The Daimler-Chrysler Collision
In the wake of Daimler-Benz
AG's $40 billion acquisition of Chrysler Corp., simply the latest in what has
become an unending series of massive mergers, it seems increasingly likely that
this is all the fault of that ad campaign for Godzilla . Tell people
often enough that size matters, and look what happens. (Feel free to insert
your favorite Viagra joke here.) At this rate, it'll be the Fortune 15 before
too long. But each of those 15 companies will offer a full range of financial
instruments, car models, and computer chips. It'll be just like Korea, only
better.
Actually, that's far too
harsh a verdict on the new DaimlerChrysler, particularly since Daimler-Benz has
spent the last four years shedding noncore businesses and refocusing its
energies on automobiles, which now account for 70 percent of its revenues. In
addition, as I've pointed out here before, the auto industry is facing severe
problems with excess capacity, so reducing the number of players in the global
marketplace may decrease the chance of dramatic overbuilding. Finally, unlike
the Citicorp-Travelers deal, Daimler and Chrysler will not try to merge
fundamentally different product lines in an elusive quest for super market
glory. Economies of scale do exist in capital-intensive industries, which means
there are opportunities for companies to be simultaneously bigger and more
efficient.
Still,
it's not clear those conditions will exist in DaimlerChrysler. At first glance,
in fact, it looks as if Daimler-Benz got taken. That may seem an odd
conclusion, when you consider that Chrysler is both more profitable than
Daimler--earning $2.8 billion last year on $61 billion in sales, where Daimler
earned $1.8 billion on $69 billion in sales--and vastly more efficient. If
Daimler is adding all the resources of a low cost, lean manufacturing
powerhouse to its already impressive collection of assets, how can it be
getting the raw end of the deal?
In the first place, as impressive as Chrysler's comeback
from the debacle of the late 1970s and from the disastrous later years of Lee
Iacocca's reign was, the company is hardly the jewel of American manufacturing
that last week's press accounts made it out to be. Last year, the company's
earnings slid by 20 percent, while GM's and Ford's both rose; and its U.S.
market share is just 15 percent. And while Chrysler's Jeep and SUV lines are
excellent, it doesn't make a single passenger car of note, aside from the
limited-release Dodge Viper and Prowler.
Chrysler
definitely did a brilliant job of reinventing itself in the early 1980s, taking
advantage of the fact that it operated tax-free until 1985 (because of
carry-over losses) to streamline its operations and rework its design and
manufacturing processes. It also slashed payrolls, cutting the white-collar
work force in half and the blue-collar work force by almost a quarter. As a
result, it halved the number of vehicles it had to sell every year to break
even. More recently, Chrysler's tough-love approach has given its parts
suppliers a financial incentive to cut costs--with resulting savings to
Chrysler of $3.7 billion since 1990. But how all this is really relevant to
Daimler-Benz remains somewhat unclear.
Daimler is not, after all, getting Chrysler at
no cost. Rather, Daimler will be paying--depending upon what its own stock
price does--something like $13 billion more for Chrysler than the stock market
had thought Chrysler was worth. That's a huge premium and, in exchange for it,
Daimler must be expecting to receive more than just the opportunity to include
Chrysler's sales with its own. It must be expecting "synergy."
Certainly
"synergy" is the word on the lips and the word processors of everyone who has
commented on the deal. But not all these commentators seem to understand what
synergy means. For instance, there's very little overlap between the product
lines of the two companies. Chrysler sells SUVs, minivans, trucks, and
mass-market cars. Mercedes sells luxury sedans and sports cars. This doesn't
mean synergy is automatic. All it means is that the two companies are
complementary, that there are no redundancies. And while DaimlerChrysler will
be able to offer cars to the full spectrum of buyers, the current lack of
overlap also means there aren't any easy cost savings to be found by
eliminating duplication. It also means the deal's effect on the overcapacity
problem will be negligible, unless you believe Daimler is going to cut back on
production of its E-class sedans because it's also making the Dodge Neon.
To repeat a point made here too many times before, synergy
occurs only when two companies together can make and market products more
efficiently than they were able to do apart. Daimler is going to have to be
able to make and sell more Mercedes more cheaply because it has acquired
Chrysler, and vice versa, for the deal to make sense. And with a $13 billion
premium, the deal has to make an awful lot of sense.
From
Chrysler's angle the possible synergies are fairly obvious. Chrysler gets 93
percent of its sales from North America. Daimler will give it immediate entry
into the European market, and presumably some of the Daimler cachet will rub
off on Chrysler abroad. Daimler's cars feature safety innovations that Chrysler
will be able to incorporate into its vehicles and, most intriguingly, Daimler
has been a pioneer in fuel-cell technology, which means that Chrysler will
immediately become the dominant American player in developing
noncombustion-engine cars.
But what will Daimler get? Chrysler's expertise
in front-wheel-drive engineering will be a nice addition, although it hardly
seems likely that Mercedes is suddenly going to abandon rear-wheel drive. And
there is the hope that Chrysler's lean manufacturing style will help Daimler
shake up a company that is still heavy with layers of middle management.
Chrysler makes four times as many cars as Daimler with fewer than half the
workers, and although there are good reasons for this--luxury cars require more
labor, Daimler is diversified into other labor-intensive businesses--much of
the difference does stem from Daimler's bureaucratic approach. The addition of
Chrysler may help change that approach, but how remains to be seen. Chrysler's
elaborate system of dealerships might, in theory, help Mercedes crack the U.S.
market, where its share is now less than 1 percent. But, as Daimler recognizes,
selling Mercedes through Chrysler dealers--with all the memories of the Volare
and K-Car--could damage the car's treasured cachet.
DaimlerChrysler will
probably be big enough to run harder bargains with suppliers, although there's
no real evidence that Ford or GM has enjoyed huge cost savings on parts because
of their size. The new company may also benefit from merging warehousing and
inventory management, and ideally there will be joint production of components
that both companies use. But size brings disadvantages as well as benefits, and
never more so than when it's the result of cross-national mergers. If being the
biggest company was a guarantee of success, we'd all be using IBM computers and
driving GM cars. Daimler-Benz and Chrysler were great companies on their own,
productive and profitable, making quality cars that people wanted to buy. Now
they're risking that present for an Ozymandian future, at the cost of billions
of dollars. Size matters, but sometimes for all the wrong reasons.
