Here Comes The Road Test

By Barrett Seaman; Ron Stodghill II Reported By Jordan Bonfante and Peggy Salz-Trautman/Bonn and Joseph R. Szczesny/Detroit

It was kind of cute, actually, how they came to be an item: following some small talk last year over a possible joint venture in Latin America or maybe Asia, Juergen Schrempp, 53, chairman of doughty Daimler-Benz, invited Chrysler chief Robert Eaton, 58, to spend some quiet time alone during the crowded Detroit Auto Show in January. Schrempp said he liked Chrysler a lot and suggested that maybe they should consider going all the way.

"I've been thinking about the same thing," replied Eaton, chairman of the once dented but lookin'-pretty-good-these-days American automaker. And so began a rapid courtship, replete with the secret rendezvous (London, Frankfurt) and code name (Operation Gamma) that lovers and business executives are wont to employ. The result, the largest industrial marriage in history, takes what had been the world's No. 6 car company, Chrysler, and stuffs it into the trunk of erstwhile No. 15 Daimler-Benz, to produce the planet's fifth biggest automobile concern. The new combine, valued at $40 billion, will generate $130 billion in sales and employ more than 400,000 people.

The merger is notable not only for its size and complexity (the fine print of labor law and trade policy will have the lawyers tied up for months) but also for its symbolism. The creation of DaimlerChrysler Akteingesellschaft represents a triumph of the global economy and the end of car companies as national emblems of industrial might. The car business is too capital and customer hungry to care about flags. Witness last week's other big news: Volkswagen's $713 million deal to buy Rolls-Royce, the once regal, now tarnished marque of British motoring. Ford also announced last week that it will consider increasing its 16.9% stake in Kia Motors Corp., South Korea's troubled No. 2 automaker, which filed for bankruptcy last summer. Audi is apparently considering purchasing Lamborghini. VW and Renault could be next.

Notably absent from this marriage-go-round are the Japanese, who, even if they weren't insular and risk averse, are operating in such a depressed economy that it's hard to see them making a bold move. No longer gunslinging international capitalists, Japanese managers prefer to build--and control--from the ground up.

Like love and marriage, the idea of creating a global car company is not new. Lee Iacocca, even as he scrambled to save Chrysler during the dark years of 1979-81, dreamed of creating what he called Global Motors, a fully integrated international car and truck builder and seller. Global Motors would be one of perhaps six to 12 similar consortiums that would be all that remained of the more than 30 car companies operating in 1980.

Specifically, Iacocca's Global Motors was to be an alliance of Chrysler and Volkswagen (or Fiat or Renault if VW didn't want to play), with American Motors thrown in to make trucks and utility vehicles. American-designed cars would run on German (or Italian) engines, and joint dealerships around the world would be able to match the market penetration that only GM and Ford had at the time. It was one of Iacocca's typically brash ideas.

Iacocca is long gone from the industry, now happily peddling electric bicycles in Southern California. But Global Motors lives again as DaimlerChrysler, and while the pieces are a little different, they certainly fit the scenario of a world in which the number of car companies can be counted on fingertips.

The industry has already undergone considerable consolidation. Along with its equity interest in Kia, Ford Motor Co. owns Jaguar PLC and a one-third stake in Mazda and is considering an alliance with Samsung Motors Inc. GM, still the world's largest automaker, owns Germany's Adam Opel AG, the U.K.'s Vauxhall Motor Cars Ltd., Holden's in Australia, 50% of Saab Automobile AB in Sweden and about a third of Isuzu. On top of that, GM operates a joint venture in Canada with Suzuki Motor Corp. and an assembly plant called NUMMI in California with Toyota.

Toyota Motor Co. has achieved world class another way, first through exporting from Japan and then by building foreign plants. In both cases it employs a unique production system that cuts costs through continuous improvement, yielding sharp reductions in product development and manufacturing lead times. The cornerstone of the system involves a "platform team" approach that unites managers in such disparate areas as engineering, design, purchasing and field service and even provides suppliers to shepherd a vehicle from blueprints into the customer's hands in 2 1/2 years instead of the typical four to six years most car manufacturers take.

The new DaimlerChrysler team aims to adopt a similar strategy. But this alliance will work on a different strategic level than do most other globalization efforts. First and foremost, the sheer size and scope of this merger all but assures mutual survival in ongoing global consolidation. Along with Ford, Toyota and GM, DaimlerChrysler will be a first-tier, all-world player.

Together, Daimler and Chrysler have a good product and market fit, filling in each other's weaknesses. Because of its dependence on North American sales, Chrysler needs greater international exposure for its products. And Daimler could stand to broaden its Mercedes product line with more mass appeal. But how that will play out beyond theory is still unclear.

Schrempp and Eaton boast of major cost-cutting opportunities. For example, the two companies combined spend $7 billion on R. and D. every year. Much of the money that goes into research on, say, safety or fuel-cell technology can be put under one umbrella for savings. Economies can also be extracted from joint purchases of raw materials. "Daimler and Chrysler will maximize the number of common parts they're using for their cars," says Christian Breitsprecher, a Dusseldorf-based industry analyst. "Engines, engine control systems, transmissions, door locks, seats--you name it." As Eaton insisted to TIME, "There's $100 million of savings the first year on current product."

And as odd as it sounds, given the stylistic differences between Mercedes and Chryslers, one half of the company can help the other half design cars. For example, it's no secret that Mercedes badly wants a minivan for Europe. Chrysler, with 15 years' expertise in that market, could co-design a platform for a luxurious minivan that its partner could sell in Europe, saving money and adding sales. "They had a minivan going that they won't do now," says Eaton. That is only one of many planned savings, he says, "but we don't want to talk about our product plans right now."

Getting new cars out the door in a hurry into hot market niches is one of Chrysler's strengths. It comes from the company's design-driven managers, and from the company's inordinate reliance on outside suppliers. Mercedes engineers everything but the screws from the ground up, one reason it took years to develop its M-Class sport utility vehicle. Scrappy Chrysler could teach it how to develop and roll out in a more timely fashion a superluxurious SUV to compete against the popular Lincoln Navigator.

Earlier this year, Chrysler stunned audiences with the Chronos, a conceptualized superluxurious, Euro-styled touring sedan with a V-10 engine. It's a dream for Chrysler--too expensive for the company to produce alone. Daimler's deeper pockets, though, could support such a program. "Daimler has been lacking the potential for growth, but it has the cash flow," says Andre Igler, industry expert and editor of Vienna's business daily Wirtschaftsblatt. "Chrysler has the potential for growth but no real cash flow."

The merged company will definitely not save money on labor, on either side of the Atlantic--a point that was well received by workers. "We think it's good for Chrysler and our union," said United Auto Workers president Stephen P. Yokich, who represents more than 64,000 blue-collar and 7,000 salaried Chrysler personnel. "But we'll take a good look at it. Our job is to protect the interests of our members."

In Stuttgart, Daimler Workers Council representative Jurgen Hesse was more cautious: "When a capitalist enterprise undertakes a move like this, it wants to save money. And that can mean cutting back on jobs. We can't say yet where the pressure will be felt."

Since labor costs are higher in Germany, logic suggests the pressure will be felt there in the long run. On the other hand, the company will follow the German mandate that half the 24-member supervisory board (a group separate from the board of directors) must come from labor, the remaining 12 from the combined management. That requirement could help build new alliances among unions in Canada, Germany and other parts of the world. "This means now there is a whole different environment at Chrysler," said Buzz Hargrove, president of the Canadian Auto Workers. Ultimately it will be up to I.G. Metall, the union that represents German autoworkers, whether the Americans and Canadians get seats on the board. Pending that, most workers seemed pleased. "I just hope my stock goes up and I can buy a Mercedes with my Chrysler discount," laughed an employee from Chrysler's Jefferson North assembly plant, on Detroit's gritty east side.

If there are doubts about the rightness of the fit, they center on the issue of the two corporate cultures. Chrysler's near-death experience has turned the company into a lean, profit-obsessed organization--short on bureaucracy but long on management talent. In the great Detroit tradition, pragmatism and margin protection can take precedence over quality when they are in conflict.

Daimler-Benz, on the other hand, is considered conservative even by the Germans--an aristocrat in a double-breasted suit, haughtily dismissive of anyone who suggests cutting corners on quality for anything so ephemeral as profit. Says German car-magazine editor Wolfgang Konig: "Perfectionism is at home at Daimler. I get the feeling sometimes it was invented there."

Like most big German firms, Daimler has been content with profit margins of 2% or less (VW gets 1.2%), vs. Chrysler's 6.5% margin last year. One look at the numbers reveals volumes about the culture gap: last year Chrysler earned $2.8 billion producing 2.88 million vehicles with 121,000 workers, while Daimler-Benz earned $1.78 billion making 1.13 million vehicles on a payroll of 300,000. "Such a difference can lead to real conflicts in investments," warns one German auto executive.

Schrempp, who will succeed Eaton as DaimlerChrysler's chairman after the first three years, might be the kind of Mercedes executive who can bridge that gap and make this marriage work. A former apprentice mechanic, he arrived in Stuttgart in 1987 and made--and later unmade--an ill-fated deal with Dutch aerospace firm Fokker. He also did a stint at a Daimler division in Cleveland, Ohio. When Daimler fell deep in the red in the mid-'90s, he embarked on a series of American-style cost-cutting programs that reduced the work force by some 20,000 and the number of operating businesses from 35 to 23, earning himself the nickname "Neutron Juergen," in honor of General Electric's famous cost cutter "Neutron Jack" Welch.

Schrempp and Eaton give themselves three years to integrate their new company. DaimlerChrysler has the ingredients of a good merger, but it won't be easy. The world is glutted with manufacturing capacity and doesn't need more cars--even fancy German-American ones. And the bottom line on big mergers is that they don't work. "Three years is not a very long term to integrate a culture," says Schrempp. "If we are really there after three years, then we really did a good job." And if not, Schrempp, not to mention thousands of global workers, will be out of his.

--Reported by Jordan Bonfante and Peggy Salz-Trautman/Bonn and Joseph R. Szczesny/Detroit