Wed, May 16, 2007 page10

• DaimlerChrysler: Portrait of a failed deal

  • AP
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  The merger between Daimler-Benz and Chrysler Corp was billed as a merger of equals and a marriage made in heaven -- the perfect model for the future of auto manufacturing worldwide.

  After nine tumultuous years, it was neither.

  The US$36 billion deal that saw Daimler-Benz AG take over Chrysler Corp in 1998 sputtered through nearly a decade of up-and-down Chrysler earnings and repeated cost-cutting. Through it all, there was the simmering resentment of German shareholders, who felt that something pedestrian, unimpressive -- indeed, American -- had dulled the lustrous sheen of one of their country's greatest carmakers.

  Now, with the company set to split in a 5.5 billion euro (US$7.4 billion) deal -- a fraction of Chrysler's value a decade ago -- it serves as a very public illustration of the pitfalls inherent in attempting to bring car makers from Asia, Europe and the US into large-scale partnerships.

  "Big cross-border mergers in the auto industry have never worked," said Stephen Cheetham, a European auto analyst at Sanford C. Bernstein Ltd in London. "Mega-deals in the auto space are very problematic."

  Cheetham said the creation of DaimlerChrysler was the peak of transnational tie-ups from the late 1990s, such as General Motors Corp (GM) and Korea's Daewoo Motor. Now, he said, "globalization in the auto business these days is not very pragmatic."

  The drawbacks include the higher costs of shipping and transportation, rising health care and pension funding costs in the US and cultural differences.

  "The Germans never knew really quite what to do with Chrysler," Cheetham said.

  "Managing across the pond and managing this very, very different business is very difficult," he said.

  DaimlerChrysler's split is one of many auto partnerships to collapse in the past few years. GM paid US$2 billion in 2005 to break off its alliance with Fiat SpA after the Italian company's finances and market share deteriorated. In the 1990s, BMW AG lost billions after buying Britain's MG Rover, which it sold for a token ?10 in 2000.

  It all looked different in the mid-1990s. Daimler-Benz was eagerly searching for new markets and new opportunities at the dawn of what many thought would be an age of global consolidation. Chrysler was an ideal target, with a line of cleverly designed, efficiently built minivans, pickups and Jeeps.

  Throw in a rich country that was car crazy and it made perfect sense.

  Daimler and Chrysler said it was a "merger of equals," but then chief executive officer Juergen Schrempp later dismissed that in an interview, leading to a lawsuit from billionaire investor Kirk Kerkorian. He lost, and it was clear the center of power had shifted to Stuttgart.

  The company rebounded from a brutal 2001 restructuring and launched hits like the 300C, only to see earnings slip again. After declining sales and recalls over defects, DaimlerChrysler dumped its other cross-border venture, with Mitsubishi in Asia, in 2004.

  And as gas prices rose, consumers looked to smaller cars with better mileage. Ferocious competition with rivals General Motors and Ford Motor Co, along with Japan's Toyota Motor Co -- unencumbered by the crippling legacy costs the US automakers were facing -- led to flat prices and thin margins.

  Losses at Chrysler were one thing. But when the company's jewel, Mercedes, posted its first quarterly loss in 10 years in 2005 amid concerns over costs and quality, the virtues of size faded even more. Shareholders looked enviously at other German automakers such as BMW and Porsche, which kept a sharp focus on high-margin luxury cars.

  That disappointment hastened the departure in 2005 of Schrempp, who had masterminded the DaimlerChrysler deal -- dubbing it a "marriage made in heaven." Finally, in February, DaimlerChrysler said it was considering all its options for Chrysler.

  "Certainly anyone contemplating a major mega-deal will use DaimlerChrysler as a very large warning," Cheetham said.

  Some analysts say major automakers like Nissan Motor Co and France's Renault SA -- which have a partnership many cite as cooperation that works -- and Fiat show that they have learned their lessons.

  Nissan and Renault chief executive Carlos Ghosn has touted the seven-year-old Nissan-Renault alliance -- which is, perhaps significantly, short of a merger -- saying that Renault's market worth has tripled, while Nissan's has grown fivefold. The French automaker has a 44 percent stake in Nissan.

  "In today's global business landscape, the creation of transnational partnerships is becoming a familiar and valid practice," Ghosn said then. But talks about partnership with GM to give the company a US foothold did not lead to a deal.
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