The DaimlerChrysler Merger

Okan Doan M. Can ncekara yk Alanbay Ertan Kkolu

Introduction
The merger of Chrysler Corporation and Daimler Benz involved the creation of a truly global corporation by combining two organizations of roughly the same size and in the same industry, but with two very diverse cultures. This presentation will try to explain the driving factors of merger and the keys to post-merger success.
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Industrial Analysis
The worlds largest manufacturing industry The most global one High fixed-costs High entry barriers Indusrty shaping breakpoints
Fuel-efficient cars with good price/performance ratios from Japanese Arrival of lean manufacturing systems and optimization of operations The global drive for rationalization led to overcapacity and decreasing price levels Overcapacity led to consolidation in the industry
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Market Analysis
The world population has doubled The number of cars on the road increased tenfold North America, Western Europe and Japan accounted for %75 of sales Traditional markets in industrialized countries saturated Growth expected in developing countries ( Asia and Latin America ) Large idle capacity, currency volatility , high inflation and competetive pressure creates difficulties

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Market Analysis
Number of available models increased considerably Many car producers switched to platform design Customers became more demanding at no extra costs Powerful features needed to be included in the base package Few profitable market niches exists; light trucks
Pickup trucks - Ford as market leader Multipurpose vehicles ( MPVs) - invented by Chrysler Sport Utility vehicles - Fastest growing segment in U.S Minicars - Mailnly popular in Europe

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The Worldwide Market for Cars

(in 000s of Units)
60 50 40 30 20 10 0 1993 1994 1995 1996 1997 1998 1999 2000 Cars Com.Vehicles Total

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Trends in the industry

Overcapacity
Closing of plants, decreasing number of producers, mergers and acquisitions

Role of suppliers
Strict quality standarts, complex system of subassemblies,closer relationships, sole suppliers, longterm contracts Large suppliers offered their product globally Pressure on reducing prices and on global existence forced suppliers to merge or exit
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Trends in the industry

Marketing and Brand image
Sales over the internet Financing the market Megadealer companies for used cars New business concept based on selling , renting, leasing and servicing Segments started to overlap and became obsolete More focus on the power of brands

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Trends in the industry

Technology
Industry became knowledge-intensive Large manufacturers cooperate to reduce R&D expenses Because of traffic jams various approaches taken to reduce overcongestion Heavy pollution forced to lower emissions, many companies started to invest in fuel cells

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Dominant Economic Traits in Auto Industry

Scope of the Rivalry Market Size Number of Competitors Growth Rate (Units) Increasingly Global, W. Europe has 41% of Car Market, NAFTA 50% of Commercial Vehicle Market 1998 500 Million Vehicles on the Road, 49 Million New Registrations Industry is Shrinking, Several mergers and acquisitions; GM/Saab, Ford/Jaguar 1998 (-2.7%), forecast for 1999 (-3.4%) and 2000 (.1%). Forecast are low for 2002. Profits decreased even with growth Partially integrated industry

Prevalence of Backward Integration Entry Barriers

Very High, Experience Curve, sizable economies of scale, brand loyalty, large capital requirements, access to distribution channels.

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Dominant Economic Traits in Auto Industry

Exit Barriers Pace of Technology Product and Customer Characteristics Capacity Utilization Rapid Product Innovation High Fixed Costs, Specialized Plants and machinery to some degree, Shared facilities Obsolescence is not really an issue because of resale value and functionality. Segmented by Social Status and Value Orientation. Most manufacturers have broad product lines. Over capacity. U.S. - 80% capacity, W. Europe 70% capacity, Asian Mfgs. 60% Many innovations in the 1990s , numerous cooperation agreements. In ten years, timeto-market went from an average of 60 months to 24 months.
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Drivers of Change in Auto Industry

Driver Slow Industry Growth Increasing Globalization Technological Change Suppliers Larger Role Increasing Government Regulation Increasing emphases on reducing Costs Industry Effect
More Consolidation, Larger firms in better position to reduce costs in production, purchasing, and product development costs Requires an infrastructure to manufacture and distribute vehicles internationally. Encouraging more cooperative agreements Suppliers account for 69% of entire value. Working in parallel with suppliers helps to reduce time to market. Concerns regarding safety, emissions, fuel efficiency. Mature market requires new features, but at the same time manufacturers must be concerned about costs
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Key Success Factors in Auto Industry

Technology-related Manufacturing-related Distribution-related Skills-related

Product Innovation is required Low-Cost Production Efficiency is a must Requires a network of dealers to distribute vehicles internationally. Time-to-market is important

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New segments in the U.S Auto market

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Consolidation in the Auto Industry

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Global Players in the Auto Industry

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Financial Performance of Selected Automakers

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Daimler Benz
Characterized by structured, hierarchical management, and German engineering excellence. Emphasized luxury markets within a highly diversified corporate structure.

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Daimler-Benz - SWOT
Being sold in more than 200 countries Mercedes is one of the strongest global brands Regarded as the best engineered cars in luxury cars sector Lean Manufacturing Systems

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Daimler-Benz - SWOT
Diversification process into a technology concern didnt produce anticipated synergy. European truck division produced heavy losses. Due to small production volume of Mercedes-Benz, suppliers transfer innovations to competing brands R&D cost-on-turnover was far above the industry average Basically a German manufacturer with huge factories
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Daimler-Benz - SWOT
Except for niche players, luxury car brands are not independent. DM covered a much broader range than its competitors although it remains as a kind of transportation company

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Daimler-Benz - SWOT
Japanese rivals producing similar quality & technology with lower costs Number of brands increasing in luxury segment Over capacity in world economy Unsuccessful attempt of Mercedes with Smart brand trying to expand outside its traditional target segment Consolidating Industry
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Chrysler
Grounded in market driven American entrepreneurship and forged in the near bankruptcy of the 1980s Emphasized innovation and flexibility, within a highly focused business strategy.

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Chrysler - SWOT
Crysler has been fighting for survival, thus is a strong competitor. It has the best cost effectiveness time-to-market design & development times set world standards. Successful in market due to trendy and fashionable design Mostly bought technology from suppliers

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Chrysler - SWOT
Crysler is the smallest and most vulnerable of U.S. Big three, is the leanest manufacturer. It had been to the edge of bankruptcy twice. Its position in car segment is weakening. It lacks of management depth & products suited to nonNAFTA markets thus cannot expand beyond North American
Free Trade Area

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Chrysler - SWOT
Crysler is focused only on cars & light trucks. Market leader in minivans and sport utility devices. A fast follower in technology.

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Chrysler - SWOT
Target of a hostile takeover battle by its largest shareholder. Emerging distribution systems in US car industry like megadealers, e-commerce, car management companies. Rapid dissemination of electronic systems in cars leading Crysler to be an assembler more than a manufacturer thus weakening position in
value creation chain.

Any decline in US economy could hit Crysler harder than the larger Big Three rivals and the Japanese competitors. Competition was catching up for minivans ans sport utility vehicles
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Geographic Spread of Daimler Benz AG and Chrysler corporation

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Communicating the merger

Daimler-Benz proposed the merger Within 4 months , a team of only 20-30 managers The merger was announced on May 7, 1998 Merger of equals, not an acquisition Merger for growth ( no layoffs, no plant closures) With revenues of $132 billion Approximately 440,000 employees An international union of this size was without precedent Integration phase was expected to last 3 years Difficult to achieve cost saving due to lack of overlapping products
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Proxy statement of the merger

Specified the financial targets
Savings of $1.4 billion in the first year. Annual benefits of $3 billion within 3 to 5 years

Clearly defined a framework for the postmerger phase

Speed was priority number one Accountability and transparency All top managers involved in the process
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Mission
Purpose is to be a global provider of automotive and transportation products and services, generating superior value for our customers, our employees and our share holders. Mission is to generate two great companies to become a world enterprice that by 2001 is the most succesfull and respected automotive and transportation products and services provider. We will accomplish this by consistently delighting our customers with the quality and innovation of our products and services, resulting from the excellence of our process, our people, and our unique portfolio of strong brands.
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Goals and Values

Goals
Delighted customers Superior profitability Unique portfolio Sustained growth Integrated enterprice Globalization

Shared belief & values

Customer Focus Innovation Teamwork Inspiration Opennes Agility Quality Speed Excellence Profitabilty Responsibility

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Monitoring the integration (CIC)

The Chairmens Integration Council (CIC) was founded to monitor the integration Co-Chaired by both Eaton and Schrempp 2 executives from Chrysler 4 executives from Daimler-Benz Process divided into 12 clusters ( Issue resolution teams ) identifiying and realizing the synergies between the two companies The Postmerger Integration (PMI) Team supported and helped monitor the integration process This coordination structure oversaw 80 integration projects invloving hundreds of managers across the organization
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CIC

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The War Room

The center of the aggretaging and monitoring the progress of the different Post Merger Integration Team (PMI) projects Located in Stuttgart Equipped with the most modern IT equipment Progress input on a weekly basis Easy access to this system

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The Bible
Guidelines for DaimlerChrysler Brand management (bible)
Outlined the clear separation of both brands Prohibited a common platform strategy Prohibited the establishment of combined dealers en Europe.

The brand value of both Mercedes-Benz and Chrysler was undisputed. The brands were considered the most valuable asset The perception of both brands was very different.

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The results of the merger for the first year

Sales had risen by %12 to $146.5 billion Operating profit had grown by %38 to $9.6 billion DCX was the worlds most profitable car company in 1998 Over 19,000 new employees had been hired Other divisions had achieved record results Surprising loses from the new Smart city-car

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The results of the merger for the first year

Was the company running the risk of hindering anticipated cost savings ?
There were so few common parts

The wear and tear on the organization was becoming visible.

Merger activities wasting too much time up to %40 of top managerss time Stress increased

Uncertain times is increasing Improvement needed on the performance of the stock Chrysler was lacking appropriate products for the European market and developing countries
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DaimlerCrysler - SWOT
Including the two brand values. High top management support in merger activities Employees salaries guaranteed for 2 years and 19,000 new employees - loyalty

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DaimlerCrysler - SWOT
Different perceptions of two brands how to find financial
savings with so few common parts?

Little overlap between Daimler & Crysler implies little synergy created. Financial savings are not enough for a sales volume of $ 146 billions approximately.

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DaimlerCrysler - SWOT
Changing shareholder structure European shareholders increased 19 % in one year. Worlds most profitable car company in 1998. They had an example of U.S. Freightliner & Sterling divisions: US market leaders in heavy trucks not being integrated with Mercedes truck division.

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DaimlerCrysler - SWOT
Crysler lacks appropriate products for European market & developing countries. Cultures issues and uncertainities in any means Suspects of a Crysler acquisition rather than a merger-ofequals Merger activities taking too much time, up to %40 of top managers American shareholders decreased 19 % in a year
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Implementation Is Everything
From research most mergers fail Lack of speed is the single most important reason Schrempp had commited himself to making merger the best strategically and the best implemented and communicated. Set the international goal of concluding the merger in 2 years (former was 3 years). Speed was not characteristic of German model of corporate governance The strict division of supervisory board and management board was slowing down the decisions The necessary consensus with the workers councils and workers representative on the supervisory board had to be build on all important employee issues
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Cultural issues
Top management payed close attention to cultural issues Keys to Success
Profile and assess corporate cultures Identify potential or actual culture clash barriers to a merger or acquisition Determine what to do to avoid, minimize, and resolve culture clash Plan for efficient and effective post-merger cultural integration of the two organizations
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Cultural issues
In Europe , the public focused on differences in compensation.
Eatonss salary in 1997 ($16 million) estimated to be 8 times that of Schremppss. All Chrysler employees salaries were guarantied for 2 years. For future executive salaries
A base salary depending on the executivess responsibilities An annual bonus payment Stock-option plans Phantom share payouts linked to certain key earning targets

Salary differences with in other parts of the organization (had to pay globally competetive salary) Dividend payments Americanized
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Seven Rules of Merger Success

Design the strategy Develop the integration plan Vision and strategy Leadership Synergies and growth Early Wins Culture Communication Risk Management
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Implementation

Why Do Mergers Fail ?

Excessive competition for leading positions / Power Politics Focusing on the old organizational chart rather than new business process Conflicting goals among newly merged departments Disregard for the needs of employees Disregard for change in the process of integrating the new partner. Consepts for integration are not detailed enough Length of the integration process
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Recommendations
DaimlerChrysler has to properly determine its brands in relation to its competitors Improve cost effectiveness Managing cultural differences
Training and development

Re-define the organizational structure and procedures if necessary Downsizing The vision must be reinforced with actions Extensive and regular communication Effective planning Post-merger integration teams continue Retain key people
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Thank You...

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