Daimler Chrysler failed merger - The W1nners' club

 

Back in May 1998, the top brass at car giants Daimler-Benz and Chrysler announced the biggest cross-border merger in industrial history. The rationale at the time was quite clear. Chrysler languishing in third place in the Detroit Big Three, was struggling to maintain its productivity and world standing.  The more prestigious Daimler Benz on the other hand was dynamic, but essentially a specialist producer of premium saloons that had made few efforts to widen its product range and customer base.

Amalgamating the two companies created an industrial giant that had global sales of more than $150 billion, making it easily the fifth largest car manufacturer in the world. It was to be held aloft as a shining example of what could be achieved via globalisation by combining two well established brand names. The seamless integration of the two corporations would enable the group to meet demand in nearly all segments of the car market and sales as a result were expected to rise exponentially.

The seeds of post-merger discontent were sown early however, as it became clear that a “merger of equals” was in effect a takeover of Chrysler by Daimler. The cultural differences between the two organisations proved insurmountable and as is often the case in acquisitions, the perceived synergies ultimately only existed on the surface.

In theory the merger should have created two specific areas of competitive advantage. The first lay in the creation of a cohesive global brand architecture. Consider Toyota for example. Its brand structure is very clear and logical: Lexus for the high-end buyer, Toyota for the middle-income family, and Scion for the young and hip. The unambiguous segmentation makes sense in the marketplace and the progression between demographics exists naturally. Young people get married, have children, and then go on to buy minivans; people with money make the move up to luxury vehicles.

The second area of strategic advantage lay in the creation of a coherent platform strategy that was built on the economic logic of parts sharing. The cost of new vehicle development is notoriously high so car companies usually create generic “platforms” from which they then design families of vehicles. They will also try to share parts between different platforms to drive economies of scale.

Realizing synergy across brand architecture and developing a coherent platform strategy would have required the deep integration of the two companies. German engineers for example, would be forced to design cars using parts that were created by American engineers and vice versa. The management teams would need to develop a global brand strategy that was backed up by logical market positioning. In the end none of this actually happened. The two organizations were run as separate entities and when structural shifts in the marketplace like rising gas prices and the move away from SUVs and trucks took hold, Chrysler was left out in the cold meaning it became necessary for them to part ways.

Initially, Chrysler was granted the freedom to do what it had always done by the more cautious German management. Daimler-Benz simply wanted to take advantage of Chrysler’s efficiencies but a number of key players at Chrysler had left the company and the staff became demoralised.

Within a period of 19 months from the date of the merger, two American CEOs had been sacked and German management took on a more hands-on role in a bid to administer the Chrysler division as if it were a German company.

From a Chryslerian perspective therefore, instead of leveraging economies as a result of the merger and gaining a competitive advantage, the marriage achieved nothing more than driving Chrysler into ever deepening chaos.

The different cultural habits and attitudes irritated both sides; a situation that was exacerbated by the fictitious official line that the amalgamation was a merger of equals. It was in effect nothing of the sort. Managers maintained the “merger” fiction for a considerable period which was relatively harmless in itself, except American staff members continued to believe that there was an element of “joint control”. It took several years to achieve any measure of integration of the companies’ different ways of working and neither side was given the required time or training to study the other’s mindset.

Cultural differences ultimately led to differences of opinion and methods at almost every level. From a German perspective, Chrysler was a company that had problems in every department, not least productivity. It took Chrysler 40 hours to make a vehicle on average but Honda and Toyota were able to produce a car every 20 hours. The Germans, with their emphasis on quality found Chrysler’s quality control wanting. There was also no plan in place to make improvements in this area. The beleaguered Chrysler swung from making a profit of $2.5 billion in the first half of the merger year to a loss of $2 billion in the second.

The Daimler Chrysler merger ultimately proved to be a costly mistake for both companies. Daimler-Benz was characterized by methodical German decision-making whilst the US based Chrysler encouraged creativity. Chrysler represented American adaptability and equality empowerment whilst the culture at Daimler-Benz valued a more traditional respect for hierarchy and centralized decision-making.

In the case of the Daimler Chrysler merger, both companies were never truly willing to cooperate to the fullest by accepting the required change and compromise needed to make the merger a success.

In defence of the two companies, our publisher Darcus White once tried to chat up both an American girl and a German girl whilst on holiday in Ibiza and apparently didn’t get anywhere with either of them – cast-iron proof that a successful acquisition is dependent upon cultural understanding as well as not being too drunk to hold a decent conversation by the dancefloor!

 

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