DaimlerChryslerMerger

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The DaimlerChrysler Merger

Okan Doan

M. Can ncekara

yk Alanbay

Ertan Kkolu


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Introduction

The merger of Chrysler Corporation and DaimlerBenz 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 drivingfactors 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 andcompetetive pressure creates difficulties


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Market Analysis

Number of available models increased considerablyMany car producers switched to platform design

Customers became more demanding at no extra costs

Powerful features needed to be included in the base packageFew 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)

0

10

20

30

40

50

60

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, long-term 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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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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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

Very High, Experience Curve, sizable economies ofscale, brand loyalty, large capital requirements,

access to distribution channels.

Entry Barriers

Partially integrated industryPrevalence ofBackwardIntegration

1998 (-2.7%), forecast for 1999 (-3.4%) and 2000 (-.1%). Forecast are low for 2002. Profits decreasedeven with growth

Growth Rate (Units)

Industry is Shrinking, Several mergers and

acquisitions; GM/Saab, Ford/Jaguar

Number of

Competitors

1998 500 Million Vehicles on the Road, 49 MillionNew Registrations

Market Size

Increasingly Global, W. Europe has 41% of Car

Market, NAFTA 50% of Commercial Vehicle Market

Scope of the Rivalry


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Dominant Economic Traits in Auto

Industry

Many innovations in the 1990s , numerous

cooperation agreements. In ten years, time-

to-market went from an average of 60 months

to 24 months.

Rapid ProductInnovation

Over capacity. U.S. - 80% capacity, W.

Europe 70% capacity, Asian Mfgs. 60%

Capacity Utilization

Segmented by Social Status and Value

Orientation. Most manufacturers have broad

product lines.

Product and CustomerCharacteristics

Obsolescence is not really an issue because of

resale value and functionality.

Pace of Technology

High Fixed Costs, Specialized Plants and

machinery to some degree, Shared facilities

Exit Barriers


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Drivers of Change in Auto Industry

Requires an infrastructure to manufacture and

distribute vehicles internationally.

Increasing Globalization

Industry EffectDriver

Mature market requires new features, but at the same

time manufacturers must be concerned about costs

Increasing emphases on

reducing Costs

Concerns regarding safety, emissions, fuel efficiency.Increasing GovernmentRegulation

Suppliers account for 69% of entire value. Workingin parallel with suppliers helps to reduce time to

market.

Suppliers Larger Role

Encouraging more cooperative agreementsTechnological Change

More Consolidation, Larger firms in better positionto reduce costs in production, purchasing, andproduct development costs

Slow Industry Growth


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Key Success Factors in Auto Industry

Time-to-market is importantSkills-related

Requires a network of dealers to distribute vehiclesinternationally.

Distribution-related

Product Innovation is requiredTechnology-related

Low-Cost Production Efficiency is a mustManufacturing-related


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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 - SWOTDiversification 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 notindependent.

DM covered a much broader range than its competitors

although it remains as a kind of transportation company


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Daimler-Benz - SWOTJapanese 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 - SWOTCrysler 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 - SWOTCrysler 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 non-

NAFTA markets thus cannot expand beyond North AmericanFree Trade Area


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Chrysler - SWOTCrysler 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 - SWOTTarget 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 tobe an assembler more than a manufacturer thus weakening position invalue creation chain.

Any decline in US economy could hit Crysler harder than the largerBig 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 precedentIntegration phase was expected to last 3 years

Difficult to achieve cost saving due to lack of overlappingproducts


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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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Purpose is to be a global provider of automotive and

transportation products and services, generating superiorvalue for our customers, our employees and our shareholders.

Mission is to generate two great companies to become aworld enterprice that by 2001 is the most succesfull andrespected automotive and transportation products andservices provider. We will accomplish this by consistently

delighting our customers with the quality and innovation ofour products and services, resulting from the excellence ofour process, our people, and our unique portfolio of strongbrands.

Mission


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Goals and Values

Goals Shared belief & values

Delighted customers Customer Focus QualitySuperior profitability Innovation Speed

Unique portfolio Teamwork ExcellenceSustained growth Inspiration ProfitabiltyIntegrated enterprice Opennes ResponsibilityGlobalization Agility


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Monitoring the integration (CIC)

The Chairmens Integration Council (CIC) was founded to

monitor the integrationCo-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 twocompanies

The Postmerger Integration (PMI) Team supported andhelped monitor the integration process

This coordination structure oversaw 80 integration projectsinvloving 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 equipmentProgress 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 wasundisputed.

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 becomingvisible.

Merger activities wasting too much time up to %40 of topmanagerss time

Stress increased

Uncertain times is increasing

Improvement needed on the performance of the stockChrysler was lacking appropriate products for theEuropean market and developing countries


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DaimlerCrysler - SWOTIncluding the two brand values.

High top management support in merger activities

Employees salaries guaranteed for 2 years and 19,000new employees - loyalty


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DaimlerCrysler - SWOTDifferent 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 - SWOTChanging 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 - SWOTCrysler lacks appropriate products for European market

& developing countries.

Cultures issues and uncertainities in any means

Suspects of a Crysler acquisition rather than a merger-of-

equals

Merger activities taking too much time, up to %40 of topmanagers

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 reasonSchrempp had commited himself to making merger the beststrategically 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 corporategovernance

The strict division of supervisory board and management board

was slowing down the decisionsThe necessary consensus with the workers councils and workersrepresentative on the supervisory board had to be build on allimportant employee issues


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Cultural issues

Top management payed close attention tocultural issues

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

Keys to Success


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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

Designthe

strategy

Developthe

integration plan

Implementation

Vision and strategy

Leadership

Synergies and growth

Early Wins

Culture

Communication

Risk Management


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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 departmentsDisregard 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 competitorsImprove cost effectiveness

Managing cultural differences Training and development

Re-define the organizational structure and proceduresif 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...

DaimlerChryslerMerger

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