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Company Perspectives:
We aim to convince our customers with our exciting automobiles, attractive and economical commercial vehicles, and tailored financial services. With our innovative technology, we intend to make the traffic of tomorrow even safer, as well as more economical and environmentally friendly. And by implanting this strategy, we intend to create lasting value for our shareholders. To these ends we focus our global resources and the knowledge, experience, and energy of our employees.
DaimlerChrysler AG--the third-largest car maker in the world--is the product of the November 1998 merger of Daimler-Benz AG of Germany and Chrysler Corporation of the United States. Vehicles built by the resultant powerhouse include Mercedes-Benz luxury passenger cars; a microcompact car sold under the name Smart; Chrysler, Jeep, and Dodge cars, pickup trucks, minivans, and sport utility vehicles; and commercial vehicles, including vans, trucks, and buses, under the brand names Mercedes-Benz, Freightliner, Sterling, Setra, and Western Star Trucks. The company's revenue stream is heavily weighted toward the United States and Europe--the Mercedes Car Group and the Chrysler Group divisions account for the majority of company sales. The company has been plagued with problems in recent years related partly to its investment in Mitsubishi Motors. Its troubled Chrysler division experienced a $637 million loss in 2003 due to restructuring costs and slowing U.S. sales. In addition to its vehicle manufacturing operations, DaimlerChrysler is a leading provider of information technology services in Germany and offers a variety of financial services--including vehicle sales and leasing financing, dealer financing, and insurance services--primarily in North America and Europe. The European Aeronautic Defence and Space Company (EADS), which is 33 percent-owned by DaimlerChrysler, operates as the world's second-largest aerospace and defense company.
The History of Daimler-Benz AG
The roots of Daimler-Benz go back to the mid-1880s and two engineers, Carl Benz and Gottlieb Daimler, who are cited by most authorities as the most important contributors to the development of the internal combustion engine. Despite the fact that they were both concerned with the same idea at virtually the same time, and they lived within 60 miles of each other, the two apparently never even met. They certainly never envisioned the 1926 merger of their two companies.
Although Benz drove his first car in 1885 and Daimler ran his in 1886, neither was actually the first to create gasoline-powered vehicles. They were, however, the first to persist long enough to make them viable as transportation. At this time the obstacles to motorized vehicles were enormous: gasoline was considered dangerously explosive, roads were poor, and few people could afford an automobile in any case. Nevertheless, Benz dedicated himself to revolutionizing the world's transportation with the internal combustion engine.
Early in 1885 Benz--who had formed Benz & Companies in Mannheim in 1883--sat in a car and circled a track next to his small factory, while his workers and his wife stood nearby. The car had three wheels and a top speed of ten mph. This engineering triumph was only slightly marred by Benz's first public demonstration, which took place shortly afterward, in which he forgot to steer the car and smashed into the brick wall around his own home. Despite this inauspicious debut, Benz's cars quickly became known for their quality of materials and construction. By 1888 Benz had 50 employees building his three-wheeled car. Two years later, he began making a four-wheeled vehicle.
Daimler's convictions about the internal combustion engine were as intense as Benz's. Originally a gunsmith, Daimler later trained as an engineer, studying in Germany, England, Belgium, and France. After working for a number of German and British firms, he became technical director for the Gasmotorenfabrik Deutz. Disillusioned by the company's limited vision, he and researcher Wilhelm Maybach resigned in 1882 to set up their own experimental engine workshop near Stuttgart. They tested their first engine on a wooden bicycle. Later, they put engines into a four-wheeled vehicle and a boat. Daimler sold the French rights to his engines to Panhard-Levassor (which later fought him for the use of his name). In 1896 he granted a patent license to the British Daimler company, which eventually became independent of the German Daimler-Motoren-Gesellschaft, which was incorporated in 1890.
The story of how Daimler found a new brand name for its cars has become legendary. In 1900 Austro-Hungarian Consul-General and businessman Emil Jellinek approached the company with a suggestion. He offered to underwrite the production of a new high-performance car. In return, he asked that the vehicle be named after his daughter--Mercedes. Daimler's Mercedes continued to make automotive history. In 1906 the young engineer Ferdinand Porsche took the place of Daimler's oldest son, Paul, as chief engineer at the company's Austrian factory. (Paul Daimler returned to the main plant in Stuttgart.) In the five years Porsche was with Daimler, he produced 65 designs, which made him one of the most influential and prolific automotive designers ever. Approximately the same time, in 1909, the Mercedes star emblem was registered; it has embellished the radiators of all the company's cars since 1921.
In 1924 the Daimler and Benz companies began coordinating designs and production, but maintained their own brand names. They merged completely in 1926 as Daimler-Benz Aktiengesellschaft and began producing cars under the name Mercedes-Benz. The merger undoubtedly saved the two companies from bankruptcy in the poverty and inflation of post-World War I Germany.
The company continued to grow throughout the 1930s. The most consistently successful participant in automobile racing history, Mercedes-Benz scored international victories that added to its reputation. The company's racing success was also used as propaganda by the Third Reich in the years before World War II. The Mercedes-Benz became Adolph Hitler's parade transportation. Whenever he was photographed in a vehicle, it was a Mercedes. In 1939 the state took over the German auto industry, and during the war Daimler-Benz developed and produced trucks, tanks, and aircraft engines for the Luftwaffe--using, in large part, the slave labor of prisoners. The company's importance to the German war machine made Daimler-Benz a primary target for Allied bombing raids. Two weeks of air strikes in September 1944 destroyed 70 percent or more of the company's plants. Although little was left of the company, workers returned to resume their old jobs after the war. To the surprise of many people, the factories recovered and the company again became one of the most successful auto manufacturers in the world.
Much of Daimler-Benz's growth in the 1950s occurred under the direction of stockholder Friedrich Flick. A convicted war criminal, Flick lost 80 percent of his steel fortune at the end of World War II. Yet he still had enough money to purchase a little more than 37 percent interest in Daimler-Benz between 1954 and 1957. By 1959 his $20 million investment was worth $200 million, and he had become Germany's second ranking industrialist. Flick's holdings allowed him to push the company in 1958 to buy 80 percent of competitor Auto Union GmbH and its Audi line, to gain a smaller car for the Daimler product line. The acquisition made Daimler-Benz the fifth largest automobile manufacturer in the world and the largest outside the United States.
The acquisition probably lessened the competitive impact of the new U.S. compact cars introduced in the 1950s; moreover, Daimler-Benz faced a lesser threat than other European automakers because the Mercedes appealed to the market segment made up of wealthy, status-conscious customers, and its appeal grew steadily. By 1960 Daimler-Benz already had 83,000 employees in seven West German plants. Additional plants were located in Argentina, Brazil, and India, and the company had established assembly lines in Mexico, South Africa, Belgium, and Ireland. In 1966 Auto Union was sold to Volkswagenwerk AG.
Daimler-Benz's conservative outlook was evident in its strategy of gradual growth, concentration on areas of expertise, foresight, and willingness to sacrifice short-term sales and earnings for long-term benefits. This conservatism helped soften the effect of the recession and gasoline shortages that had severely affected other automakers in the 1970s. While many manufacturers were closing facilities and cutting workers' hours, Daimler-Benz registered record sales gains. Chairman Joachim Zahn, a lawyer, said the company had foreseen the challenging era the auto industry was about to confront. Between 1973 and 1975, Zahn had set aside some $250 million as preparation for bad times. While other automakers spent time and money on model changes, Daimler-Benz had invested in engines powered by inexpensive diesel fuel. These vehicles comprised 45 percent of its output by the mid-1970s. The company was not without problems during these years, as high labor costs and the increasing value of the deutsche mark were making Mercedes-Benz automobiles more expensive than ever. Rather than reducing costs or cutting corners, however, the company began to speak of its cars as investments.
Although primarily known for its passenger cars, Daimler-Benz's commercial truck line was its largest source of profits for many years. The company profited from the oil price increase of the late 1970s, when demand for its commercial vehicles rose dramatically in the Middle East. Most of the company's trucks were made outside of Germany, unlike its cars. Later, the commercial line led the company into one risk that was stalled by unfortunate timing. In 1981 Daimler-Benz purchased the U.S.-based Freightliner Corporation, a manufacturer of heavy trucks, just as sales ground to a halt in the face of a U.S. recession.
Some risk-taking was inevitable, of course; usually it paid off. Daimler-Benz increased its car production from 350,000 to 540,000 units a year between 1975 and 1983. Most of the increase was due to the introduction in 1983 of its 190 model, a smaller version of its sedan. Despite some concern that the 190 would cannibalize sales of its larger cars, the 190 expanded Daimler-Benz's customer base, and the updated image of the new model attracted younger customers, lowering the average age of a Mercedes owner from 45 to 40.
As a manufacturer of luxury automobiles, Daimler-Benz was less vulnerable than most automakers to shifts in demand during the early 1980s. Most Mercedes-Benz customers were wealthy enough to rise above concerns about finance rates, inflation, recession, gasoline prices, or tax breaks. Another traditional safeguard for Daimler-Benz was its longstanding policy of making only as many cars as it could expect to sell, especially during a recession. The result was usually a backlog of demand when a recession ended. In addition, since the company's sales were good even when the market was poor, Daimler-Benz never had to cater to demands from dealers.
However, during the mid-1980s Daimler-Benz was confronted with a dramatic increase in competition for the luxury car market, the fastest-growing segment of the automobile business. Along with this market competition was the increasing speed and sophistication of competitors' automotive research. For example, pioneering Daimler-Benz engineers spent 18 years developing anti-skid brakes to enable drivers to keep control of their vehicles during sudden stops. A few months after the company introduced the breakthrough in the United States, Lincoln brought out a similar system as standard equipment.
Competition and the high price of research and development were two of the factors precipitating the sudden moves Daimler-Benz made between February 1985 and February 1986. Industry analysts were surprised when the company acquired, in quick succession, three large conglomerates: Motoren- und Turbinen-Union, which made aircraft engines and diesel motors for tanks and ships;
Dornier, a privately held manufacturer of spacecraft systems, commuter planes, and medical equipment; and AEG, a high-technology manufacturer of electronic equipment such as turbines, robotics, and data processing, as well as household appliances. Many industry watchers were dubious about the diversification of a company that was already doing so well. Profits had increased every year but one between 1970 and 1985, and increased more than 50 percent in 1985 alone. Some analysts also questioned the speed of Daimler-Benz's purchases, as well as management's ability to hold such a large and diverse enterprise together.
Yet Chairman Werner Breitschwerdt maintained full confidence in the moves. By bringing the technical and research expertise of the new subsidiaries to Daimler-Benz, Breitschwerdt hoped to significantly expand the company's research base. The prospects were highly promising for the automotive division, whose engineers were already interested in developing "intelligent cars." In this area, the radar technology of AEG and the materials expertise of Dornier would be extremely useful.
The Deutsche Bank (which owned 28 percent of Daimler-Benz) became increasingly troubled, however, by Breitschwerdt's apparent lack of a clear program for integrating the company's $5.5 billion in recent acquisitions, and in July 1987 Breitschwerdt announced his resignation. Despite the major reservations of several board members, but with Deutsche Bank's full approval, Edzard Reuter, the company's chief strategic planner, was appointed to succeed Breitschwerdt. These upheavals seemed to have little impact on Daimler-Benz's performance; it still emerged as the largest industrial concern in Germany.
In 1989 Daimler-Benz InterServices AG (Debis) was created to handle data processing, financial and insurance services, and real estate management for the Daimler group. The following year, the dismantling of the Berlin Wall had both positive and negative repercussions for Daimler-Benz; although the recently acquired aeronautical and defense businesses were hurt, the resulting unification provided a welcome jump in demand for Daimler-Benz's automotive division.
By the early 1990s the German economy took a turn for the worse, and the consequences of Daimler-Benz's mid-1980s spending spree began to take their toll. For the first time in its history, Daimler-Benz was forced to eliminate jobs (14,000 of them, through early retirement and attrition) in its automotive division as Mercedes sales plunged and Daimler's overall profit dropped 25 percent in 1992.
First quarter figures for 1993 reflected Germany's widening recession, with Daimler-Benz's net income plummeting by 96 percent to $12.4 million on sales of $13.1 billion, while Mercedes' sales (65 percent of the group's) fell 24 percent for the period. Yet with long-term goals in mind, Daimler-Benz announced hidden reserves of $2.45 billion in an effort to become the first German firm listed on the New York Stock Exchange. The disclosure by Daimler-Benz, which had been prevented from admittance in the past by discrepancies between German and U.S. accounting procedures, was the first of several compliances offered to satisfy U.S. regulators. By midyear, using stringent U.S. accounting procedures, Daimler-Benz reported sales of $69.6 billion and its first loss since the end of World War II. Yet the company's financial maneuvering earlier in the year had paid off: in October 1993, Daimler-Benz triumphantly listed its stock on the Big Board of the New York Stock Exchange.
Mercedes-Benz, meanwhile, was busy with both internal and external expansion. A new lower-priced C-Class Mercedes (known as the Baby-Benz) was introduced in 1993 to appeal to younger buyers in the United States and Europe. Other big moves in 1993 included Debis's construction of new headquarters in Berlin, rewarded by $5.1 billion in sales, nearly double those of 1990. Also in 1993, the company's aerospace arm, Deutsche Aerospace AG (DASA), acquired a controlling 51 percent stake in Fokker, a Dutch airplane manufacturer. Daimler-Benz finished 1993 with overall revenue of $70 billion and losses of $1.3 billion, including an $88.3 million deficit from DASA, which continued to hemorrhage for the next several years.
In 1994 Mercedes-Benz initiated a sweeping reorganization that included manufacturing more car parts outside Germany, appealing to younger buyers through radically different U.S. advertising, and developing more of the smaller, C-Class Mercedes or Baby-Benz models, as well as sport utility vehicles and minivans.
While Mercedes streamlined operations, Daimler-Benz's workforce reductions from 1992 to 1994 now totaled 20 percent of its 350,000 worldwide employees (bringing with it a $2.5 billion restructuring charge). Believing it had weathered the worst of its recessionary storms, Daimler-Benz climbed back to profitability in 1994 with earnings of $750 million, due in part to a sharp increase in both buying and selling outside Germany. Yet 1995 brought a series of highs and lows beginning with a changing of the guard: Edzard Reuter was forced out as CEO and was succeeded by former protege Jürgen E. Schrempp, former chairman of DASA.
Among Schrempp's first moves was to stem the flow of red ink. Arranging a 50/50 merger with the Swedish-Swiss ABB Asea Brown Boveri Ltd. in exchange for $900 million in cash from Daimler-Benz, the new venture, ABB Daimler-Benz Transportation (ADtranz), would become the world's largest international rail systems provider, generating sales in the neighborhood of $4.5 billion annually. With the climb of the deutsche mark in 1995, Daimler-Benz was saddled with higher labor costs and serious setbacks as the dollar remained weak. Anointed as the Daimler-Benz group's savior, Mercedes-Benz, which earned $1.3 billion in 1994, was held up as a model to its ailing parent. Always Daimler-Benz's cash cow, Mercedes had just agreed to a $1.2 billion joint venture with Nanfang South China Motor Corporation to build minivans and engines in China, as well as a second $50 million venture with Yangzhou Motor Coach Manufacturing Company to build touring buses and commercial undercarriages. Nevertheless, the still-troubled DASA and Daimler-Benz Industrie posted huge losses in 1995, in part because of writeoffs, leading the company deeply into the red: a nearly $4 billion loss, the largest in German industrial history.
Fokker proved a major burden for Daimler-Benz, causing Schrempp to cut off funding in January 1996, leading to the aircraft maker's bankruptcy. That same month, Schrempp tackled another headache when he distributed the remnants of the troubled AEG electronics subsidiary into other divisions. The revitalization of the Mercedes-Benz unit continued in 1996 with the introduction of the SLK, a convertible roadster sold for about $40,000 and aimed at younger buyers. That same year, three others models were launched: C-Class and E-Class station wagons and a V-Class minivan. In early 1997 the A-Class made its debut with the launch of the A140, a 141-inch-long compact sporting a small 82-horsepower engine located underneath the floor, and selling for as little as $17,000--expensive for a compact but cheap for a Mercedes.
Spearheading the risky effort to transform Mercedes-Benz into a full-range carmaker aiming to sell 1.2 million cars a year was the unit's chief executive, Helmut Werner. The key to his strategy was to find market niches in which buyers were willing to pay more for a Mercedes-Benz because of its reputation for luxury and quality. His plan appeared to be working as Mercedes' worldwide passenger car sales increased from about 500,000 in 1993 to nearly 650,000 in 1996. In January 1997, however, Werner resigned in a power struggle with Schrempp. Werner's departure was in anticipation of a sweeping reorganization, which Schrempp launched in April 1997. As part of a dismantling of the holding company structure adopted by Daimler-Benz during its 1980s diversification, Mercedes-Benz AG, which had operated since the 1980s as a subsidiary with its own board of directors, was merged into its parent. Daimler-Benz was then organized into several divisions: passenger cars, commercial vehicles, aerospace (DASA), and services (Debis). The new structure also included three units directly managed by Daimler-Benz: rail systems (the ADtranz joint venture), Motoren- und Turbinen-Union (the diesel engine and gas turbine maker), and TEMIC TELEFUNKEN microelectronic (a specialist in automotive electronic systems). The reorganization significantly flattened the management structure, eliminating hundreds of management positions.
By early 1998 Schrempp's restructuring efforts had reduced the company's work force by 63,000 and had seen the divestment of a dozen unprofitable businesses. Then, in November 1998, Daimler-Benz merged with Chrysler Corporation, which, like Daimler, had endured tough times in the 1970s and 1980s and emerged in the mid-1990s as one of the top car companies in the world.
History of Chrysler
The story of the Chrysler Corporation began in 1920, when the company's founder, Walter Percy Chrysler, resigned his position as president of Buick and vice-president of General Motors (GM) over policy differences with GM's founder, William C. Durant. Chrysler was soon asked by a group of New York bankers to restore the Maxwell Motor Corporation to solvency; in the process, he designed a new Maxwell model, the Chrysler Six. First exhibited in 1924, the car was an immediate success, and before year's end the company sold 32,000 cars at a profit of more than $4 million. In 1925 Chrysler renamed the company Chrysler Corporation.
The enthusiasm with which the Chrysler Six was met encouraged Walter Chrysler to design four additional models for the coming year: the 50, 60, 70, and Imperial 80. These model numbers referred to the maximum velocity that the cars could reach on a level stretch of road. Until that time, Ford's Model T had enjoyed the reputation of the fastest car, achieving a modest 35 mph. Alarmed by Chrysler's technological breakthrough, Ford closed its doors for nine months and emerged with a replacement for the Model T. By 1927, however, the Chrysler Corporation had firmly established itself with a sale of 192,000 cars, becoming the fifth largest company in the industry.
Walter Chrysler realized that to exploit his firm's manufacturing capacities to their fullest, he would have to build his own plants. Since he could not afford the estimated $75 million to achieve this, he approached the New York banking firm of Dillon Read and Company. Dillon Read had bought the Dodge Corporation of Detroit from the widows of the Dodge brothers and was happy to reach an agreement with the now highly regarded Walter Chrysler. In July 1928, Dodge became a division of the Chrysler Corporation; overnight, the size of the company increased fivefold. Soon thereafter, the company introduced the low-priced Plymouth and the DeSoto.
Walter Chrysler, carefully avoiding the dangers associated with rapid growth, discontinued his policy of manufacturing as many parts as possible for his cars. Although he paid more for components than other car makers, he was able to maintain greater flexibility in models and designs. This proved to be extremely important in an age of rapid technological advance. Indeed, Walter Chrysler's farsightedness helped the company to survive the Great Depression far better than most in the industry, and his strategy of spending money on research, no matter how bleak the prospects, may have been responsible for his firm's sound financial standing until well into the 1940s.
Along with the rest of Detroit's motor industry, Chrysler converted to war production during World War II. The manufacture of its Chrysler, Dodge, and Plymouth cars was put on hold while the corporation specialized in defense hardware such as small arms ammunition and submarine nets. But chief among its war products were B-29 bomber engines and anti-aircraft guns and tanks.
The corporation's problems started in the immediate postwar period. The ambition and spirit that drove the company to constant innovation and experimentation in the early days had been lost. The auto market had exhausted fundamental engineering breakthroughs, and American tastes had changed. It seemed that the public was more excited by the sleeker, less traditional, and sometimes less reliable models being produced by Chrysler's rivals. In short, the car industry was becoming a marketer's game, and Chrysler's management was not playing.
In 1950, L.L. Colbert, a lawyer hired by Walter Chrysler in 1929, became the corporation's president. By this time, some major overhauling was necessary, and Colbert hired the management consulting firm of McKinsey and Company. Three reforms were instituted: Chrysler developed international markets for its cars, its management was centralized, and the role of the engineering department was redefined.
Colbert's reforms did little to revive the company's flagging fortunes, and two years later there was another change of management. Lynn Townsend, the new corporate head, proved to be more effective. He consolidated the Chrysler and Plymouth car divisions, closed some unproductive plants, and generally tightened operations; he also reduced the workforce and installed an IBM computer system to replace 700 members of the clerical staff. Most important, he enhanced sales by improving the quality of the Chrysler automobile, introducing the best warranty the industry had yet seen and instituting a more aggressive marketing policy. In less than five years, Townsend had revitalized the corporation.
Success led to expansion: an aerospace division was formed, and Chrysler became the prime contractor for the Saturn booster rocket. By the end of the 1960s, Townsend's international strategy yielded plants in 18 foreign countries. Before the decade was over, however, the domestic market was undergoing major changes. Inflation was taking its toll on U.S. auto manufacturers, imports of foreign vehicles had substantially increased, and the price of crude oil had risen drastically. Chrysler's troubles were compounded by internal factors: the company was more concerned with competing against Ford and GM than in adapting itself to the rapidly changing market; it did not produce enough of its popular compact cars to meet consumer demand; and it had an overstock of larger vehicles.
The corporation reported a $4 million loss in 1969 and was operating at only 68 percent of its capacity; the previous year, it had earned profits of $122 million. Car prices were substantially reduced, but this did little to solve the underlying problems. John J. Riccardo, an accountant, succeeded to the presidency and immediately set about reducing expenses. Salaries, work force, and budget were all cut, and the company experimented with the marketing of foreign-made cars.
Unfortunately, Chrysler seemed incapable of reading the public mood: it narrowed and shortened Dodge and Chrysler models to bring prices down, but sales also tumbled; it continued to make Imperials long after Cadillacs and Lincolns had demonstrated their superiority in the luxury market; and it greeted the 1973-74 Arab oil embargo with a large inventory of gas-guzzlers. Losses in 1974 totaled a massive $52 million, and the next year's deficit was five times that amount.
The company experienced a brief respite in 1976 and 1977. Its trucks were in demand and foreign subsidiaries turned in good results, but domestic car sales remained a problem. Riccardo further consolidated North American operations and increased manufacturing capacity for compact cars. By the time Chrysler became a significant contender in that market, however, American car buyers were showing a distinct preference for the reliable and relatively inexpensive Japanese compacts. The days of U.S. manufacturing hegemony appeared to be over.
A loss of $205 million in 1978 led many industry watchers to wonder if Chrysler's rollercoaster finances could rebound from this latest big dip. The syndicate of banks (with Manufacturers Hanover Trust in the vanguard), which for years had been pouring money into Chrysler, panicked. Incredibly, many of the smaller banks had agreed to virtually unlimited lines of credit on the assumption that the company would never need to use them.
However, complex and highly charged negotiations eventually saved Chrysler from bankruptcy. The federal government agreed to guarantee loans up to $1.5 billion, provided Chrysler raised $2 billion on its own. Politicians could not justify such a massive bailout, however, without changes in Chrysler's management. Riccardo, who had diligently fought against heavy odds, had to go.
It was left to the charismatic Lee Iacocca, who took over in 1978, to preside over Chrysler's comeback. An ex-Ford man with a flair for marketing and public relations, Iacocca took Chrysler's problems to the people, explaining that the company's failure would mean the loss of hundreds of thousands of jobs and could seriously damage the economy of the state of Michigan. Despite popular mythology and the near-adulation of Iacocca in some quarters, many observers suggested that Riccardo was in large part responsible for forging the agreement that gave Chrysler a new lease on life. In any event, the Chrysler Loan Guarantee Bill passed the U.S. Congress on December 27, 1979 and guaranteed $1.2 billion in loans to Chrysler.
During the early 1980s, Iacocca's skills as a superb television salesman were of crucial importance as Chrysler lost nearly $1.8 billion in 1980--the largest loss ever for a U.S. company--and another $475 million in 1981, before returning to the black in 1982. In August 1983 Chrysler was able to pay off the government loan guarantees seven years early, with the government making a $350 million profit on its investment. Chrysler's road to recovery was a difficult one, demanding the closure of several plants and the reduction of the company's workforce. Once restructured, Chrysler scrapped its plans to diversify and divested the Gulfstream Aerospace unit it had purchased five years earlier, selling it to a New York investment firm for $825 million in early 1990. Two other units in the company's Chrysler Technologies subsidiary--Electrospace Systems and Airborne Systems--were slated for divestiture as well, which underscored Iacocca's intent to create a leaner, more sharply focused company. Meanwhile, there were two key developments in the 1980s that helped form the foundation for the 1990s resurgence: the introduction of the minivan in 1984 and the acquisition three years later of American Motors Corporation and its Jeep brand for $1.2 billion.
Reorganized as such, Chrysler entered the 1990s braced for a full recovery, but the economy did not cooperate. The decline in automotive sales during the fourth quarter of 1989--the company's first fourth quarter decline since 1982--portended a more crippling slump to come, as an economic recession gripped businesses of all types, both domestically and abroad. Net income in 1990 slipped to $68 million, then plunged to a $795 million loss the following year, $411 million of which was attributable to losses incurred by the company's automotive operations. Mired in an economic downturn, Chrysler appeared destined for more of the same, rather than headed toward recovery as Iacocca had hoped, but part of the reason for 1991's losses also led to the company's first step toward genuine recovery.
Partly to blame for the $795 million loss in 1991 were the high preproduction and introduction costs associated with Chrysler's new Jeep Grand Cherokee and increased production costs at the company's St. Louis minivan plant. These two types of vehicles--minivans and sport utility vehicles--represented the key to Chrysler's recovery. The popularity of these vehicles, coupled with significant price advantages over Japanese models, fueled Chrysler's resurgence. In 1992, Chrysler turned its $795 million loss the year before into a $723 million gain. It was a signal achievement, accomplished in Iacocca's last year as CEO. Taking over during 1992 was Robert Eaton, who was hired away from GM, where he was head of European operations. Chrysler then went on to enjoy its most successful year ever, with 1994 earnings of $3.7 billion on revenues of $52.2 billion.
The good news at Chrysler continued into the late 1990s, after the company managed to fend off a $22 billion buyout proposed by billionaire investor Kirk Kerkorian in 1995. The long prosperity and low gasoline prices of the middle to late 1990s created a huge demand for large vehicles, and Chrysler was producing hot models in each of the hottest segments: the Dodge Ram pickup truck; the Town & Country minivan; and several sport utility vehicles--the Jeep Grand Cherokee, the Jeep Wrangler, and the Dodge Durango. Questions about the quality of Chrysler products continued to pop up, but the company's share of the U.S. auto market reached as high as 16.7 percent in 1996, the highest level since 1968. In 1996, the year Chrysler moved into new headquarters in Auburn Hills, Michigan, sales reached $61.4 billion.
The Creation and Early Years of DaimlerChrysler
Daimler-Benz Chief Executive Jürgen Schrempp had concluded as early as 1996 that his company's automotive operations needed a partner to compete in the increasingly globalized marketplace. Chrysler's Eaton was drawing the same conclusion in 1997 based on two factors emerging around the same time: the Asian economic crisis, which was cutting into demand, and worldwide excess auto manufacturing capacity, which was looming and would inevitably lead to industry consolidation. With annual global overcapacity as high as 18.2 million vehicles predicted for the early 21st century, it became clearer that Daimler-Benz and Chrysler could survive as merely regional players if they continued to go it alone.
After several months of negotiations, Daimler-Benz and Chrysler reached a merger agreement in May 1998 to create DaimlerChrysler AG in a $37 billion deal. The deal was consummated in November 1998, forming an auto behemoth with total revenues of $130 billion, factories in 34 countries on four continents, and combined annual unit sales of 4.4 million cars and trucks. The two companies fit well together geographically, Daimler strong in Europe and Chrysler in North America, and in terms of product lines, with Daimler's luxurious and high-quality passenger cars and Chrysler's line of low-production-cost trucks, minivans, and sport utility vehicles. Although this was ostensibly a merger of equals--the company set up co-headquarters in Stuttgart and Auburn Hills, naming Eaton and Schrempp co-chairmen--it soon became clear that the Germans were taking over the Americans. DaimlerChrysler was set up as a German firm for tax and accounting purposes, and the early 2000 departures of Thomas Stallkamp, the initial head of DaimlerChrysler's U.S. operations, and Eaton (who was originally slated to remain until as late as November 2001) left Schrempp in clear command of the company.
During 1999 DaimlerChrysler concentrated on squeezing out $1.4 billion in annual cost savings from the integration of procurement and other functional departments. The company organized its automotive businesses into three divisions: Mercedes-Benz Passenger Cars/smart, the Chrysler Group, and Commercial Vehicles. In November 1999 DaimlerChrysler announced that it would begin phasing out the aging Plymouth brand. The Debis services division was merged with Chrysler's services arm to form DaimlerChrysler Services, while DASA was renamed DaimlerChrysler Aerospace. Late in 1999 the company reached an agreement to merge DaimlerChrysler Aerospace with two other European aerospace firms, the French Aerospatiale Matra and the Spanish CASA, to form the European Aeronautic Defence and Space Company (EADS). DaimlerChrysler would hold a 30 percent stake in EADS, which would be the largest aerospace firm in Europe and the third largest in the world.
In early 2000, DaimlerChrysler set the lofty goal of becoming the number one automaker in the world within three years. The company's most pressing needs were to bolster its presence in Asia, where less than 4 percent of the company's overall revenue was generated, and to gain a larger share of the small car market in Europe. Filling both of these bills was DaimlerChrysler's purchase of a 34 percent stake in Mitsubishi Motors Corporation for $2 billion, a deal announced in late March. The company later increased its interest in Mitsubishi when it purchased a 3.3 percent stake from Volvo. In another key early 2000 development, DaimlerChrysler agreed to join with GM and Ford to create an Internet-based global business-to-business supplier exchange named Covisint.
DaimlerChrysler's lofty goal would remain unrealized however, as the company faced a host of challenges. The Chrysler Group division was plagued by high costs and weak sales which ultimately cost James P. Holden his CEO position. Buoyed by its strong sales in the mid-1990s, Chrysler had spent heavily on product development in the late 1990s and bolstered its work force while costs were skyrocketing. By the second half of 2000 Chrysler lost $1.8 billion while spending over $5 billion. Dieter Zetsche was tapped to reorganize the faltering U.S. division. He launched a major restructuring effort in February 2001 that included cutting $2 billion in costs, making additional cuts in supplier costs, slashing 20 percent of its workforce, and making changes to Chrysler's product line that included the elimination of the Jeep Cherokee (the Grand Cherokee remained in the product line) and the launch of the Jeep Liberty.
At the same time, global economies began to weaken in the aftermath of the September 11, 2001, terrorist attacks. To entice customers, car makers began offering buyer incentives that began to wreak havoc on profits. Industry analysts began to speculate that the 1998 merger may have been a mistake--Schrempp's proclamation that the deal would create the most profitable car maker in world had indeed fallen short. In fact, the company's market capitalization was $38 billion in September 2003. Before the union Daimler's market cap had been $47 billion.
Meanwhile, the company's Mercedes division plugged along launching the E-Class sedan, the SLK roadster, and the Maybach luxury vehicle. In 2003, Chrysler launched the Crossfire, a roadster developed with Mercedes components, and the Pacifica, a SUV/minivan. It also began to heavily market its powerful Hemi engine, which could be purchased for the Dodge Ram pickup and its passenger cars. In early 2004, Chrysler's 300C sedan and the Dodge Magnum sports wagon made their debut.
Competition remained fierce in the auto industry prompting DaimlerChrysler to make several changes in its strategy. In December 2003, the company sold its MTU Aero Engines business. That year the firm acquired a 43 percent stake in Mitsubishi Fuso Truck and Bus Corporation hoping to cash in on Asia's growing truck market. Perhaps its most drastic move, however, came in April 2004 when DaimlerChrysler's supervisory board voted against providing funds to bailout Mitsubishi Motors, which by now was struggling under losses and a huge debt load. Mitsubishi played a crucial role in Schrempp's Asian expansion strategy and it developed the platforms for Chrysler's compact and midsize cars. The failure to provide funds put a strain on the business relationship between the two and threatened to result in huge problems for Chrysler, which had cut back on engineering capacity as it relied on Mitsubishi to develop its small and mid-sized cars.
At the same time, DaimlerChrysler moved ahead in the Chinese market--without Mitsubishi and without another partner, Hyundai. To bolster is presence in the region, DaimlerChrysler restructured its joint venture with Beijing Automotive Industry Holding Co. Ltd. and set plans in motion to tie up with Chinese Fujian Motor Industry Group and the Taiwanese China Motor Corporation to launch several cars in the Chinese market by 2005. Rumors circulated that DaimlerChrysler's relationship with Hyundai was faltering as a result, and in 2004 the company signaled that it would sell its interest in the South Korean automaker.
By 2004, Schrempp's DaimlerChrysler was a far cry from what the 1998 merger promised to deliver. The company's financial record was lackluster, bogged down by Chrysler's $637 million loss in 2003. DaimlerChrysler remained the world's number three car maker, leaving the 2000 goal--to become the number one auto company in the world--unfulfilled. Whether the merger would provide the hoped-for results remained to be seen.
Principal Subsidiaries: DaimlerChrysler Motors Company LLC (United States); Mercedes-Benz U.S. International Inc. (United States); smart GmbH; DaimlerChrysler South Africa Pty. Ltd.; DaimlerChrysler Canada Inc.; DaimlerChrysler de Mexico S.A. de C.V.; EvoBus GmbH; Mercedes-Benz Espana S.A. (Spain); Detroit Diesel Corporation (United States); Freightliner LLC (United States); Mercedes-Benz Mexico S.A. de C.V.; DaimlerChrysler do Brasil Ltda. (Brazil); DaimlerChrysler Argentina S.A.; P.T. DaimlerChrysler Indonesia (95%); MTU Friedrichshafen GmbH (88.4%); Mitsubishi Fuso Truck and Bus Corporation (Japan; 43%); Mercedes-Benz USA LLC; DaimlerChrysler France S.A.S.; DaimlerChrysler Belgium Luxembourg S.A.; DaimlerChrysler Nederland B.V. (Netherlands); DaimlerChrysler UK Ltd.; DaimlerChrysler Italia S.p.A. (Italy); DaimlerChrysler Schweiz AG (Switzerland); DaimlerChrysler Japan Co. Ltd.; DaimlerChrysler Australia/Pacific Pty. Ltd.; DaimlerChrysler Bank AG; DaimlerChrysler Services Leasing GmbH; DaimlerChrysler Services North America LLC (United States); debis Financial Services Inc. (United States); European Aeronautic Defence and Space Company (EADS) N.V. (Netherlands; 33%); Mitsubishi Motors Corporation (Japan; 37%); Hyundai Motor Co. (Korea; 10.5%).
Principal Divisions: Mercedes Car Group; Chrysler Group; Commercial Vehicles; Services; Other Activities.
Principal Competitors: Ford Motor Company; General Motors Corporation; Toyota Motor Corporation; Volkswagen AG.
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