Global Economics

DaimlerChrysler: End of an Unhappy Pair?


A split would leave both the U.S. and German units of the automaker to face uncertain futures; Daimler's CEO plans a risk-reducing minority stake in Chrysler

The impending breakup of DaimlerChrysler is fraught with risks for both sides. The Americans face the threat of a fire sale, while the Germans are more vulnerable to a corporate takeover. But investors are lining up to get a piece of the action -- and CEO Zetsche has a secret plan.

It was probably the biggest, most beautiful and most up-to-date Chrysler plant Detroit has ever seen -- and possibly the automaker's farewell gift to its home town.

The Jefferson North assembly plant came at a price tag of more than $1 billion. When the first Jeep Grand Cherokee rolled off the assembly line in 1992, it was still cause for celebration. As helicopters circled overhead, the CEO of Chrysler and the mayor of Detroit, accompanied by a large police escort, personally drove the vehicle from the plant to the exhibition halls at the North American International Auto Show. Once there, they drove up the steps and, bursting with pride and high spirits, crashed it through a large glass wall. That was in 1992, but it seems like yesterday to Dale Hunt. "We worked in three shifts," he says. "It was a huge success."

Now, 15 years later, Hunt sits in an office at the United Auto Workers (UAW) headquarters, across the street from the plant. As a regional manager at the powerful trade union, his current job requires that he deal with management initiatives which bear promising-sounding names like SMART -- and which ultimately mean job cuts.

When asked how many jobs have been cut so far, Hunt sighs loudly. He pulls out his calculator, makes a few phone calls and comes up with an answer: Almost 5,000 layoffs in his plant a few years ago, and now another 2,700. "And there's more on the way," he adds.

The worst part of it is that neither the union nor the employees have any idea what exactly is going to happen. The DaimlerChrysler restructuring plan currently calls for layoffs totaling 13,000 jobs at Chrysler. But how many more jobs will have to go if Stuttgart-based Daimler completely divorces its erstwhile dream partner?

How many factories will be closed if financial investors like Blackstone or Cerberus take over the company? What happens if Magna International, a Canadian automotive supplier, acquires a stake in Chrysler? Does Chrysler even stand a chance of surviving without Daimler in the long term? And what will happen with the remaining German part of the group?

There is just as much uncertainty in the offices of the German part of the group, Daimler, as there is in Detroit. It's true that many executives and staff at Daimler can't wait for the expected separation to finally become reality and put an end to former DaimlerChrysler CEO Jürgen Schrempp's dream of building a "Welt AG" ("World, Inc.") global corporation. The American partner has long been seen as a hugely expensive burden for Daimler. But all euphoria aside, even senior management at Daimler's Stuttgart headquarters aren't quite sure what will happen next, once Daimler suddenly finds itself on its own again.

Fear of a black hole

It seems like Mercedes-Benz and Chrysler just can't get along. But since CEO Dieter Zetsche began looking into a sale of Chrysler, the two companies suddenly seem terrified of going their separate ways, with both apparently afraid of falling into a black hole.

Executives and board members alike still have clear memories of corporate strategist Rüdiger Grube's endless PowerPoint presentations. For years, he used his many graphs and charts to explain, in painstaking detail, why Mercedes-Benz could only have a future if it formed a partnership with Chrysler.

According to one of Grube's diagrams, Mercedes, as a premium manufacturer that sold only about a million cars a year, was spending far too much money on parts. But by combining its parts procurement system with mass producer Chrysler, the Stuttgart-based firm could save billions, Grube argued.

Another chart showed that Mercedes-Benz could hardly afford to invest in new technologies if they would only be used in the relatively small number of luxury vehicles the company produced and sold each year. A more efficient approach, according to Grube, would be to install the new technologies in Mercedes vehicles first and then in the three million cars rolling off the assembly lines at Chrysler each year.

If all those PowerPoint slides weren't just smoke and mirrors to push through the merger, then employees and shareholders must now be seriously concerned about the future of Mercedes-Benz.

According to the analyses of former Daimler-Benz CEO Edzard Reuter, Mercedes-Benz, as a premium manufacturer, was in the long term too small to survive in the cutthroat automobile sector. Reuter's plan was to transform Mercedes-Benz into a technology company by acquiring businesses in the aerospace sector, with the idea that Mercedes-Benz automobiles would benefit from the technological expertise of the new affiliates.

Reuter's plan failed, but his successor Jürgen Schrempp also believed that a luxury carmaker like Mercedes-Benz could quickly become an endangered species. By merging with Chrysler and acquiring stakes in Mitsubishi and Hyundai, Schrempp planned to form a giant global corporation which he referred to as "Welt AG." Instead, the plan turned into nothing but a giant flop.

The Daimler Group, as the company may well call itself if it splits with Chrysler, could soon become the kind of business Daimler-Benz was in 1985: a producer of cars, trucks and busses. The company will drop from the second to the sixth spot on the list of the world's biggest car manufacturers. But this would not necessarily be a tragedy -- size is no guarantee of success. The problem, however, is that Daimler cannot simply turn back the clock and become what it was once was.

Daimler isn't as well prepared for cutthroat competition in 2007 as it was when Schrempp launched his ambitious experiment. Even worse, Mercedes-Benz has since been forced to relinquish its position as the world's leading luxury carmaker to BMW, partly because executives in Stuttgart were distracted by Chrysler and allowed quality to slip.

The group now has far fewer reserves than it once did. To raise cash, it has already sold off its Adtranz rail business, as well as holdings of Debitel, MTU, Temic and many other companies, for a total value of more than €10 billion. And the group can no longer fall back on Deutsche Bank since the German banking giant reduced its stake in DaimlerChrysler from 12 to just over four percent.

What all this boils down to is that Daimler minus Chrysler is a potential takeover candidate. And what about Chrysler without Daimler? Why should the US company suddenly be more successful than it was when it had the considerable financial and technological support of its Stuttgart parent?

This is why Chrysler's future depends in large part on who becomes its new owner. Some fear that the company could face being carved up if it is taken over by a private equity firm such as Cerberus or Blackstone.

The current restructuring plan calls for shutting one plant to bring Chrysler back into the black. Under that plan, the company is expected to be earning a return of 2.5 percent by 2009. This is unlikely to be enough for either Cerberus, which has secured the services of former DaimlerChrysler and VW executive Wolfgang Bernhard, or its competitor Blackstone.

Both potential buyers must rely on the cooperation of the powerful autoworkers' union, the UAW, which will have an important say in the sale. This is because one of Chrysler's problems is its commitment to pay healthcare and pension benefits worth about $15 billion to its employees. Only if the UAW agrees to a reduction of these benefits will Chrysler's new owner stand a realistic chance of successfully restructuring the company.

UAW President Ron Gettelfinger, who wants to limit the number of layoffs, has already discussed the matter with the financial investors. One of the proposals on the table is especially interesting: In return for cuts in health insurance benefits, Chrysler employees would receive a stake in the company, in the form of stock.

But instead of Blackstone or Cerberus, Magna International Inc., a Canadian automotive supplier, is currently considered the frontrunner in the race to acquire Chrysler. The German daily Frankfurter Allgemeine Zeitung reported Tuesday that the company was in advanced talks with DaimlerChrysler about a possible purchase of its America unit.

Frank Stronach, an Austrian immigrant to Canada, founded Magna in the 1950s when he opened a small business in Toronto. Over the decades he built it into one of the world's leading automotive suppliers. Aurora-based Magna now has around 83,000 employees and does a large chunk of its business with Chrysler. Aside from being a key supplier to Chrysler, Magna also produces, in its factory in the Austrian city of Graz, the Jeep Commander and the brawny 300 C for the US brand.

Magna has a significant interest in Chrysler's survival. But it is probably also the spectacular nature of the deal that attracts self-made man and billionaire Stronach to acquiring a stake in Chrysler.

Stronach's daughter Belinda, a former cabinet minister and, in recent years, a member of the Canadian parliament, has even decided to end her political career and return to help manage her father's company -- all because of his planned investment in Chrysler.

US billionaire and former boxer

Kirk Kerkorian, 89, may well be forced to look on from the sidelines during the upcoming sale of Chrysler. Kerkorian, considered one of the most dazzling players on the stock markets, has already been a major shareholder at Chrysler and recently at General Motors; he buys and sells massive company stakes the way other people buy and sell cars.

DaimlerChrysler CEO Zetsche would rather not do business with someone like Kerkorian if he can help it. Even after the separation, Daimler wants Chrysler's future to be as secure as possible -- not out of any sentimental feelings toward its former partner, but out of self-interest.

Zetsche envisions Mercedes-Benz and Chrysler continuing to procure batteries, tires, dashboards and many other parts jointly in the future. To achieve this goal, he has developed a secret plan to ensure that Mercedes-Benz will still enjoy the benefits of cooperation with Chrysler in the future. However, he intends to limit the risk that billions in losses at Chrysler could jeopardize the entire group.

After Zetsche announced that he would "examine all options," including the sale of Chrysler, it was considered a fait accompli that Daimler would divest itself of the US company completely. But Zetsche actually intends for the new Daimler Group to retain a minority stake in Chrysler after the US firm is spun off. This would enable Zetsche to safeguard its cooperation with the new company, and the Stuttgart company would only be partly affected by losses at Chrysler.

This plan is unlikely to engender much enthusiasm in the markets, at least initially. Hopes of a complete divorce between the German and American partners have triggered a sharp rise in the price of DaimlerChrysler's stock in recent weeks. Some investors could be disappointed if Chrysler is only partially sold off. Zetsche will have some convincing to do if the decision is to be made in May as expected.

However potential buyers Cerberus, Blackstone and Magna also want to see Daimler retain a share of Chrysler, because, even with a new investor, the US carmaker would still depend on support from Mercedes-Benz. Chrysler has drastically limited its investments in recent years, so much so that the company will only be able to develop a sufficiently wide range of new models if it is able to acquire engines, transmissions and other parts from Mercedes-Benz or another partner in the auto industry in the future.

Chrysler would stand little change of surviving on its own. The company derives almost 90 percent of its business from the North American market, with more than 70 percent of its revenues coming from sales of gas-guzzling SUVs and light trucks -- a market segment that is becoming more and more competitive and which is likely to shrink as gas prices rise. Chrysler employees know that life will be even more difficult without Daimler, and they have an interest in ties between the two partners not being cut completely.

"We could face a massacre here," says Buzz Hargrove. He is head of CAW, the Canadian autoworkers' union, which represents more than 11,000 Chrysler workers on the Canadian side of the Detroit River. "Long-term trends, not quarterly results, are what is important in our industry," he says. Hargrove is worried that private equity firms would come in, cut jobs and then sell what's left of the company at a profit -- but "at the cost," he says, "of thousands of workers and their families."

This prospect is so unappealing that Hargrove has only one hope: "We should remain part of the Daimler family."

Translated from the German by Christopher Sultan


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