Long, silent car ride for pair

The 1998 merger between Daimler-Benz and Chrysler never really found a smooth road, and with buyers interested in the U.S. company, it appears DaimlerChrysler's days are nearly over

By Rick Popely and Jim Mateja
Tribune staff reporters
Published April 8, 2007

They married in 1998 but have been sleeping in separate beds most nights since the honeymoon.

Now a split between Chrysler Group and DaimlerChrysler AG seems likely, leaving the German side with egg on its face from initiating an ill-fated arrangement that will cost it billions, and the American half facing the prospect of starting over, perhaps with a more demanding new partner.

How did it come to this?

Looking back, most analysts think the only reason the marriage took place is because the chief advocate of the deal, former DaimlerChrysler Chairman Juergen Schrempp, who was trying to forge a global empire, knew he would be in charge.

During a press conference when Schrempp and then-Chrysler Chairman Robert Eaton were calling it "a merger of equals," they were asked who held the tie-breaking vote in case of a deadlock. "I do," Schrempp quickly replied.

"There were so many hesitations about the marriage in the first place, and that the mixing of two different cultures wouldn't work," Global Insight analyst Rebecca Lindland said. "But shareholders pushed it for better profits.

"The Germans had no desire to work with the blue-collar American company and share things. The feeling of the Germans was that if you mix clean water with dirty water, you get dirtier water."

Indeed, part of Toyota Motor Co.'s success is its Lexus luxury brand shares vehicle platforms and components with the Toyota brand, lowering development costs and raising the quality of both. For example, the best-selling Lexus model, the ES 350, is derived from the Toyota Camry, and the two cars were designed simultaneously.

In contrast, Mercedes-Benz, the flagship brand of the company, kept its vehicle development largely separate from Chrysler's, and the two shared only parts, not designs.

"They just let Chrysler pretty much run as Chrysler," said Mike Parker, a skilled trades worker at Chrysler's Sterling Heights, Mich., plant. "There was very little difference in the plant (after the merger). In general, people in the know said there wasn't as much integration as they expected."

The most visible change on the assembly line was that more equipment, such as robots and conveyors, came from German-based companies.

"I don't think Daimler did good due diligence in the beginning or it would have seen that Chrysler's cycle plan was sparse on new product except for the [Chrysler 300] rear-drive sedan," said George Peterson, president of industry forecaster AutoPacific.

"Chrysler saw it as a chance to move faster to become a global company with Daimler but didn't realize it would take days and days of meetings to make decisions or that Daimler wouldn't take advantage of Chrysler's dealer group and factories in the U.S.," he said.

Mercedes operates an assembly plant in Alabama that builds only Mercedes models, and no Mercedes vehicles are made at Chrysler plants in North America. Toyota builds Lexus sport-utility vehicles in the same Canadian factory as Toyota Corollas.

Chrysler lost $1.475 billion last year, the only DaimlerChrysler unit in the red, and has made money in only two of the last six years, cementing its second-class status within the company.

DaimlerChrysler's stock price has soared 32 percent since Chairman Dieter Zetsche said Feb. 14 that all options are on the table for Chrysler, including a sale, a clear signal that shareholders -- most of whom are European -- demand a divorce.

Daimler spent $36 billion on Chrysler and will never recoup most of that money. Four offers are on the table for Chrysler, the latest a $4.5 billion bid on Thursday from billionaire investor Kirk Kerkorian. The others, which haven't been disclosed, are from private equity firms Cerberus Capital Management and the Blackstone Group and Canadian-based supplier Magna International Inc.

DaimlerChrysler could narrow the list of potential suitors to one or two this week and allow them a deeper dive into Chrysler's financials, a source familiar with the situation said Friday. All the suitors except Kerkorian have seen Chrysler's books, but the source suggested that Kerkorian may not get a chance because it would delay the process too long.

Kerkorian offered $100 million earnest money to get an exclusive 60-day period for due diligence and would forfeit $25 million if he decided to back off.

If it is sold as expected, Chrysler faces the possibility of being broken up and sold in pieces or being sold again to new investors.

"Anyone who is in the game now is not in it out of benevolence. They are out to make money from undervalued assets," said David Cole, chairman of the Center for Automotive Research.

"It could be the players are in it to sell Chrysler or break it up and make money off the assets. It could be the players are fronting for other companies."

One such intriguing scenario, Cole suggests, is that Kerkorian may be angling for Chrysler so he can enlist Carlos Ghosn, chief executive of Renault SA and Nissan Motor Co. to run it. Kerkorian tried last year to push General Motors Corp. into an alliance with Renault and Nissan last year and bring Ghosn into the picture but was rebuffed by GM.

Lindland says Chrysler offers a buyer three established U.S. brands -- Chrysler, Dodge and Jeep -- with Jeep having the best chance of expanding overseas sales. But success in the auto industry depends on a simple but elusive formula: build vehicles that people want to buy.

"This is an unforgiving industry. Only a couple years ago Chrysler was the darling of the Big Three," she said. "It had momentum with great products that were making money. The Hemi V-8 promoted it as an American company for blue-collar people, and everything went great."

Lindland thinks the Dr. Z marketing campaign that featured Zetsche hurt Chrysler by portraying the company as German, but Chrysler also got caught in 2006 with a lineup too reliant on gas-guzzling trucks when gas prices topped $3 a gallon.

Magna's interest in buying all of Chrysler or an equity stake is to hang on to its largest customer. DaimlerChrysler accounted for about 25 percent of Magna's $24.2 billion in sales last year.

Peterson thinks Magna, which assembles vehicles for Chrysler, Mercedes and others in Europe, could team with an equity firm to win the bidding war for Chrysler.

The winner faces the challenge of dealing with Chrysler's unions and an estimated $18 billion in unfunded pension and health-care liabilities.

Though indications are that Chrysler will be sold, a deal is far from assured, and the unions could play a big role in the outcome.

Discussions about buying Chrysler typically include caveats that the deal hinges on getting concessions from the United Auto Workers union in the U.S. and the Canadian Auto Workers.

But Parker, a UAW worker in Sterling Heights, says union members could well balk at concessions, feeling they've given enough already.

"I'm not 100-percent certain that it will sell. Maybe the unions will make it so expensive that the bidders will drop away," Parker said.

"The fear is that most of those interested in buying Chrysler think they can pull off a deal where they sell off the valuable pieces, like Jeep, and close down the rest," he said.