslers, one half of the company can help the other half design cars. For example, it's no secret that Mercedes badly wants a minivan for Europe. Chrysler, with 15 years' expertise in that market, could co-design a platform for a luxurious minivan that its partner could sell in Europe, saving money and adding sales. "They had a minivan going that they won't do now," says Eaton. That is only one of many planned savings, he says, "but we don't want to talk about our product plans right now."
Getting new cars out the door in a hurry into hot market niches is one of Chrysler's strengths. It comes from the company's design-driven managers, and from the company's inordinate reliance on outside suppliers. Mercedes engineers everything but the screws from the ground up, one reason it took years to develop its M-Class sport utility vehicle. Scrappy Chrysler could teach it how to develop and roll out in a more timely fashion a superluxurious SUV to compete against the popular Lincoln Navigator.
Earlier this year, Chrysler stunned audiences with the Chronos, a conceptualized superluxurious, Euro-styled touring sedan with a V-10 engine. It's a dream for Chrysler--too expensive for the company to produce alone. Daimler's deeper pockets, though, could support such a program. "Daimler has been lacking the potential for growth, but it has the cash flow," says Andre Igler, industry expert and editor of Vienna's business daily Wirtschaftsblatt. "Chrysler has the potential for growth but no real cash flow."
The merged company will definitely not save money on labor, on either side of the Atlantic--a point that was well received by workers. "We think it's good for Chrysler and our union," said United Auto Workers president Stephen P. Yokich, who represents more than 64,000 blue-collar and 7,000 salaried Chrysler personnel. "But we'll take a good look at it. Our job is to protect the interests of our members."
In Stuttgart, Daimler Workers Council representative Jurgen Hesse was more cautious: "When a capitalist enterprise undertakes a move like this, it wants to save money. And that can mean cutting back on jobs. We can't say yet where the pressure will be felt."
Since labor costs are higher in Germany, logic suggests the pressure will be felt there in the long run. On the other hand, the company will follow the German mandate that half the 24-member supervisory board (a group separate from the board of directors) must come from labor, the remaining 12 from the combined management. That requirement could help build new alliances among unions in Canada, Germany and other parts of the world. "This means now there is a whole different environment at Chrysler," said Buzz Hargrove, president of the Canadian Auto Workers. Ultimately it will be up to I.G. Metall, the union that represents German autoworkers, whether the Americans and Canadians get seats on the board. Pending that, most workers seemed pleased. "I just hope my stock goes up and I can buy a Mercedes with my Chrysler discount," laughed an employee from Chrysler's Jefferson North assembly plant, on Detroit's gritty east side.
If there are doubts about the rightness of the fit, they center on the issue of the two corporate cultures. Chrysler's near-death experience has turned the company into a lean, profit-obsessed organization--short on bureaucracy but long on management talent. In the great Detroit tradition, pragmatism and margin protection can take precedence over quality when they are in conflict.
Daimler-Benz, on the other hand, is considered conservative even by the Germans--an aristocrat in a double-breasted suit, haughtily dismissive of anyone who suggests cutting corners on quality for anything so ephemeral as profit. Says German car-magazine editor Wolfgang Konig: "Perfectionism is at home at Daimler. I get the feeling sometimes it was invented there."
Like most big German firms, Daimler has been content with profit margins of 2% or less (VW gets 1.2%), vs. Chrysler's 6.5% margin last year. One look at the numbers reveals volumes about the culture gap: last year Chrysler earned $2.8 billion producing 2.88 million vehicles with 121,000 workers, while Daimler-Benz earned $1.78 billion making 1.13 million vehicles on a payroll of 300,000. "Such a difference can lead to real conflicts in investments," warns one German auto executive.
Schrempp, who will succeed Eaton as DaimlerChrysler's chairman after the first three years, might be the kind of Mercedes executive who can bridge that gap and make this marriage work. A former apprentice mechanic, he arrived in Stuttgart in 1987 and made--and later unmade--an ill-fated deal with Dutch aerospace firm Fokker. He also did a stint at a Daimler division in Cleveland, Ohio. When Daimler fell deep in the red in the mid-'90s, he embarked on a series of American-style cost-cutting programs that reduced the work force by some 20,000 and the number of operating businesses from 35 to 23, earning himself the nickname "Neutron Juergen," in honor of General Electric's famous cost cutter "Neutron Jack" Welch.
Schrempp and Eaton give themselves three years to integrate their new company. DaimlerChrysler has the ingredients of a good merger, but it won't be easy. The world is glutted with manufacturing capacity and doesn't need more cars--even fancy German-American ones. And the bottom line on big mergers is that they don't work. "Three years is not a very long term to integrate a culture," says Schrempp. "If we are really there after three years, then we really did a good job." And if not, Schrempp, not to mention thousands of global workers, will be out of his.
--Reported by Jordan Bonfante and Peggy Salz-Trautman /Bonn and Joseph R. Szczesny /Detroit
THE NEW WORLD OF GLOBOCARS
Where do the global automakers operate, and how big do you have to be to play the game?
DaimlerChrysler
COUNTRIES
Daimler-Benz operates in 87 countries, while Chrysler sells in 140 countries
SALES
7.4% of the world's cars and trucks
GM/Opel/Saab
COUNTRIES
Largest U.S. exporter of vehicles, GM has a presence in more than 150 countries
SALES
16.2% of the world's cars and trucks
Ford/Mazda/Jaguar
COUNTRIES
Ford/Jaguar operates in more than 200 countries; Mazda is in 130 countries
SALES
12.9% of the world's cars and trucks
VW/Audi/Rolls-Royce
COUNTRIES
VW is in 21 countries; Rolls-Royce sells mainly in Europe, North America and Asia
SALES
7.9% of the world's cars and trucks
Toyota
COUNTRIES
Third largest carmaker in the world, Toyota sells in 160 countries
SALES
9% of the world's cars and trucks
What is the strategy for growing sales and earnings in this integrated global economy?
DaimlerChrysler
THE PLAN
Merged company is in a position to reach a much wider range of customers with a fully
diversified line of cars, utility vehicles, luxury cars and trucks
GM/Opel/Saab
THE PLAN
To expand as rapidly as possible into emerging markets, such as China and Southeast Asia,
while maintaining strong car and truck sales in North America and Europe
Ford/Mazda/Jaguar
THE PLAN
Ford is the leading proponent of the "world car" concept: build vehicles on a
common chassis, or "platform," all over the world; global sourcing and
manufacturing maximizes economies of scale
VW/Audi/Rolls-Royce
THE PLAN
Look for joint ventures and alliances that bolster the core company's product lines and
distribution networks; hot new Beetle has raised VW's profile
Toyota
THE PLAN
Steady as she goes, to maintain position as the largest low-cost producer and gradually
expand into new markets like Latin America
Let's kick the tires: What are their hottest cars? What are they developing?
DaimlerChrysler
Jeep Wrangler
Mercedes SLK
GM/Opel/Saab
Saab 9-3
Chevrolet Camaro
Ford/Mazda/Jaguar
Ford Taurus
Jaguar XK8
VW/Audi/Rolls-Royce
VW Beetle
Rolls-Royce Silver Seraph
Toyota
Toyota Camry
Lexus LS 300
Is this global stuff for real? What are the advantages and disadvantages of this approach?
DaimlerChrysler
ADVANTAGES
Combining German engineering and American savvy could produce surprising results, like
Mercedes minivan
DISADVANTAGES
Very different corporate cultures; a complex management structure on the Daimler side
GM/Opel/Saab
ADVANTAGES
Ubiquitous distribution, a wide array of products and broad global experience; enormous
size and deep pockets
DISADVANTAGES
Overly bureaucratic decision making, uninspired product development, high costs, labor
issues
Ford/Mazda/Jaguar
ADVANTAGES
Long history as a world player, worldwide manufacturing base and popular brands
DISADVANTAGES
Uneven product portfolio; the "world car" strategy hasn't been proved yet;
spotty distribution
VW/Audi/Rolls-Royce
ADVANTAGES
Strong brand recognition, loyal customer base and diverse global managers
DISADVANTAGES
Weak presence in North America, unfocused marketing strategy and limited product portfolio
Toyota
ADVANTAGES
Perhaps the world's best carmaker, in both quality and efficiency; strong balance sheet
DISADVANTAGES
Insular corporate culture, bland product design and limited presence in Europe
Source: Automotive News 1998
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