THE DAIMLERCHRYSLER CASE

1
During the next three years we are going to
fire 26.000 employees and to close six factories
Dieter Zetsche, DaimlerChrysler C!, fe"ruary 200#
INTRODUCTION
DaimlerChrysler $.%. &DC' came to life as a corporation after the merger of Daimler(
)en* and Chrysler in #++,. -ince then it has continued producing largely the same
products and ser.ices the two companies separately produced "efore. $lthough the
merger was hailed as a "rea/through achie.ement at first, and the stoc/s rose high
immediately afterwards, the corporation has seen some serious trou"les since. 0any
segments are doing 1uite well, "ut there are also areas of serious concern, and the current
under(performance of the Chrysler %roup is a main irritant for the corporation as a
whole. )y early Decem"er 2000, the time of our in.estigation of DC, the stoc/(prices
had "een falling more or less steadily since 2anuary #+++.
AN OVERVIEW OF THE CORPORATION
DC is the world3s fiftht largest car manufacturer. 4t produces a "road range of
transportation products such as cars, commercial .ehicles, aircraft for ci.il and military
purposes, railway systems, as well as ser.ices in finance and information technology. !n
"usiness segments, the "rea/down is the following5 0ercedes()en* passenger cars and
6smart3 cars, Chrysler %roup, Commercial 7ehicles, -er.ices, $erospace and others. DC
had re.enues of #80 "illion euros for #+++, compared with #9#., "illion for #++,. 4n
#+++, 82 percent of DC3s re.enues were generated in the :-, #+ percent from %ermany,
and #; percent from other uropean :nion countries.
0ercedes()en* passenger cars and 6smart3 cars
<his segment3s strength lies in a high le.el of 1uality, safety, comfort, as well as
inno.ati.e design. $n example of the latter is the .ery small 6smart3 car, introduced in
#++, as an answer to new demands in ur"an mo"ility and en.ironmental friendliness.
<his segment contri"uted a"out 2; percent of DC3s re.enues for #+++. $udi, )0=, as
well as >ord, ?incoln, 7ol.o and others compete in this segment.
Chrysler %roup
#
Case written "y 0artin @olst $ndreassen, with the colla"oration of !riol $mat, Department of conomy
and )usiness, :ni.ersitat Aompeu >a"ra
#
<his di.ision produces the car "rands Chrysler, 2eep, Dodge, and Alymouth, and
contri"uted around ;2 percent of DC3s re.enues last year. <he most important
competitors are %0, >ord, <oyota, @onda, and Bissan.
Commercial 7ehicles
<his di.ision produces commercial .ehicles under the names 0ercedes()en*,
>reightliner, -terling, -etra, and <homas )uilt )uses, and contri"uted approximately #C
percent of #+++ re.enues. Arincipal competitors in this segment are 47C! &>iat',
7ol/swagen, >ord, Denault, Aeugeot E Citroen, 7ol.o E -cania, and 0$B.
-er.ices
<he >inancial -er.ices :nit is one of the largest financial ser.ice pro.iders in the world
apart from the "an/ing and insurance sectors. <hey offer, among other things, customi*ed
financing and leasing pac/ages, particularly in connection with the sale of DC3s
automoti.e products and insurances.
$erospace
<his di.ision de.elops and produces commercial and military aircraft &DC is a partner in
$ir"us 4ndustrie', satellites, and space infrastructure. <he contri"ution was around 6
percent of total company re.enues in #+++. 0ain competitors are )oeing, ?oc/heed
0artin, Dassault, -i/ors/y, =estland and others.
!thers
<his segment, dominated "y rail systems, electronics and diesel engines, contri"uted
a"out ; percent of DC3s re.enues for last year, and competes with -iemens, $lstom,
)om"ardier, )osch, <D=, Bippondenso, Caterpillar and Cummins.
TROUBLE IN THE CORPORATION
<he merger of Daimler()en* and Chrysler, was, in the words of <he conomist
&28.##.00', a disastrous failure. $s of early Decem"er 2000, the total .alue of
DaimlerChrysler3s shares were lower than that of Daimler()en* alone "efore the
ta/eo.er, with the share(price down from around F#0, per share in 2anuary #+++ to the
current share(price of around F9+. <he Chrysler di.ision saw a loss of F800 million in the
third 1uarter of this year, and could lose e.en more in the fourth. >or the first three
1uarters of 2000, re.enues rose #2 percent to a"out #2# "illion while net income &"efore
extraordinary item and a change in accounting methods' slipped #0 percent to 9.6 "illion.
<hese results are the conse1uences of higher unit sales of .ehicles coupled with lower
gross margins. 4n the fourth 1uarter of 2000, howe.er, sales dropped disastrously.
2
Chrysler used to "e /nown for its solid margins on sales, "ut as foreign competitors
mo.ed in to the mini.an E sport(utility segment, margins fell a"ruptly, and Chrysler
started spiraling downwards. <he increasing cost of research and de.elopment, partly
caused "y new en.ironmental standards, pro.ed too much for a company that had a
limited num"er of products and mainly produced for the $merican mar/et. !n the #C of
Bo.em"er 2000, <he =all -treet 2ournal reported that the Chrysler %roup, "ecause of its
high costs and unexpectedly large .ehicle discounts on old models that had "ecome hard
to sell, would "e una"le to reach its profit target for 2000, and that it would "e li/ely to
report pure losses for the fourth 1uarter. $ leading analyst with 0et*ler )an/ in
>ran/furt, 2uergen Aieper, argued that Chrysler did most things right "ut was too slow in
reacting to the suddenly increased competition in the auto mar/et &$ssociated Aress,
#.#2.00'. :ntil the third 1uarter of 2000, Chrysler had "een a maGor profit creator in DC,
"ut increasing competition turned this reality around. -weeping management changes
were carried out, and more could "e in the ma/ing. !n a more general le.el, Chrysler
%roup was affected "y a general downturn in the :- car mar/et. @owe.er, a Bo.em"er
2000 research report "y DC attri"uted much of Chrysler3s under(performance in the :-
to under(optimi*ation within the :- di.ision itself. !ne could of course "e tempted to
speculate whether this announcement was ordered from the %erman leadership in order to
"olster the e.entual new strategy for the Chrysler that was then "eing wor/ed on "y
Dieter Zetsch following the firing of 2ames @olden as the Chrysler %roup3s C! along
with se.eral other top $merican executi.es.
<he Class $ction ?awsuits
4n a 90
th
!cto"er 2000 >inancial <imes inter.iew, DaimlerChrysler3s "oss, 2uergen
-chremmp admitted that the merger ne.er was the merger of two e1ual companies that it
was originally presented to "e, "ut rather a ta/eo.er of Chrysler "y Daimler()en*. 4n the
aftermath of this statement, Bo.em"er 2000 saw a num"er of law(suits "eing raised
against DaimlerChrysler, against the leadership, and against 0r. -chremmp himself. <he
"iggest of these was the one filed "y :- magnate Hir/ Her/orian, who accused the
leadership of Daimler()en* of unlawfully misleading the then owners of Chrysler, and
particularly his own <racinda Corporation, to "elie.e that the merger was one of
e1uals. Her/orian, pre.iously Chrysler3s largest shareholder with a #9.C8 percent sta/e,
argued that the defendants manipulated the Chrysler shareholders and )oard of Directors
to appro.e the merger through deceitful statements that it was one of e1uals. @e argued
that Daimler3s intentions were to ac1uire Chrysler, su"Gugate it, and then reduce it to a de
facto di.ision of Daimler, firing its management. Her/orian claim amounts to F+ "illion
in damages, and also see/s to reesta"lish Chrysler as an independent corporation.
Coordination Aro"lems
<here ha.e "een coordination pro"lems "etween Daimler and Chrysler entities since the
#++, merger, and lac/ of post(merger synergy in engineering as well as in research and
de.elopment. $ parallel that can "e drawn is the one "etween )0= and Do.er. <here
are clear analogies "etween the way )0= recently let their ac1uisition mismanage its
9
own "usiness without too much interference from the mother organi*ation, and the way
Chrysler and its leadership in the latter parts of 2000 were percei.ed as una"le to stem the
crisis. <here was nonetheless reason to "elie.e that Chrysler3s pro"lems to a greater
extent than Do.er3s were caused "y external factors such as the sudden influx of non(:-
cars into the :- mar/et, a mar/et in which Chrysler traditionally has had a particularly
strong position in the sports car E utility segment.
@ea.y Competition from Bon(:- )rands in the :- auto mar/et
!n the first of Decem"er 2000, >or"es.com asserted that Chrysler, and indeed the whole
$merican auto industry, was losing out to foreign competitors "ecause their competitors
offered technologically more ad.anced products. >or example, the "est low(polluting
engines were 2apanese. <he :- cars, on the other hand, suffered from a relati.e lac/ of
technological inno.ation.
arlier, the profit margins on truc/s and sport(utility cars, Chrysler3s main source of
income, were good, as demand was "igger than supply. <his excess demand had largely
"een tapped "y late 2000, and as a conse1uence, Chrysler3s and other :- carma/ers
started recording losses.
Aroduction Cuts, ?ay !ffs I -toc/ 7alues
4n the "eginning of Decem"er 2000, DaimlerChrysler announced that it was going to
drastically cut the production in Borth $merican plants "y idling or reducing output at ##
of its #9 assem"ly plants. <he planned cut in .ehicle production amounted to #;6,000
units, representing a reduction of #,.8 percent. $ccording to the then newly appointed
Chrysler C!, Dieter Zetsche, the com"ination of a saturated mar/et for cars as well as
Chrysler3s growing in.entories re1uired this urgent action &$ssociated Aress 0#.#2.00'.
-imilar "ut not e1ually serious pro"lems were "eing experienced "y other .ehicle
producers as well, and %0 and >ord also had to idle plants in order to reduce their own
growing in.entories.
<he Chrysler %roup struggled hard to stem its losses and restore the deteriorated in.estor
confidence. 4n mid Bo.em"er 2000, the DC share fell to a three year low, dropping to
only F9C.+0 per share. $t the first of 2anuary 2000, the share price was around FC; while
one year "efore that, in 2anuary #+++ it reached as high as F#0,. 4n the last #+ months,
the stoc/ has lost o.er half its .alue, while the Dow 2ones -toxx auto index has fallen
only 20 percent. <his meant that the performance of DC on the stoc/ exchange was
disastrous compared to the sector a.erage. $ccording to Bewsma/er &2,.##.00', many
would("e in.estors considered a price of 98 uros &F90.8' to "e the first "uying
opportunity. -hould the price fall that low, DC would "e close to trading "elow its "oo/
.alue of 9C "illion uros. <his would "e 1uite grim compared to the sector a.erage of
trading at #.6 times "oo/ .alue, and indicated exactly how dire straits DC were in.
)efore the details of Chrysler restructuring, to "e announced in the first 1uarter of 200#,
were /nown, and "efore the effect of the restructuring was /nown, the cautiousness
among in.estors was considered li/ely to remain. Deutsche )an/, DC3s largest
shareholder with a #2 percent sta/e, among others, expressed concerns o.er the
corporation3s strategy to grow in .olume instead of concentrating on a premium "rand
;
strategy, "elie.ing it would "e li/ely to help "ring down the .alue of the company e.en
further &Deuters 29.##.00'.
-chremmp, -in/ing -hare Arices I -in/ing Arofits in the Chrysler %roup
<he stoc/ performance of DC lead to widespread criticism, and reached a new high at the
end of Bo.em"er 2000, as leading %erman and :- shareholders called for -chremmp to
resign. <he %ermans generally argued that -chremmp and the pre.ious DaimlerChrysler
management paid too much for Chrysler, negati.ely3s affecting shareholder .alue, and
that -chremmp had "een following economically unhealthy policies. -ome of these
wanted DC to dump the loss(ma/ing Chrysler. <he $merican stoc/holders were strongly
dismayed "y -chremmps admission that the merger "etween the two companies from
Daimler3s side always was intended as a ta/eo.er, and not as the purported merger of
e1uals &>inancial <imes, 90.#0.00'. DC3s chief executi.e, 2uergen -chremmp, recei.ed
loads of sharp criticism, "ut recei.ed support from some analysts who pointed to the fact
that it would "e premature to e.aluate a merger only two years after it happened when the
a.erage life cycle of a modern car lasts six to eight years, and where it ta/es a"out three
years to "uild a new product &something that indicates that current pro"lems could ha.e
old roots'. Be.ertheless, it was estimated that his credi"ility, "y late !cto"er 2000, had
fallen to the lowest le.el possi"le &Bewsma/er 2,.##.00'. <he fact that there appeared to
"e no natural successor at that point, made a num"er of analysts conclude that -chremmp
might "e gi.en from a few months to half a year to rectify the current trou"les of DC
<he DC "oss, for his part, was 1uoted as saying that5 !riginally Chrysler was supposed
to ma/e a F9.C+ "illion profit in 2000. 4n 2uly the expectation was reduced to a"out F9.09
"illion. 4n !cto"er to a"out F2.## "illion. $nd now we are tal/ing a"out less than two
"illion, and 4 fear we ha.en3t yet seen the end, while the then recently installed Chief
xecuti.e of Chrysler, Dieter Zetsche, called the situation for Chrysler %roup a"solutely
dramatic &Deuters 28.##.00'.
Drop in 0ercedes()en* Juality as =ellK
4n late Bo.em"er 2000 news "ro/e that DC not only faced pro"lems within the Chrysler
unit, "ut also with regards to the 0ercedes()en* "rand. 4nternal DC reports had
concluded that the corporation had "een underestimating the so(called Juality arly(
=arning -ystem from the corporation3s car dealers. Dealers were "ecoming increasingly
critical of the 1uality of new 0ercedes()en* cars. Aarticularly technical pro"lems
emerged as a maGor area of discontent among dealers. $lthough pro"lematic, analysts did
not at the time expect this do influence the share price significantly.
0oody3s and -tandard I Aoor3s Downgrade DC3s De"t Datings
<he first of Decem"er 2000 saw a downgrade in DC3s long term de"t ratings "y 0oody3s
4n.estors -er.ice, and the short(term de"t ratings were expected to reach an e.en lower
le.el. <he long(term de"t rating was lowered to 6$23, the sixth highest le.el, from 6$#3,
and is on re.iew for a further downgrade to 6$93. >or short(term de"ts, the ratings were
down from 6$23 to 6$93. <hey came the same day DC announced its intentions to cut
8
unit production in Chrysler plants "y #,.8 percent. <he downgrading came as 0oody3s
predicted sales of Chrysler3s 6"ac/"one3 .ehicles to fall significantly from #+++3s le.els
o.er the next two years, as competition from a"road tightened, according to Deuters.
-tandard I Aoor3s effected a similar downgrading. 4n total, the effect of these
downgradings were regarded as li/ely to increase DC3s cost of de"t, and "ecause of
lower short term de"t rating, it was expected that the corporation would "e pre.ented
from speculating and ta/ing ad.antage of the offerings in the commercial paper mar/et, a
mar/et in which loans of 2C0 days and shorter are a.aila"le.
Cultural Differences I <rans($tlantic Clashes
$s lawsuit after lawsuit were esta"lished against the %erman part of DC3 leadership "y
$merican shareholders, the %erman side of the corporation started defending themsel.es
"y directing charges against the :- leadership. $ccording a DC super.isory "oard
mem"er, the pre.ious management of Chrysler %roup held "ac/ information prior to the
merger in #++,. <he mem"er also claimed that the entire leadership philosophy at old
Chrysler resulted in hidden pro"lems on all le.els so that important management
potential could not "e utili*ed &>< 0ar/et =atch, #.#2.00'. @owe.er, accusations ha.e
"een seen as unreasona"le "y some analysts on the grounds that all necessary information
more or less was out in the open and easy for Daimler to see prior to the merger.
4t has "een suggested that the reason why DC shed its :- executi.es was the fact that the
$mericans had a hard time getting along with the %erman side of the corporation and
.ice .ersa. Aarticularly, it has "een argued that -chremmp tried to push the 6Daimler3
way of doing things upon Chrysler, and not paying too much attention to the other side,
and that the lac/ of cooperation in DID followed from Daimler3s fear of getting their
6superior3 or at least more prestigious 0ercedes()en* cars contaminated "y using the
same components and procedures as the Chrysler models &=orldlyin.estor.com,
0#.#2.00'.
6
Fig.1: Profitability
-ector $.erage
2
&90.##.++(
90.##.00'
DaimlerChrysler
&90.##.++(90.##.00'
DaimlerChrysler
&year ended 9#.#2.++'
%ross 0arginE -ales 90.+;L 19.58% 21.18%
!perating 0argin C.6+L 4.84% 6.22%
Bet Arofit 0argin ;.;6L 2.98% 3.42%
Fig.2: Financial Strength
-ector $.erage
&90.##.++(90.##.00'
DaimlerChrysler
&90.##.++(90.##.00'
DaimlerChrysler
&year ended 9#.#2.++'
Juic/ Datio #.#+ 1.2 1.4!
Current Datio #.,C 1.66 1.63
De"t to e1uity 2.;8 2.!8 1.9
Fig.3: Management Effectiveness
-ector $.erage
&90.##.++(90.##.00'
DaimlerChrysler
&90.##.++(90.##.00'
DaimlerChrysler
&year ended 9#.#2.++'
Deturn on $ssets 8.;8L 2.6!% 2.93%
Deturn on 4n.estment ,.0CL 4.18% 5.1!%
Deturn on 1uity #+.C+L 12.85% 14.21%
Fig.4: Growth ates
-ector $.erage
&90.##.++(90.##.00'
DaimlerChrysler
&90.##.++(90.##.00'
DaimlerChrysler
&year ended 9#.#2.++'
-ales 4ncrease 2#.0;L 14.!4% 13.81%
arningsE-hare &A-' 9.0+L 4.66% 4.4%
A- &-ept(Bo. 2000' ( 8.8;L BE$. " 91.56%
2
$ll figures for -ector $.erages from http5EEyahoo.mar/etguide.com
C
Fig.!: "he #evelo$ment of %&'s share$rice from (an to )ct 2*** relative to sector
averages
9
Fig.+: "he #evelo$ment of %&'s share $rice on the ,-SE
;
9
%raph ta/en from DC3s third interim report 2000
;
%raph ta/en from http5EEyahoo.mar/etguide.com &figures in :-D'
,
#UESTIONS
#. 4dentify the strengths and wea/nesses of DC as per early Decem"er 2000.
2. 4n your opinion, what were the most salient o"stacles to growth and success in DC at
this point in timeK 2ustify your reasoning.
9. =ould you in.est in DC nowK
;. Mou are a senior "an/er in a large "an/. <o what extent will you emphasi*e DC3s
recent downgrading on the de"t(ratings in assessing whether or not you would want
to gi.e DC long or short terms loan respecti.elyK <o what extent will you loo/ to
others factorsK
+
TEACHIN$ NOTE
5
<he corporation3s annual and 1uarterly statements, indicate that DC, "y early Decem"er
2000 was in a reasona"ly good financial health and that it displayed good growth figures
in many segments. @owe.er, the fact that the com"ined worth of the corporation had
fallen to less than the worth of Daimler(Chrysler alone "efore the merger, hints to the
possi"ility that there were more dirt and hidden corpses in DC than had "een re.ealed at
that stage. 0ore specifically, there is reason to suspect DC of ha.ing employed creati.e
accounting, and that they in so doing were a"le to camouflage a good deal of negati.e
information whilst performing profit smoothing. 4n late Bo.em"er 2000, -chremmp
declared that DC expected an operating profit for 2000 to end up at a"out F,.+9 "illion at
the year3s end, e.en expecting a positi.e result from the :- operations. <his is only
a"out C.8 percent lower than the results for #+++, further strengthening the suspicion that
prime examples of creati.e accounting and profit smoothing are li/ely to "e found in
DC3s 2000 interim reports.
$t the time of our analysis of the corporation, -chremmp en.isaged more technical
coordination, Goint purchases and cooperation "etween DC different di.isions to de.elop.
@e furthermore said he "elie.ed this could easily lead to significant impro.ement in it3s
profita"ility o.er the next few years &Deuters, #.#2.00'. 4t was pro"a"ly a"out time that
DC started to reap the potential synergy effects inherent in the #++, merger.
?et us now turn to the enclosed ta"les of profita"ility, financial strength &li1uidity I
sol.ency', management effecti.eness &also comprising profita"ility measures' and rates
of growth in sales I earnings per share.
Arofita"ility
>ocusing on the ratios for gross margin, o$erating margin and net $rofit margin we see
that the pre.ious twel.e months, Decem"er #+++ to Bo.em"er 2000, as compared to the
whole of #+++, show significant decreases.
<he gross margin is down "y C.6 L, Nonly 69.9L of sector a.erage
6
O
the o$erating $rofit is down "y a massi.e 22.2L, Nonly 62.+L of sector a.erageO
whilst the net $rofit margin is down "y #2.+L Nonly 66.,L of sector a.erageO
Contrasting the a"solute .alues of DC3s ratios with the sector a.erage, highlights
wea/nesses in the corporation3s performance, and explains at least part of the reason why
potential stoc/("uyers had "een reluctant to pay much for DC stoc/sP its profita"ility
ratios do not compare well with those of other performers in the sector.
8
<eaching note prepared "y 0artin @olst $ndreassen, with the colla"oration of !riol $mat, Department of
conomy and )usiness, :ni.ersitat Aompeu >a"ra.
6
$ll figures for -ector $.erages from http5EEyahoo.mar/etguide.com
#0
>inancial -trength &?i1uidity I -ol.ency'

Contrary to the findings a"o.e, the measures of DC3s financial strengths do not indicate
.ery serious pro"lems. DC had a nota"le growth in its #ebt to e./ity ratio, "ut it was still
reassuring positioned "eneath that of the sector as a whole. ?oo/ing to the ratios more
specifically, we note that5
<he ./ic0 ratio is down from #.;0 to #.2C representing a +.9 L fall. <he sector a.erage of
#.#+ as well as the literature, suggests that this is within the 6safe *one3. <he c/rrent ratio
of #.66 is only slightly down from #+++ result of #.69, and is also fairly close to the
sector a.erage of #.,C. $ little "it more worrisome is the #ebt to e./ity ratio where last
year saw a Gump from #.C+ to 2.0,, representing a #6.2 L increase. <hese figures along
with other external factors such as an increasingly competiti.e auto mar/et may ha.e
"een a contri"uting factor to 0oody3s Bo.em"er 2000 downgrade of the corporation3s
de"t ratings.
0anagement ffecti.eness I Arofita"ility
<he profita"ility ratios that are closely attri"uted to management effecti.eness, for
example ret/rn on assets, ret/rn on investment, and ret/rn on e./ity, all show a distinct
negati.e pattern of de.elopment. $lthough not catastrophical, they indicate that all was
not well in the 6mighty3 DC
<he ret/rn on e./ity, one of the "asic measures for stoc/holders3 satisfaction, is down to
#2.,8L from #;.2#L a reduction of +.6L. Compared to the sector a.erage of #+.C+L, it
is o".ious why DC experienced such a sharp fall in its stoc/ .alue. $s of early Decem"er
2000, it pro.ided only around 68L of the a.erage return in the sector.
<he ret/rn on investment is e.en more disappointing, showing a plunge of #,L. DC3s
return on in.estment, at ;.#,L is only a little o.er half the sector a.erages, standing at
,.0CL. <his result calls into 1uestion DC3s in.estment policy, and su"stanti.e changes
might ha.e to "e made there.
<he ret/rn on assets is, similarly, "ad news. Down ##.9L to 2.60L it is less than half
the sector a.erage of 8.;8L &Q'.
%rowth rates
<he growth rates of DC "oth contain reasona"ly good news &if your perspecti.e is long'
and "ad news &if your perspecti.e is short'. <he corporation saw solid increases in sales
as a whole, "ut the Chrysler %roup contri"uted to a tangi"le "ac/lash for the latter half of
2000. <he growth rate of the 0#.#2.++ to 0#.#2.00(period is marginally higher, "y early
Decem"er 2000 standing at #;.0;L. <his result is still less than the sector a.erage of
##
2#.0;L, "ut remains a respecta"le result, particularly as the merged corporation had
limited time to optimi*e its wor/ings.
<he perhaps single most worrisome result found in the analysis of DC, along with the
disproportionately low profita"ility ratios and the recent downgradings in de"t ratings "y
0oody3s and -tandard I Aoors, is the de.elopment in the earnings $er share from
-eptem"er to Bo.em"er 2000. =hilst the sector, generally facing a slight downturn,
recorded an a.erage of R8.8;L, DC3s earnings $er share plummeted spectacularly with
a R+#.86L decrease &Q'. <his de.elopment is an o".ious reflection of Chrysler %roup3s
under(performance and reflects their slumping sales.
)uying stoc/sK
$s of early Decem"er 2000, there does not seem to "e any forthcoming good news for
DC in the short term, and the chances of a growth in share prices are therefore small.
Daimler()en* paid F96 "illion for the #++, merger with Chrysler, "ut as of early
Decem"er 2000, the merged company is worth not more than F9, "illion, less than the
.alue of Daimler()en* alone "efore the merger &Q'. <his might indicate that DC, as the
"oss 2uergen -chremmp had it, was highly under.alued, "ut it could also reflect hidden
rotting structures within the corporation or imminent pro"lems a"out to surface. <here
appears to "e a certain ris/ of DC shedding the Chrysler %roup if the poor results are to
continue for much longer. $ mo.e li/e that might lead to chain reactions that in turn
would ma/e the .alue of the DC shares uncertain in the short term. @owe.er, "uilding
upon the corporation3s inherent expertise, its products and "rand names, and the
significant amounts of funds "eing channeled into research and de.elopment, it has a
high li/elihood of muddling through the crisis without losing its course, achie.ing "etter
results and more sta"ility in the long term.
$t the "eginning of Decem"er 2000, 0errill ?ynch analyst -tephen Deitman was 1uoted
"y C)- 0ar/et=atch.com &#.#2.00' as saying "he o/tloo0 for the fo/rth ./arter an#
2**1 is e1tremely /nclear an# it is still way too soon to antici$ate what sort of recovery
if any wo/l# be seen in 2**2. $fter in.estigating DC, this Gudgement seems a reasona"le
one. )uying stoc/s in DC at this point in time, should "e for someone willing to wait up
to a couple of years to ma/e money on them. Aersonally, we thin/ it would "e wiser to
follow the de.elopment in DC, and particularly the de.elopment of Chrysler %roup,
another three to fi.e months into 200#. <his is li/ely to pro.e a crucial period for
Chrysler, for the mother(corporation as a whole and certainly for the de.elopment of the
share price.
=hat is the solution to Chrysler3s pro"lemsK
Cost reduction and production cuts might help to stem the tide of recession in Chrysler,
"ut the creation of new, high 1uality inno.ati.e cars could do more, particularly in the
long run, to sol.e Chrysler3s serious end(of(2000 pro"lems. )y early Decem"er 2000,
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they are, perhaps for the first time, really facing competition in the :- mar/et from
reasona"ly priced and inno.ati.e foreign models, some ironically coming from
0ercedes()en*, and it has "een a while since Chrysler had inno.ati.e cars on offer. <he
need for cost cuts was ac/nowledged in DC3s third 1uarterly report 2000. @ere, the
corporation announced comprehensi.e cost cutting programs in all di.isions, and a
re.iew of all processes along the automoti.e chain. Concerning the 1uestion of a lac/
of inno.ati.e products, the report declared that a .ariety of new and attracti.e products
should positi.ely influence unit sales and re.enues.
-/ewed planning processes and unrealistic expectations a"out the demand for Chrysler3s
aging product line ha.e "een seen as maGor contri"utors to DC3s crisis, and no 1uic/
fixes has, as of early Decem"er 2000, yet "een identified.
4t is the opinion of the authors that DC, at the "eginning of Decem"er 2000, is far from
ha.ing fully exploited the latent synergy effects inherent in the #++, merger with
Chrysler. <he lac/ of synergy might "e reflect the relati.ely short time that has passed
since #++,. <he time needed for adGusting two large auto producing cultures such as the
%erman Daimler()en* and the $merican Chrysler, might "e yet another year or two. =e
ha.e to ta/e into consideration the fact that car producers need a long time to de.elop
new products, and that some of the pro"lems experienced at this point in time could "e
attri"uted to mista/es committed "efore the merger, as well as to "irth pains. Cultural
differences ha.e pro"a"ly also played a role in the under(performance of Chrysler.
Despite this, the corporation shows sufficient signs of health to gi.e it a fairly good
prognosis. 4t should ha.e the power to turn the situation around, seeing Chrysler return to
profita"ility, and end up with a long run situation where the latter is /ept in the
corporation instead of "eing sold off cheaply. 4t appears e1ually li/ely that if Chrysler3s
state of affairs does not impro.e significantly "y the end of the second 1uarter of 200#,
and possi"ly "efore that too, we will see DaimlerChrysler shedding its $merican de facto
su"(di.ision, and thus at least temporarily gi.ing up what 2uergen -chremmp, according
to Der -piegel, has identified as the potential of our position as a glo"al auto concern.
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