How the king of the Daimler snakepit got bitten by Chrysler

The megadeal to 'set the pace in the automotive world in the 21st century' has gone into a skid. Stewart Fleming reports

WHEN DAIMLERCHRYSLER chairman Jrgen Schrempp announced two years ago that he was separating from his wife, he told journalists he was facing a choice between work and marriage.

The then just-completed $37 billion (25 billion) merger with America's Chrysler Corporation "means more to me than anything else in the world", he added.

Today, as the US Federal Reserve is cutting interest rates to try to head off a recession and Chrysler - which barely escaped bankruptcy in the two previous US slumps - is once again the sickest of the American motor giants, Schrempp could be forgiven for cursing the day he allowed his ambition and his impetuosity to lure him into such a high-risk venture at the peak of the US industry cycle.

Within six months of completion in November 1998, doubts about whether the new company was meeting its financial targets triggered the start of a long slide in DaimlerChrysler's share price. US investors in particular baled out amid a cacophony of clashing boardroom egos and the departure within two years of most of the top American management - beginning with Bob Lutz, the man widely credited with making Chrysler the money machine it had become by the mid-1990s.

"The top executives at Chrysler had little incentive to stay and make the deal work.When they left, several of them were able to cash in tens of millions of dollars of share options," says David Waller, whose book on Daimler-Chrysler is to be published next month.

A succession of profits warnings last year, culminating in December's revelation that the Chrysler operation had racked up losses of e1.4 billion (900 million) in the fourth quarter alone, have confirmed the wisdom of those investors who dumped their stock.

At the Detroit Motor Show last week, there was even more bad news.

Chrysler's losses are helping to bleed the merged group dry. Daimler-Chrysler ended last year with no net cash in its balance sheet even though it finished the third quarter with a surplus of just under e6 billion.

The merged businesses are now worth less together than Daimler- Benz was on its own before the Chrysler deal.

"Schrempp got the timing totally wrong," says a senior investment banker who knows the company well.

Johannes Reich, head of research at private Frankfurt bank Metzler says: "In retrospect, the price Daimler paid was far too high. The deal also demonstrates just how difficult it is to achieve global scale, especially through acquisitions."

So Schrempp, the self-proclaimed "king" of the snakepit that is the Stuttgart company's headquarters, faces months of wriggling as he tries to explain to shareholders how the Chrysler acquisition has turned into a gaping wound near the heart of Europe's most consistently profitable car and truck manufacturing business and what he and his management colleagues are planning to do about it. The launch of the DaimlerChrysler union could not have been more glitzy.

Schrempp and his Chrysler opposite number Bob Eaton booked the London Arena in Docklands to make a joint announcement. As they were mobbed by reporters and photographers, the rhetoric too was florid. "We are combining the two most innovative and creative companies in the world," Schrempp gushed, adding that DaimlerChrysler "would set the pace in the automotive world in the 21st century".

But the seeds of doubt were already being sown. The transaction was presented publicly as a merger of equals, not a takeover. It was a structure that helped get Chrysler management support, tackle the public relations problem posed by the German company's decision to march into Motown and reduce investor and corporate taxes.

It also helped to get the powerful United Auto Workers union behind the deal. Thus, although DaimlerChrysler was ultimately incorporated under German law with a German-style two-tier board (and was not therefore included in US stock market indices), Schrempp and Eaton became joint chairmen, a more than symbolic demonstration of American managers' continuing belief in their operational independence.

In reality, as former Chrysler executive Tom Stallkamp confided to a journalist and Schrempp inadvisedly confirmed in a Financial Times interview last year, the "merger" was a German takeover. The propaganda and personnel moves to the contrary served only to muddy the waters at the top, fostering dissent.

Fears that this was going to be a marriage made in hell, not "motor heaven" as Schrempp and Eaton maintained, were being voiced even before the ink was dry on the contract. "Is there smoke in the cockpit?" asked one angry small investor sporting full Bavarian dress with a feather in his hat at the September 1998 shareholders' meeting that approved the Chrysler takeover.

"There is, and it's black smoke. There are going to be huge losses everywhere, (these companies) are too different."

Comments after the deal from then Chrysler boss Eaton to the effect that, as well as seeking expansion out of its US market, Chrysler was looking for a financially strong partner to help see it through the next recession, suggest that Schrempp's global ambitions blinded him to the very risks against which Chrysler's management were insuring themselves.

Not that Schrempp lacked support. Daimler had long concluded that it could not just rely on luxury cars for its future growth. This judgment lay behind the even more disastrous diversification strategy followed in the 1980s and aborted in the 1990s.

Schrempp's decision to focus the company on cars and move out of the luxury bracket and into volume production in the US (and Asia) so as to turn it into a global rival to General Motors and Toyota was approved by Deutsche Bank, Daimler's biggest shareholder with more than 20% of the premerger equity.

Deutsche's former chief executive, Hilmar Kopper, is still chairman of DaimlerChrysler's supervisory board.

So now, as Eaton foresaw, Schrempp is publicly pledging to use the deep pockets of the world's largest bus and truck manufacturer and still hugely profitable luxury car builder to sustain Chrysler's continuing losses. He has warned that it could take three or four years before the new (German) top management can turn Chrysler around. For not only are Chrysler's models ageing, there is already excess capacity in the light truck segment of the market, whose growth was the foundation of Chrysler's mid-90s profitability.

This segment, which includes minivans and sports utility vehicles, now accounts for about half the US industry's 16.5 million annual unit sales - cars no longer dominate. But analysts are saying that over the next two years, as demand for cars crashes, US car companies could add a further two million units a year of capacity to the 8.5 million that already exist.

Dieter Zetsche, the new Chrysler boss, will have to chop capacity and workers and hope that America avoids a protracted downturn. Chrysler's inflexible labour contract with the UAW will help to make restructuring an expensive proposition.

Copyright 2001
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