Chrysler Fiat

Theshin Angulugaha and Tristan Haas

BADM 670 Global Competition and the World Economy

Prof. John Volkmar

5/12/11
 Chrysler LLC, founded by Walter Chrysler in 1925, is the sixteenth largest

automobile manufacture in the world ("World motor vehicle," 2009) and also the third

largest American automaker for years. The company manufactures and distributes

Chrysler, Jeep, Dodge, Ram, Mopar, and GEM brand vehicles and parts in over 80

countries. Chrysler competes globally against auto mass producers Toyota Motor

Corporation, General Motor Company, Volkswagen AG, and Ford Motor Company.

On January 20, 2009 the two companies confirmed a merger with Fiat holding an

initial 20% equity ownership of Chrysler without making a cash investment or a

commitment to fund Chrysler in the future. Under the agreement, Fiat is contributing to

create a global strategic alliance and the sixth largest global automaker. Fiat will provide

advanced technology and platforms to Chrysler to build smaller fuel efficient cars and

also free license to use all of its intellectual property (“Obama administration,” 2009).

According to the U.S. Department of the Treasury, Fiat will have the right to earn up to

an additional 15% equity in three installments of 5% in exchange for meeting

performance metrics, including a vehicle produced at a Chrysler factory in the U.S. that

performs at 40 mpg; providing Chrysler a global distribution network; and manufacturing

state-of-the art, next generation engines at a U.S Chrysler facility (“Obama

administration,” 2009).

In 1998 Daimler-Benz and Chrysler Group merged to form DaimlerChrysler.

Daimler purchased Chrysler for $36 billion dollars. The combination of both companies

was continuously referred to as a "merger of equals." Daimler and Chrysler were similar

in size, both wanted a stronger market segment in each other’s geographic areas, and both

were in good financial standing within a year of the merger. These companies wanted to
merge in order to lower operational costs, improve market shares of both lines, and

strengthen brand names to stay competitive. Chrysler needed to revitalize some brands

and improve designs. Daimler wanted to improve quality in America and streamline the

use of Daimler parts. The companies made a good decision to merge and improve

business, but some issues surfaced soon after the merger. ("Daimler, Chrysler and," 2008)

DaimlerChrysler had several events occur and specific issues arise before the

separation of the merger. One issue the new company had was attempting to operate with

co-CEOs and co-Chairmen. Trying to run one company with two different leaders who

have different visions, management styles, and are used to different company cultures

does not work. The co-CEOs did not see eye-to-eye at DaimlerChrysler and eventually,

Chrysler's CEO, Bob Eaton, left the company. ("Daimler, Chrysler and," 2008).

Employee wages and benefits were another area of friction for the company. Chrysler's

employees earned significantly more money, "sometimes four times as much," according

to Professor Sydney Finkelstein (Finkelstein, 2002). Differences in pay tore the company

apart even more as German employees found out about it. Time passed and the merger

began to falter, executives from both sides of the company made harsh statements and

accusations about each other. Jürgen Hubbert, a Mercedes-Benz division chief, said,

"My mother drove a Plymouth, and it barely lasted two-and-a-half years.” (Finkelstein,

2002). Other Daimler executives were quoted saying they "would never drive a

Chrysler." (Finkelstein, 2002). The banter by executives was not one sided, Chrysler

vice-chairman, Bob Lutz said, "the Jeep Grand Cherokee earned much higher consumer

satisfaction ratings than the Mercedes M-class.” (Finkelstein, 2002). One of the

synergies the two companies were supposed to benefit from was each other’s dealership

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networks. Daimler did not want Mercedes to be affiliated with a low quality brand, so

the vehicles did not share space at dealerships, especially in Europe. Ultimately

DaimlerChrysler sold Chrysler. ("DaimlerChrysler closes transaction," 2007).

All of the problems Daimler and Chrysler were subjected to were a direct result of

cultural issues. Although millions of dollars were put towards cultural sensitivity

training, such as "Sexual Harassment in the American Workplace" and "German Dining

Etiquette," it was not enough (Finkelstein, 2002). Matthew C. Keegan said Daimler and

Chrysler were battling between "German authoritarian[ism]" and "American creativity.”

(Keegan, 2005). Those were significant cultural attitudes to overcome and were not

going to be completed by basic cultural sensitivity training.

When Daimler and Chrysler began their merger, several things should have

happened. The companies should have been open about the merger and disclosed that it

was never designed to be a "merger of equals." Daimler was in fact purchasing Chrysler.

Cultural training was a good step but only basic sensitivities were discussed. The

executives should have studied the assumptions, perceptions, and mapped each culture.

International Management Behavior (IMB) says it is important to understand how and

why people make assumptions about others. When people understand their assumptions,

then perceptions of different cultures can be controlled as we interact with them. Daimler

and Chrysler should have become more aware of their cultural stereotypes. That way, the

companies would have been able to move past such differences and improve their

operating profits and market shares. The authors of IMB developed a process to

understand social perceptions: describe, interpret, and evaluate (D-I-E) (Lane, 2009). By

using this process, Daimler and Chrysler would have stayed more objective when trying
to understand the differences between each other’s employees, customers, and corporate

vision. Had Daimler and Chrysler applied the D-I-E process, the company would have

understood that salaries and benefits should have remained confidential, the strengths of

each individual company had a place in the new company, and dealerships would have

been able to sell both car brands. (Lane, 2009)

Another tool Daimler and Chrysler should have used was Mapping. Mapping

provides a guide to cultural understanding, especially in complex and changing

circumstances. Mapping the different cultures would have provided Daimler and

Chrysler with detailed information about different people’s values and what they

expected from the merger. (Lane, 2009). Additionally, executives should have treated

every employee from both companies with more respect. It was unprofessional and

ineffective when executives made harsh statements about each other’s brand.

Management never blended together in the new company. The vision of the

DaimlerChrysler company was never jointly developed. From the beginning, the merger

was on a failing path. Had Daimler and Chrysler recognized that there was going to be a

new company culture as a result of the merger, than DaimlerChrysler might not have

failed. In 2007 Cerberus Capital Management, a subsidiary of Cerberus, bought an

80.1% stake in Chrysler. ("How Daimler, Chrysler," 2007)

Under the merger with the German luxury car manufacturer Daimler, Chrysler

LLC continued to strengthen its primary focus on low fuel-efficient vehicles such as

SUV’s, pickups, full size/luxury cars that were popular products in their largest North

American market. These vehicles carried high profit margins for Chrysler and about three

out of every four vehicles sold by the Chrysler group was a light truck, which was the

5
highest percentage by any automaker (Isidore, 2007). When sales began to drop due to

the energy crisis in 2003-2008, Chrysler continued to report losses in billions of dollars.

In 2007, DaimlerChrysler sold 80% of its US brand to Cerberus Capital Management, a

private equity bank, for $ 7.4 billion which it paid $36 billion nine years ago (Isidore,

2007). The situation was critical as the credit crunch increased the prices of the raw

materials and decreased the availability of credit for auto consumers. As the consumers

shifted the demand for smaller, fuel efficient cars, Chrysler was unable to respond

quickly as their plants and technology were focused on producing SUVs and trucks and

luxury brands, therefore the Japanese and European automakers increased and established

their market share in North America. When Chrysler reported a 32% sales decrease in

2008, its competitors Honda and Nissan reported sales increases 1.5% and 8.5%

respectively based on the strong demand for their fuel economic cars with powerful

engines. Chrysler knew that they had to increase their capacity of fuel-efficient cars to

increase their market share to response to the shift in the long-run demand curve. They

had to diversify their product portfolio and bring new models to the market to meet the

consumer demand soon enough before it was too late to compete with the Japanese and

European automakers. On the other hand, Ford has secured a $2.6 billion private loan and

is already on the process of manufacturing low fuel efficient cars. GM had the financial

ability to stand alone and continued to improve their technology and produce smaller new

vehicles even after a federal bailout followed by a bankruptcy protection. As the U.S.

President Barack Obama mentioned in 2009, the situation was more challenging for

Chrysler. Simple federal government bailout or even chapter 11 bankruptcy filing was

not the complete solution for Chrysler not only to survive the crisis situation but also to
be able to thrive in the global automotive industry to create comparative advantage to

compete with strong global automakers.

Conversely, the largest Italian automobile manufacturer Fiat S.p.A., founded in

1899, faced a multiple of threats including rising steel prices, a strong euro and increase

of Japanese and South Korean car sales in Europe. When current CEO, Sergio

Marchionne was appointed to his position in 2004, the world’s 9th largest automaker

("World motor vehicle," 2009) carrying global brands in its portfolio including Alfa

Romeo, Maserati, Ferrari (90% ownership) and Fiat had reported losses during the last

four years. Fiat Group had even considered selling its automotive business to General

Motors in late 2004. Marchionne returned the company to profitability by 2006 through a

revamp of company culture by speeding up introducing new stylish cars to the market.

While turning around Fiat into one of the fastest growing European auto manufactures,

Marchionne introduced a new corporate culture influenced by the American business

model based on markets and profits. He used Apple as a model, focusing on transforming

his products into a “global icon of cool” and followed Apple’s powerful branding process

and even benchmarked his activities against Apple (Gumbell, 2009). Newly redesigned

Fiat 500, which won the European car of the year award in 2008 (“Car of the,” 2008) also

named as “our iPod” by Marchionne and its success, demonstrated the new direction of

the company.

With its global mindset, Fiat formed joint ventures with China’s Chery Motors

(“Fiat ends JV talks with China’s Chery”, 2010) and Indian Tata motors (“Fiat and tata,”

2007). Under the new leadership, Fiat also re-entered several large markets it had

occupied before such as Mexico and Australia. However, Marchinonne realized that in

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order to survive long term in this business, Fiat needed to increase its market share and

produce more cars. Marchinonne mentioned, “The only way for companies to survive is

if they make more than 5.5 million cars every year” (Castonguay, 2008). Marchinonne

estimated only six mass auto producers could survive the crisis with gas prices continuing

to increase in the future. He also stated, “It cannot continue as it did in the past,

independence in this business is no longer sustainable.” (Castonguay, 2008)

As Michael Porter mentioned “An industry’s profit potential is largely determined

by the intensity of competitive rivalry in that industry.” Both Chrysler and Fiat were

facing high rivalry in the industry with the slow market growth and Japanese automakers

such as Toyota and Honda were continuously increasing their sales and market share in a

global scale. Though the threat of new entrants was almost nonexistence, automakers

were restructuring their ownership models, forming alliances and global partnerships to

become more strategic and cost effective producers against each other. Ford’s sale of

Jaguar and Land Rover to Tata Motors in 2008, Nissan-Renault Merger, and GMs

presence in China are a few examples of other companies’ strategic models. More

bargaining power from customers has shifted the demand for smaller, fuel-efficient cars

instead of trucks and SUVs. The shift in demand by customers was the largest threat for

Chrysler, because they lacked the technology and platforms or even the time and capital

to transform their business model. On the other hand, Fiat had invested in the research

and development of these types of vehicles many years ago, therefore they already had

the early advantage over competitors, such as GM and Ford, bringing smaller fuel

efficient cars to the market in a timely fashion. However, Fiat will be at high risk when

Ford and GM (who had the immediate access to capital and technology) begins to build
smaller fuel efficient cars and innovate technology to build powerful hybrids and electric

cars (as a solution for future fuel prices) with direct access to the highly important North

American market. Fiat knew to grab a market share for their new cars, including the Fiat

500. The company has to offer competitive pricing because of the bargaining power of

customers in the North American market. For Fiat to produce a low cost fuel efficient

vehicle, the vehicles have to be produced in the US. Production in the US will allow for

economies of scale and a market hungry for fuel efficient vehicles.

The two companies merged in 2009 with the support of the US government. Both

companies will benefit with Fiat’s access to the US dealership network because it will

bring Alfa Romeo back to the US market and introduce Fiat 500, increase market share,

achieve economies of scale, and also arm Chrysler with advanced technology and

management services by Fiat. It will also provide Chrysler with access to the key growth

markets such as China, Russia and Latin America. Fiat is currently holding 30% of

Chrysler, after achieving two performance goals, and both companies have reported

steady sales growth since the merger. For example, the Fiat 500 is now selling in over

200 dealerships in US. Fiat expects to increase its Chrysler stake to 51% (5% after

completing the final performance metrics plus additional 16% equity for $12.3 billion

through a call option) at the end of this year, when both companies will further

consolidate for accounting purposes and also for better operational functioning. The

company is in the process of refinancing the remaining $7 billion debt owed to the

Canadian and US governments, in order to acquire a 51% stake before the planned IPO

for Chrysler shares in 2011 (Jolly, 2011)

In conclusion, if Chrysler was able to learn from the mistakes they made during

9
the DaimlerChrysler merger, they will be more successful in the future, specifically in

regards to their more recent merger with Fiat. The Fiat merger is more likely to succeed

because it brings a singular, strong leader who has a clear vision for the company. Both

companies are determined to broaden their markets. Additionally, both companies are

advocates for the other’s brand. These two mergers exemplify today’s environment of

global competition. The primary focus for global businesses is market share, mass

production and cost efficiency. Additionally, global alliances will help companies

maximize their comparative advantage by combining their strengths and diversifying

their risks.
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