Selling Chrysler

From a marriage made in heaven to a divorce made in Stuttgart

STAMPING JOURNAL® JULY 2007

July 10, 2007

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Selling Chrysler only nine years after the merger is a de facto admission that it was a mistake. While some analysts publicly wondered if Daimler would not eventually sell Chrysler, the suddenness of the declaration was unexpected.

For sale sign

When Daimler Chairman Dieter Zetsche, who ran Chrysler for five years, admitted the automaker was for sale this past February, Detroit began its latest soap opera.


While some analysts publicly wondered if Daimler would eventually sell Chrysler, the suddenness of the declaration was unexpected. After all, only a few months earlier Zetsche was part of a U.S. advertising campaign as Dr. Z, expounding on the benefits of Chrysler's involvement with Daimler.

The Perfect Storm

Why the sudden change? Hurricane Katrina became pivotal in altering U.S. buying habits. As a result of high gas prices, Americans' vehicle-buying habits have changed and have become less American.

The domestic industry is used to producing vehicles that are larger, heavier, and thirstier than those buyers increasingly demand. Suddenly the domestic market looks a lot more like the markets in Japan, Korea, and European countries. The automakers in those countries already have the expertise, capacity, and credibility to make vehicles Americans want to drive.

Sound familiar? It's because it's similar to what happened in 1973 and 1979, when oil and economic crises had a huge impact on consumer buying behavior. The same scenario is unfolding right now in Australia's automotive industry.

Breaking Up

The difference from past crises is that this time fewer people suffer from the delusion that this is temporary. That includes executives at Daimler, who found themselves owners of the one automaker (Chrysler) in the world most dependent on sales of light trucks. Among Chrysler's light trucks, of course, are the minivans for which it's famous. Increasing competition from other automakers and consumers' growing preference for SUVs, however, have diminished the value of Chrysler's iconic minivan lineup.

While the financial impact of such a market hit may be the main reason to sell, there are others. Daimler and Chrysler never succeeded in forging a corporate culture that took advantage of the complementary market offerings that were heavily touted as a big reason for the merger. It turns out that "no product overlap" makes for an easier merger, with less of a need for trimming duplicative products, but it also produces few synergies.

Several reasons have combined to make this the time for Daimler to attempt to separate itself from Chrysler. One that doesn't seem to be mentioned at all is that many of the Daimler executives responsible for executing the merger in 1998 are no longer part of the company. Chief among them is Jurgen Schremp, former Daimler Chairman, who played the largest role in acquiring Chrysler and has since been replaced by Zetsche.

Selling Chrysler only nine years after the merger is a de facto admission that it was a mistake. Such an admission would be embarrassing to many former Daimler executives, and it certainly comes much easier with Schremp and others out of the picture.

An example of a similar scenario is BMW's ill-fated purchase of England's Rover. BMW was never successful in reaping the benefits it expected from the acquisition: A more complete product line that would expand into lower-priced segments and insulate the automaker from economic fluctuations. Instead, BMW ended up spending so much money trying to fix Rover's ills that it came to be known as "The English Patient." In light of this example, it's likely that Daimler wants the separation to come before it invests as much money in Chrysler as BMW did in Rover.

Interestingly, the assets of the former Rover now are owned by a Chinese automaker that, not owning the rights to the Rover name, is marketing its vehicles under the Roewe brand. Rumors have surfaced that a Chinese automaker may also end up buying Chrysler. Such a scenario is unlikely, however, as the Chrysler Group probably will be worth much more on the auction block than Rover. It also brings with it pension obligations that would be too expensive for a Chinese OEM to shoulder.

Chrysler's Many Suitors

Many potential buyers were mentioned as possible future owners of Chrysler. From GM to Magna to a Chinese automaker, all these options were viewed as less likely than an equity investment firm. Chrysler's new owner, Cerberus Capital Management, exemplifies the recent influx of such investment firms into the automotive industry.

Cerberus is likely to be a tough owner, with an eye for cutting costs wherever possible. While equity investment firms are viewed with skepticism as owners of highly complex automotive firms, their tough, disciplined approach may ultimately provide Chrysler with the efficiencies it needs to tap if it is to compete with larger, leaner OEMs.

The sale of Chrysler is likely to be another in a series of watersheds for the Big Three as they continue a third decade of decline. Putting Chrysler up for sale was Daimler's answer to the question it ducked for nine years: This was not a merger of equals. If the honeymoon seems short, it's because there never really was a marriage. Thousands of Chrysler employees hope the so-called divorce is a smoother ride.



Center for Automotive Research

Bernard Swiecki

Contributing Writer
Center for Automotive Research
1000 Victors Way
Suite 200
Ann Arbor, MI 48108
Phone: 734-929-0484
The Center for Automotive Research focuses on the future of the international automotive industry. Its overall objectives are to provide industry research and analysis, communication forums, and informational resources that respond to the changing needs of the international automotive and automotive-related industries.

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