Why GM Is Serious About Buying Chrysler

Outsiders have been skeptical that GM is really interested in acquiring its smaller rival. But sources say both sides are giving the deal careful consideration

by David Welch

When news broke on Feb. 16 that General Motors (GM) could be interested in buying Chrysler from its German parent DaimlerChrysler (DCX), most industry watchers hated the idea. Longtime industry watcher John Casesa, who is now a partner in the consulting firm Casesa Shapiro, said he also couldn't see the logic. Former Chrysler President Thomas Stallkamp called it "lunacy" (see BusinessWeek.com, 2/20/07, "Kicking the Tires at Chrysler").

But get this: Both sides are serious about it. Two sources close to the situation say that both companies are very interested in exploring a deal, and both have discussed the prospect internally. Daimler management is open to an easy way out of Chrysler's problems, and GM sees plenty of advantages in snapping up its 80-year-old rival, the sources say.

In the three business days since DaimlerChrysler Chairman Dieter Zetsche floated the idea that he was open to divesting Chrysler, GM has looked at the benefits of a deal, and the company's board of directors already has been consulted, the sources say.

While a deal of this magnitude will be difficult to pull off, and a sale may not happen, the serious nature of the talks raises a big question: What does GM see in a troubled company such as Chrysler? The smallest of the traditional Big Three carmakers has plenty of problems, including the loss of $1.4 billion last year and announced job cuts of 13,000.

Combining Operations

One clear implication is that buying Chrysler would add sales of 2.65 million cars a year to GM's 9 million, keeping it way ahead of a surging Toyota (TM) in the race to remain the world's No. 1 automaker.

But there are potential benefits beyond the nearly meaningless sales crown. GM could merge operations so that the combined company would add Chrysler's $62 billion in revenue, plus such plums as the Jeep brand, the Chrysler 300, and the minivan franchise. GM would pull all of that in, without most of Chrysler's overhead. Says Jim San Fillippo, a consultant with Automotive Marketing Consultants: "They look at this as getting all of Chrysler's market share and just a little of its structural cost."

Then GM and Chrysler could combine engineering of vehicle platforms and thousands of parts, systems, and engines to save billions in a way that DaimlerChrysler never did. One Chrysler executive, who asked not to be named, said that talk of sharing whole vehicle platforms between Chrysler's brands and Mercedes is practically verboten. At a press conference on Feb. 14, where DaimlerChrysler announced that it was cutting jobs and considering all options for Chrysler, Zetsche said Chrysler and Mercedes would share engineering but not platforms.

More Layoffs Likely

One can imagine a combined company that merges back-office departments such as legal, purchasing, information technology, and public relations. GM could potentially bring Chrysler's design and engineering groups in, but both would be slimmed-down versions. That means a wide swath of Chrysler's 18,600 white-collar workers might be gone, as either Chrysler workers or their GM counterparts are let go to eliminate redundancies. With former Chrysler President Robert Lutz as its own vice-chairman of product development and having hired a handful of Chrysler stylists in the past couple of years, GM already knows Chrysler's designs pretty well. Casesa hyperbolized that "all of Detroit would be laid off."

Acquiring Chrysler may not be so outlandish for GM. The auto giant already figures that it can save billions just by sharing vehicles among existing members of its own far-reaching global empire. GM is finally coming together as one global company, using models developed in one market (say, Europe) and selling versions of it around the globe the way Honda (HMC) and Toyota do. GM's new midsize Saturn Aura shares many parts with the European Opel Vectra.