The DaimlerChrysler Merger

Summary

In the mid-1990s, Chrysler Corporation was the most profitable automotive producer in the world.
Buoyed by record light truck, van, and large sedan sales, revenues were at an all-time high.
Chrysler had taken a risk in producing vehicles that captured the bold and pioneering American
spirit when imports dominated the market – the Dodge Ram, the Jeep Grand Cherokee and the LH Sedan
Series. In these vehicles Chrysler found an instant mass appeal, and its U.S. market share climbed
to 23% in 1997. As revenues and market share rose, product development costs shrank to 2.8% of
revenues - compared with 6% at Ford and 8% at General Motors. Chrysler's integrated design teams
and noncompetitive relationships with suppliers kept costs down, while its marketing department
scored success after success in gauging consumer tastes.

Chrysler had always fashioned itself the bold and risk-taking underdog. It had brought itself back
from the brink of bankruptcy four times since the Second World War, and its boombust revenue flow
pattern had earned it a "comeback kid" reputation. With $7.5 billion in cash on hand and a full
range of best-selling products, Chrysler finally seemed ready in 1997 to weather the volatile
American automotive business cycle on its own – without government bailouts or large-scale R&D
cutbacks. Its wealth did not go unnoticed: Investor Kirk Kerkorian, a 13% shareholder, threatened
to mount a takeover -- citing "the management's practice of cash hoarding" as his reason.

Daimler-Benz, meanwhile, was looking for a soul-mate. Despite a booming U.S. economy, its luxury
vehicles had captured less than 1% of the American market. Its vehicle production method was
particularly labor intensive - requiring nearly twice as many workers per unit produced over
Toyota's Lexus division. It recognized that it could benefit from an economy of scale in this
capital-intensive industry. With $2.8 billion in annual profits, remarkable efficiency, low design
costs, and an extensive American dealership network, Chrysler appeared to be the perfect match.

On May 7th, 1998, Eaton announced that Chrysler would merge with Daimler-Benz. Thanks to a $37
billion stock-swap deal, the largest trans-Atlantic merger ever, Chrysler would not "do it alone"
any longer. Daimler-Benz CEO Jürgen Schrempp hailed the union as "a merger of equals, a merger of
growth, and a merger of unprecedented strength". The new company, with 442,000 employees and a
market capitalization approaching $100 billion, would take advantage of synergy savings in retail
sales, purchasing, distribution, product design, and research and development. When he rang the
bell at the New York Stock Exchange to inaugurate trading of the new stock, DCX, Eaton predicted,
"Within five years, we'll be among the Big Three automotive companies in the world".

In 2001, three years after a "merger of equals" with Daimler-Benz, the outlook is much bleaker. The
financial data is sobering: Chrysler Group is on track to hemorrhage $3 billion this year, its U.S.
market share has sunk to 14%, earnings have slid by 20%, and the onceindependent company has been
fully subordinated to Stuttgart. Its key revenue generators – the minivan, the Jeep SUV, and the
supercharged pickup truck – have all come under heavy competition from Toyota, Honda, General
Motors and Ford. Chrysler continues to make few passenger cars of note, save the Neon and
limited-release Viper and Prowler. In the words of DaimlerChrysler CEO Jürgen Schrempp, "What
happened to the dynamic, can-do cowboy culture I bought?" DaimlerChrysler's market capitalization
stands at $44 billion, roughly equal to the value of Daimler-Benz before the merger. Its stock has
been banished from the S&P 500, and Chrysler Group's share value has declined by one-third relative
to pre-merger values. Unlike the Mercedes-Benz and Smart Car Division, which posted an operating
profit of EUR 830 million in Q3 2000, the Chrysler Group has been losing money at an alarming rate.
In the same quarter, it lost $512 million. In 1998 Daimler bought Chrysler for $38 billion. In 2007
was Chrysler sold for $7.4 billion.

Why the Merger Failed

Culture Clash:

To the principles involved in the deal, there was no clash of cultures. “There was a remarkable
meeting of the minds at the senior management level. They look like us, they talk like us, they’re
focused on the same things, and their command of English is impeccable. There was definitely no
culture clash there.” (Interview with Robert Lutz, Former Vice-Chairman, Chrysler, February 23,
2001)

Although DaimlerChrysler's Post-Merger Integration Team spent several million dollars on cultural
sensitivity workshops for its employees on topics such as "Sexual Harassment in the American
Workplace" and "German Dining Etiquette," the larger rifts in business practice and management
sentiment remain unchanged.

James Holden, Chrysler president from September 1999 through November 2000, described what he saw
as the "marrying up, marrying down" phenomenon. "Mercedes [was] universally perceived as the fancy,
special brand, while Chrysler, Dodge, Plymouth and Jeep [were] the poorer, blue collar relations".
This fueled an undercurrent of tension, which was amplified by the fact that American workers
earned appreciably more than their German counterparts, sometimes four times as much.

The dislike and distrust ran deep, with some Daimler-Benz executives publicly declaring that they
"would never drive a Chrysler". "My mother drove a Plymouth, and it barely lasted two-and-a-half
years," commented Mercedes-Benz division chief Jürgen Hubbert to the Suddeutsche Zeitung. Irate
Chrysler managers responded with jabs of their own. Bob Lutz, then Chrysler vice-chairman, pointed
out to the Detroit Free Press that "The Jeep Grand Cherokee earned much higher consumer
satisfaction ratings than the Mercedes M-Class".

With such words flying across public news channels, it seemed quite apparent that culture clash has
been eroding the anticipated synergy savings. Much of this clash was intrinsic to a union between
two companies which had such different wage structures, corporate hierarchies and values. At a
deeper level, the problem was specific to this union: Chrysler and Daimler-Benz's brand images were
founded upon diametrically opposite premises. Chrysler's image was one of American excess, and its
brand value lay in its assertiveness and risk-taking cowboy aura, all produced within a
cost-controlled atmosphere. Mercedes-Benz, in contrast, exuded disciplined German engineering
coupled with uncompromising quality. These two sets of brands, were they ever to share platforms or
features, would have lost their intrinsic value. Thus the culture clash seemed to exist as much
between products as it did among employees.

Differing product development philosophies continued to hamper joint purchasing and manufacturing
efforts as well. Daimler-Benz remained committed to its founding credo of "quality at any cost",
while Chrysler aimed to produce price-targeted vehicles. This resulted in a fundamental disconnect
in supply-procurement tactics and factory staffing requirements. Upon visiting the Jeep factory in
Graz, Austria, Hubbert proclaimed: "If we are to produce the M-Class here as well, we will need to
create a separate quality control section and double the number of line workers. It simply can't be
built to the same specifications as a Jeep". The M-Class was eventually built in Graz, but not
without an expensive round of retooling and hiring to meet Hubbert's manufacturing standards.

Mismanagement:

In autumn 2000, DaimlerChrysler CEO Jürgen Schrempp let it be known to the world - via the German
financial daily Handelsblatt - that he had always intended Chrysler Group to be a mere subsidiary
of DaimlerChrysler. "The Merger of Equals statement was necessary in order to earn the support of
Chrysler's workers and the American public, but it was never reality". This statement was relayed
to the English-speaking world by the Financial Times the day after the original news broke in
Germany.

To be sure, it was apparent from Day One that Daimler-Benz was the majority shareholder in the
conglomerate. It controlled the majority of seats on the Supervisory Board; yet the DaimlerChrysler
name and two parallel management structures under co-CEOs at separate headquarters lent credence to
the "merger of equals" notion.

This much, however, is clear: Jürgen Schrempp and Bob Eaton did not follow a coordinated course of
action in determining Chrysler's fate. During 1998-2001, Chrysler was neither taken over nor
granted equal status. It floated in a no man's land in between. The managers who had built
Chrysler's "cowboy bravado" were no more. Some remained on staff, feeling withdrawn, ineffective
and eclipsed by the Germans in Stuttgart. Others left for a more promising future at G.M. or Ford.
The American dynamism faded under subtle German pressure, but the Germans were not strong enough to
impose their own managers. According to a Daimler-Benz executive, "Eaton went weeks without
speaking with Jürgen [Schrempp]. He preferred to maintain lower-level contact. . .Jürgen,
meanwhile, was afraid of being labeled a takeover artist. He left Chrysler alone for too long".

Why? According to one well-placed senior executive at Chrysler, “Jurgen Schremp looked at
Chrysler’s past success and told himself there is no point in trying to smash these two companies
together. Some stuff was pulled together but they said operationally let’s let the Chrysler guys
continue to run it because they have done a great job in the past. What they didn’t take into
account was that immediately prior to the consummation of the merger or shortly thereafter, enough
of the key members of that former Chrysler management team left. They saw the forest but they
didn’t realize that removing four or five key trees was going to radically change the eco system in
that forest. It was a misjudgment.”

As a result, Chrysler sat in apathy, waiting for Daimler's next move - a move which came too late
-- eleven months after Eaton's retirement -- when Schrempp installed a German management team on
November 17, 2000. During that interval, Chrysler bled cash.

Synergy savings are only achieved when two companies can produce and distribute their wares more
efficiently than when they were apart. Owing to culture clash and a poorly integrated management
structure, DaimlerChrysler is unable to accomplish what its forbears took for granted three years
ago: profitable automotive production.



Tasks:

1.       Define how the strategies of the original entities may have looked.

2.       Define the strategy of DaimlerChrysler.

3.       Define important characteristics of the original organizational cultures.

4.       Define the organizational culture adequate to the DaimlerChrysler strategy.

5.       Propose a method of changing both original organizational cultures into a new one.