In 1997, one year before the merger, Chrysler was more profitable than Daimler.
The economical Environment
Before the merger of the two companies, the car industry was already suffering from the
“Godzilla syndrome”. It means that only the biggest car companies will be able to survive.
There was a market of 40 car companies but only 10 of them were efficient; the 30 “bad” ones could survive thanks to the States for unemployment reasons.
The car industry was dispatched into three categories:
From 1998 to 2000, there were a lot of mergers and acquisitions, especially concerning the “prey” and “problems” companies.
We can see a summary of what happened in the late 1990’s hereunder:
This table is a reminder that Daimler and Chrysler were exactly in the same situation as their concurrent before they merged.
We can notice that the car prices in Europe are supposed to decline thanks to the Euro currency.
It is also important to say that the car market started to decrease in the 1990’s after several years of strong growth demand in Europe and in the U.S.A.
Social
The two companies are very different “socially” speaking.
Chrysler has an American way of working with a free style to decide and to manage. Daimler is a German company, which means they are very serious and organised.
To sum up they were two different companies, implanted in two different markets, having two different cultures of work.
Technological
The companies had different specialities: engineering and technology for Daimler, and design and product development for the American company.
This is also one of the reasons why they wanted to ally with other companies, because they had to share the competences and the knowledge to get better and to face the “predator concurrent”.
Part 2: The reasons why Daimler and Chrysler merged.
I Historical:
We are now going to analyse what happened during the few years before the merger. It will help us to understand the reason why they merged.
- In 1995, Schrempp becomes the new chairman
- Daimler-Benz’s entered new segment with the Class A and the Smart.
- Chrysler; Volvo; Suzuki; Honda and Renault were the targets to build an alliance one year before the merger.
- They failed the alliance with Ford.
-
In 1997, Daimler was at the 13th rank in term of sales.
- In the late 1970’s, they come back from non-bankruptcy thanks to the U.S. Government.
- They failed the alliance with Fiat.
-
In 1997, Chrysler was at the 5th rank in term of sales.
II Products
To analyse the products of the two companies we will create a Daimler and Chrysler Boston Consulting Group Matrix:
We can see on one hand that Daimler specialisations are luxury cars and heavy trucks and on the other hand Chrysler is specialised in moderately priced cars and light trucks.
Basically, it means that they are very complementary on the car and truck markets.
Even if the car industry is the most important aspect of these two companies; we also have to notice that the truck segment is an important factor for Daimler and Chrysler because both are among the best in their market. Moreover, they complete each other perfectly; just like in the car market.
We can have an overview of what represents the two companies while they are together on next page:
Source: 1998-2002 Daimler Chrysler. All rights reserved.
,
III Reasons for the alliance
As we have seen on the first part in the political aspects, the two car companies were in an environment, which was a reminder of the sentence: “eat or be eaten”. They were both trying to enter new segments with new products and thinking about entering a new market in another place.
The demand in both regions was already declining, and Daimler as Chrysler was present in only one region (E.U. for Daimler and U.S. for Chrysler).
Chrysler is strong in North America but only with 1% market share in Europe, Daimler just the reverse. Basically, Daimler can help Chrysler in Europe, and Chrysler can help them in the U.S.
Daimler was making luxury cars and heavy trucks while Chrysler has moderately priced cars and light trucks. Even if they both failed in many mergers before, this is a perfect combination of product ranges to cover the market of trucks and cars.
Chrysler was capable in terms of design and product development. Daimler was specialised in engineering and technology. That means that they can combine their strengths.
To see the primary reasons of these two companies to merge, we will have a look at the five forces of the future possible merged company.
They’re no entrants in the car industry because there are already many companies (about 40), and the concurrence is already very strong.
The “prey”(BMW, Volvo…) and the “problems”(Fiat, Nissan…) are entering the merger and acquisition business. It is a reminder of the Godzilla syndrome: “eat or be eaten”.
Daimler has an agreement with Ford concerning the research.
Mercedes (Daimler) has the exclusive use of the intelligent cruise control.
The possibility to enter the Asian market thanks to new companies (see next questions).
Demand is expected to decline in the U.S. and in the E.U.
The price of fuel is one of the reasons. But the Euro will put pressure on prices and margins, which is good for the European customers.
The Daimler luxury cars will be too expensive for customers in developing countries (Asian market for example). On the other hand Chrysler the leader in SUV and minivan, will be able to send its cars.
The public transports are growing since the problems of pollution are getting really important. There will be more and more restriction about driving petrol cars in the towns.
The aim of the E.U. is to privatise the public institutions like the train for example; it means that there will be lower prices and then a bad impact on the car industry.
As a conclusion I will say that Daimler’s strengths are Chrysler’s weaknesses and the reverse too.
Chrysler makes moderately priced cars, Daimler makes Mercedes luxury cars.
Chrysler is strong in North America and weak in Western E.U., Daimler just the reverse.
Chrysler is very capable in terms of design and product development. Daimler holds the upper hands in engineering and technology.
So it could be a marriage of opportunity. As the portfolio suggests, both companies have to do a diversification, which means they have to merge.
Question 2: What were the major problems in the post-merger process that DaimlerChrysler had to address? Overall was Schrempp’s merger strategy a success?
We are going to analyse the major problems in the post-merger process, which are cultural and structural, and then see if Scrhrempp’s merger strategy was a success or not.
I The majors problems in the post-merger process.
- The cultural problems:
In one hand, Daimler–Benz was characterized by methodical decision-making and a serious way to take decisions just because it is a German company. On the other hand, Chrysler encouraged creativity and flexibility, which is the American way to work. Moreover, Chrysler was the symbol of American adaptability and resilience.
Both companies also had different ways to pay their employees. The American’s were paid with a compensation scheme (stock option) based on low salaries with performance dependent bonuses. So it was a problem for the German’s who had a bigger fixed salary but no bonuses which meant they were paid less.
We have also to notice that the Management Board had to specify each brand’s identity, its market segment, the research and the development, purchasing, production and marketing issues.
- The structural problems:
The Management board with 18 members was impossible to apply; the legal structure of the new company was a critical issue. At the end, the German model won, because the German side was the strongest one in the transaction. It results in a reduction of the organisation structure of 5 members (1 from Daimler-Benz and 4 from Chrysler), which shows the Daimler-Benz dominance.
The companies also had to safeguard each brands unique image, while teams were expected
to work together and share best practices. And that was a real barrier to the efficient work.
II Is Scrhrempp’s merger strategy a success or not?
- The success of the merger in the first years:
First, we will see the success in the first years for the new merged company. We have seen on the 5 forces in the first question that there were many reasons for a great and big alliance for the two companies. We can summarize them:
Chrysler makes moderately priced cars, Daimler makes Mercedes luxury cars.
Chrysler is strong in North America and weak in Western E.U., Daimler just the reverse.
Chrysler is very capable in terms of design and product development. Daimler holds the upper hands in engineering and technology.
So, the merger allowed the two companies to enter a new market area with speed. It also permits it to cut in cost efficiency as said Robert Eaton:“Both companies have product ranges that complement each other perfectly”.
Jürgen Schrempp said: “We will improve return and value for our shareholders”.
But in fact he lied by saying that it will be a ‘merger of equals’, to have the merger approval of Chrysler management and shareholders.
- The DaimlerChrysler real situation:
The merger between Daimler-Benz and Chrysler took place in May 1998. As a short-term analyse, the Schrempp’s merger strategy was a success because synergies represented an amount of $1.6 in 1999 and that was more than what was expected.
But, as a long-term strategy, the Schrempp’s merger was more questionable.
The analysts did not think that the merger would be a success; and maybe it is the reason why, between September 1999 and January 2001, the share lost almost half of its value in Frankfurt and New-York Stock Exchange.
Its market share in the US market decreased from 18.5% in 1997 to 13.5% in 2001. Consequently, the Chrysler CEO, Dieter Zetsche, announced that Chrysler would slash 26,000 jobs. It is the real proof that the merger with Daimler-Benz was not favourable for Chrysler.
In March 2000 the merged company obtained an alliance with Mitsubishi, which is good to enter the Asian market but the problem is that the company is in dept.
As a conclusion, I will say that the initial idea of the merger was good and it is true that at first DaimlerChrysler had good results. But Schrempp did not respect the initial rules, and now this merger is a synonym of unemployment and bad results. Moreover, the ambition to enter the Asian market is compromised because the new local partner is in dept. It is the reason why we can not say that Schrempp’s strategy is a success.
