Chrysler Daimler Case

1. How would you characterize the auto industry in 1998?

Three trends were apparent in the auto industry in 1998:

Globalization - Auto makers from around the globe had grown in size and reach. All players were moving towards standardization and building models for regions outside their home market.

Excess Capacity - An unintended consequence of the industry's race to globalize was a worldwide excess capacity of 15 million units by1998. Production far outstripped demand in the mature North American and Western Europe markets, and economic downturn in emerging markets lead to oversupply in those markets.

Consolidation - globalization and excess capacity lead to industry consolidation. From 1990-1997, PriceWaterhouse estimated that approximately 750 mergers, acquisitions, or alliances took place between auto firms. The need for economies of scale (EOS) and the quest to improve profits also drove the consolidation trend. EOS in R&D and procurement allowed for lower production costs as many auto makers moved to the platform concept (sharing chassis and components across brands and models) and as car life cycles shortened.

2. Does the Diamler-Benz and Chrysler Corporation merger make sense? Why? Why not?

At first glance, the merger made financial sense. Chrysler had high efficiency, low cost of design production and a very well established distribution network in the U.S. Chrysler was unsuccessful at breaking into international markets and needed fend off takeover threats. Daimler-Benz (Benz) was successful in Europe but was never able to get ahead in the North American market. Its high work intensity through the production process made for high-quality vehicles but above average R&D costs lead to higher price point cars that did not allow Benz to be competitive in the U.S. The merger seemed to capitalize on Benz's strong reputation for quality and Chrysler's cost efficiency, giving the joint company a competitive advantage during the recession.

At closer inspection, the merger was much more complex than both sides thought. In a pre-merger rush, the due diligence that should have occurred on operations, culture and ways of doing business was not done. Decision making at Benz was very bureaucratic and methodical; Chrysler on the other hand, was much more creative and encouraged input from employees. Compensation at the two companies also differed significantly. American managers received attractive pay packages that seemed excessive to their German counterparts. Another important difference between the two companies was organizational structure. Chrysler's flat organization was in stark contrast to the German hierarchies, complicated management boards and block shareholders.

The merger of Daimler-Benz and Chrysler was coined a merger of equals. The competitive advantage the merged company hoped to achieve through new synergies was never realized. From a strategic standpoint, the merger made sense; one company's strengths complement the other company's weaknesses. From a cultural and organizational standpoint, the merger made much less sense. A more thorough pre-merger due diligence and planning may have led to the companies reconsidering or placing more