Change Management Analysis of Daimler – Chrysler Merger Report

Abstract

The merger between Daimler and Chrysler was designed to create a complex multinational automobile manufacturer with a market worth of more than $130 billion. The merger was supposed to ring paradigm shifts in the way that cars would be made and driven. But unfortunately, the great upheavals and changes that were predicted did not happen and the merger sunk into a morass of cultural mismatch. Synergies between Daimler, a German company, and Chrysler, an American company could not develop. For the merger to be successful, a climate of mutual trust, learning, creativity common values, and ethics need to be developed first. When two companies merge, there needs to be a balanced change management policy where both parties are given their due right and encouraged to exchange ideas for mutual growth. Daimler tried to ramrod its policies on the resilient Americans who resisted and this resulted in a war of attrition in which neither party won. This paper analyses the Daimler Chrysler merger and the change management issues that the two companies faced. The paper also provides a brief overview of change management methodologies and explains the factors to be considered for managing change in organizations.

Stakeholders in the Merger

Stakeholders played an important role in the merger. These were entities that could critically influence any decisions in the merger. The major stakeholders were the two companies, the workers union and the majority Share holders. Table 1. Daimler Chrysler Statistics in 1997, gives information about the two companies.

Table 1. Daimler – Chrysler Statistics in 1997 (Schulten Thorsten, 1998)

Daimler – Benz AG

Daimler Benz or Daimler Mercedes Benz (DMB) was incorporated in 1926 after a merger of Daimler and Benz companies. The new company made the famous Mercedes cars that have dominated the market for premium, luxury, and racecars for the past few decades. The company has drastically changed how cars are made and driven and have brought in several technology changes in areas such as the engine, transmission, safety, and in providing a rich riding experience. The company has introduced innovations such as safety crumple zones, anti-lock brakes, airbags, seat belts pre-tensioners, and many more. The carmaker has manufacturing facilities in several countries and Mercedes cars and is sold throughout the world. The company also makes racecars, trucks, buses, and SUVs.(Waller David, 2001).

What Daimler Benz brought into the merger

DMB brought into the merger, world-class engineering and top-of-the-line premium and luxury cars through its M and E class series. The company has a worldwide dealer and after-sales network and has a very strong brand identity as an exclusive and prestigious car and owning a Mercedes car is considered a status symbol. DMB also brought in its excellent research and development lab that is highly regarded and very well equipped to develop high speed and high-performance cars with a high level of safety (Waller David, 2001).

Chrysler Corporation

Chrysler Corporation (CC) was founded in 1925 in America by Walter Chrysler. The company had created a strong reputation with its well-engineered cars that were targeted at the middle class. In 1965, CC entered the European market and challenged the market with cars such as Plymouth Road Runner, Plymouth GTX, Dodge Charger, and a few others, and these were called the muscle cars. It also introduced the concept of minivans that became highly successful. It also had a stable of well-received Jeeps such as Commander, Compass, Grand Cherokee, Liberty, Patriot, and Wrangler and these were in the 15000/ 30000 USD price range. Over the years, the company had peaks of high revenues followed by a fall in sales and the US Government has bailed it out on a few occasions. At the time of the merger with Daimler Benz, the revenues were 61, 147 million USD. Faced with increasing competition from the Japanese carmakers, CC was seeing falling sales and was not in a dominant position in the merger (Waller David, 2001).

What Chrysler brought into the merger

CC had a great acceptance with the middle-class Americans. It had an excellent marketing strategy in place and the cars were categorized to cover different market segments such as Town and Country. Cruiser, Convertible, Jeep, mid-size, full size, sports, and SUV. It brought its expertise in marketing in recession struck economies, very good brand identity, an excellent and skilled workforce, and a huge sales network made of many dealers and sales agents. The car was identified with the blue-collar worker, middle-class segment and people who required value for money, and with people who shopped on a tight budget (Waller David, 2001).

Workers Union

The merger was not only a merger of two companies but also of the worker’s unions. Daimler Benz had a workers union of 300,168 who were affiliated to IG Metall while Chrysler had 121,000 workers affiliated to the American United Auto Workers. The merger would create the largest group of workers, a total of 421,168. The German workers union leaders were not taken in by the assurances given by Jürgen E Schrempp, president of Daimler-Benz that there would not be any layoffs and job cuts. The leaders wanted the management to extend the job guarantee agreement that was valid till 2000, to be extended to 2002. The management was not ready to give a written guarantee and this caused increasing unrest among the German workers. Since the merger was registered as a German company, as per the German laws, 10 workers would be given a place on the supervisory board. But after the merger, the management announced that five members would be from Chrysler. The German workers felt that since this was a deemed German company, the members had to be elected from the workers union and the elected members could, in turn, sit on the board. Since the Germans outnumbered the Americans by three times, the Americans were not ready to accept this arrangement. This issue was to be settled amicably by mutual discussions, but the strain had already set in (Schulten Thorsten, 1998).

Major Shareholders

Kirk Kerkorian (Auto Talk, 1998) was the single largest private shareholder in Chrysler Corporation. Kirk was a billionaire from Beverley hills. He had bought a 10% stake in 1990 in Chrysler and this grew to more than 15%. In 1995 he attempted a hostile takeover of the company but had to abort it due to government intervention. He then offered to sell a part of his shares in exchange for a place on the Board of Directors. It is reported that it was this hostile takeover bid that made Chrysler think of a merger with Daimler. He sued Daimler Chrysler in 2000 claiming that he had lost billions of dollars due to the merger. His case was turned down since the company was registered in Germany and German rules do not allow for stock options. In 2007, he has again made a bid of 4.5 billion USD for Chrysler (Kerkorian, 2007).

Literature Review

Many researchers and scholars have written about the care to be taken for organizational changes and change management policies that occur when international companies merge. Taylor (Taylor, 2000) has written about how companies need to communicate effectively. He argues that when dealing with cross-cultural changes, societal and cultural forces have to be addressed effectively. These forces can severely affect organizations and restrict their functioning.

Johnson (Johnson et all, 2004) have argued that in the early 1980s if employees would follow a predetermined set of corporate values then they could be allowed to bring in innovation. This would mean that shared values would help to encourage employees to perform better than ever. But this approach has its disadvantages. By placing importance on shared values, the employees may feel that they are being manipulated and this can create distrust and cynicism. Another important fact that Johnson has pointed out is regarding slogans and the vision statement. These things need to be followed and reflected in the behavior of managers. So slogans such as people are our greatest assets become meaningless when job cuts are looming ahead and the whole exercise is derailed. Johnson has also written about Change Levers and the issues that change agents face in organizations. Some several levers and interventions need to be used. Organizations have several interdependent subsystems and these need to be aligned to each other. The subsystems cannot work in isolation and any change that is brought should be effected at the organization level. If this does not happen then other units in an organization will start a counter effect. Johnson speaks of the cultural web of an organization that centers around an explicit paradigm. There are various factors such as Stories, Symbols, Power Structures, Organisation Structures, Control Systems, and Routines and Rituals. All these forms a part of the social fabric and any change management policies must ensure that these elements are included.

Bloomgarden (Bloomgarden, 1999) suggests that there are four phases in a merger. In the first phase, the merger is announced and this is the chance when the management can make a good impression. Special efforts need to be taken to present the facts in the best possible way. The second phase covers the time frame between the initial announcement of the merger and the final approval. A lot of questions need to be answered about finance, workers and staff status, market caps, and others. The management needs to be honest about certain things that they are not sure of. If any job cuts are planned, then it is best if this is mentioned as a possibility. In the third phase, the merger is signed and the merger needs to stay away and ahead of the rumormongers. The management needs to make regular announcements about any plant closures or job losses. In the fourth and the final stage, the change management policies from the merger are implemented. Stockholders will ask questions about the performance and how the merger has performed against the forecasts.

What the Merger was supposed to do

The merger between Daimler Chrysler was supposed to create a vast automobile manufacturing company that would create a virtual monopoly in all market segments. The market cap was supposed to be more than 130 billion USD. Daimler had a very good presence in the premium and luxury car market while Chrysler had a good hold in the middle-level car market segment. While Chrysler had managed to salvage its operation from bankruptcy on more than a few occasions, it was financially vulnerable. Daimler on the other hand had a sound business model and had enjoyed stable growth. Both these companies were expected to use their knowledge proactively and cooperatively to increase their business. (Surowiecki James, 1998).

The merger was also supposed to produce huge savings in the form of reduced development cost, sharing of resources, and reduction in procurement and outsourcing costs. US Suppliers to Chrysler were looking forward to sales in the European market while the German suppliers looked for similar opportunities in the US, South America, and Canada. The market was supposed to include OEM sales as well as the spare parts market. As the editorial board of WSES put it “If Daimler Chrysler were a country, it would rank 37th in the world in terms of Gross Domestic Product, just behind Austria, but well ahead of six other members of the European Union–Greece, Portugal, Norway, Denmark, Finland and Ireland” (WSWS, 1998).

What went wrong

Several reasons have been attributed to the failed merger and these cantered around certain cultural perceptions, work methods, technology, and other issues. These are discussed in this section.

Clash of Cultures

Though Schrempp had announced that this was a merger of equals, this was not the case. Daimler has paid 37 billion USD in a stock swap exchange and it wanted good value for its money. When the merger was to be signed, the Americans had the impression that the Germans were simpletons, hard-working but brilliant who had a low profile and kept to themselves. The Germans on the other hand had imagined a ‘Cowboy’ image of the Americans and were expecting a gung ho team. But the reality was very different as the German leader, Jürgen Schrempp, had a different background. It is reported that in one of the first meetings held on 11 December 1998 in Spain called the ‘Top Management Meeting’, the Germans outnumbered the Americans by two to one. It was clear that Schrempp was in charge as he rushed about, talking from the podium and shouting around. When the time came for drinks, everybody joined in the fun and it was Schrempp who sang the loudest and probably drank the most. The Americans were expecting a sober German, but they were facing someone who seemed to be more fun than their serious CEO, Eaton and it was clear who was in charge. This incident created a new paradigm shift in the relations and it was understood that the Germans with their money and superior cars would be in a dominant position. They looked down on the Americans as rather poor cousins who made small and inexpensive cars for the middle class (Vlasic et all, 5 June 2000).

Disparities in Wages

There were wide disparities in wages between the US and the German workers. It was felt the US workers were being a larger amount when compared to the amount the Germans were getting much lesser. According to Orr (Orr Deborah, 17 May 1999), Eaton, the head of Chrysler was getting about 11.7 million USD while his counterpart, Schrempp was being paid about 2 million USD. The company had filed a declaration with the Securities and Exchange Commission and had declared that only 17 managers and board members were paid a total sum of 40.4 million USD. The big question that was being asked was if the US workers would have to take a pay cut or would the Germans be given a massive pay hike. The US workers would not agree to any pay cuts while increasing the wages all around for a 440,000 workforce would mean certain financial ruin. Certain changes were made and bonuses paid to the Daimler staff and the options are given to the Chrysler staff disappeared when the merger came into effect. This issue continued to cause severe strain in the interactions between the US and German employees, but incidentally, before the issue became very serious, the merger itself was doomed.

Different Business Models

There was an apparent clash of business models and ethics for the stakeholders. The Germans catered to the high and premium market segment and consequently followed the high-cost, low-volume manufacturing model. The value proposition is offered to its customers was brand identity and exclusiveness. The company made and sold its cars with the finest engineering technology and quality and it demanded a premium price from its discerning customers that the customers paid. Chrysler, on the other hand, had to skim off each cent it could save and provide low-cost models to price-sensitive and fuel economy-minded customers. It had adopted a low-cost, high volume-manufacturing model that relied on mass production techniques. While the engineering and technology adopted were acceptable, the quality control was aimed at meeting the requirements and not exceeding them. Mixing and integrating these two models, unfortunately, did not pay off and was not handled well (Sandoz, 2002).

Adverse Media Reporting

The media, which had initially applauded the merger, started damming the merger and everyone from lay journalists to authors had a field day in bashing the merger. This created very bad publicity and may have hastened the failure of the merger. An excerpt from the book by Vlasic says

“But the union didn’t turn out to be a merger made in heaven. When the dust settled, Daimler was firmly in control of Chrysler, and the shock waves were reverberating on both sides of the Atlantic. An American icon would lose its independence, and a German giant would grow in power and influence. Daimler chief Jurgen E. Schrempp grabbed the wheel of DaimlerChrysler. His co-chairman from Chrysler, Robert J. Eaton, took a back seat. And Thomas T. Stallkamp, Chrysler’s president, got caught in between.” (Vlasic et all, 5 June 2000)

Such writings were published day in and day out and caused much anger and distrust among the Americans who believed that they had been ‘conned’ and ‘taken for a ride’ by the wily Germans.

Technology Issues

Chrysler had certain technologies that could have helped the German company. Chrysler had always used the front-wheel-drive transmission that got power from the New Venture gearbox that had been developed along with general motors. This was supposed to help the Daimler cars, which were always rear-drive vehicles. Mercedes on the other hand had the famous 5-speed automatic transmission that are standard features in its cars while this technology was not used at all by Chrysler. While Chrysler always led in the 2 stroke petrol engine that has been termed as more powerful but ‘gas guzzling’, Germans had advanced in the field of 4 stroke direct injection diesel engines. If the Mercedes engine could be adapted to the Chrysler vehicles and vice versa, then a very competitive model could have been developed for Chrysler in the 4 cylinders to 12 cylinder automobiles. Daimler cars were renowned for certain safety measures that were built into the cars and these included features such as anti-lock braking systems, smart baby seats, ultrasonic obstacle detectors, seat belt pre-tensioners, safety airbags, and others. Chrysler did not implement these systems in their cars since they felt there was no need for these innovations, the cost of the car would go up and finds lesser takers. Chrysler had used aluminum and impact-resistant composite materials in the body panel construction. This could have been used by Daimler to improve the fuel economy of their cars since the German company had always used gauge steel sheets for the body panel work. Both the companies had developed prototypes of hybrid vehicles that could run on alternative fuels such as electricity, biodiesel, fuel cells, hydrogen-based fuel cells, and so on. But common projects were never taken up to develop these vehicles. Unfortunately, deep distrust and the ‘we are better’ attitude acted as sound barriers to knowledge sharing. The benefits of engineering knowledge remained isolated in their respective companies (Herman Don, 1998).

Cost Cutting Measures

With reducing sales and increasing overheads, there was an urgent need to control costs. The management decided to cut about 13,000 jobs and close several plants and factories. This was deemed necessary since sales were down and there was excess capacity, so closing down idle plants was the immediate solution to control costs. This has created a lot of unrest in the workforce and the labor unions (Hawranek Dietmar, 19 February 2007).

At the beginning of the merger, an exercise to integrate the different systems running in the two companies and at the supplier’s was undertaken. Both companies were using SAP Financials for enterprise planning and CATIA for computer-aided designing. This proved beneficial to the IT systems people who were given the task of cost-cutting and identifying redundant systems that could be scrapped. The IT systems did a very good job and managed to provide substantial savings in the form of system maintenance and upgrades. This was one effort that had proved very beneficial and effective for both organizations (Wallace Bob, 1998).

Market Segments Issues

Chrysler had an upper hand in the gas-guzzling card such as the SUVs and the minivan. While these vehicles were popular in the early 1990s, the market demand for these cars fell in the early 2000s. While there was a demand for fuel-efficient, compact cars, Chrysler did not have any good car model to meet this demand. Consequently, Chrysler lost about 1.5 billion USD in 2006. There have been increasing demands from major shareholders such as the Deutsche Bank to sell off the ailing unit (Heading For Divorce, 2004).

Where the merger stands now

Daimler had reportedly spent 36billion USD to acquire Chrysler. With steeply falling sales, Chrysler is worth only about 14 billion dollars and it has a pension and health liability of 12 billion USD. This leaves a very small operating margin. Daimler has announced that it wants to sell the company and is reportedly seeking buyers (Hawranek Dietmar, 2007).

Daimler on the other hand has shown steady growth and increased sales. In 2006, Daimler showed an operating income of 7.28 billion USD up from 8.84 billion USD in 2005. The earning per share of the company has also gone up to 4.17 USD from the 3.7 USD of 2005 (Isidore Chris, 14 February 2007). The credit rating company, Standard & Poor’s, has brought down the rating of the company from BBB+ to BBB and has given it a negative outlook since they have strong doubts about any possible recovery by the company. This downgrade is a strong blow as it would make credit companies and banks think twice before involving themselves in this company or backing any investor who would be interested in it (Harnischfeger et all, 2003).

Conclusion

The Daimler Chrysler Merger is an example of how technologically advanced and financially strong market leaders manage to bring down a merger that should have worked wonders and turned the merged entity into a global giant. There was a cultural mismatch, poor support from the management, and political issues that played a negative role in bringing down the merger. Both companies had some intrinsic strength and good, non-competitive car models and between themselves, they stood a chance to cut a wide swathe in the car market ranging from the small mid-priced passenger cars, the SUV, town, and country cars, Jeeps, and the premium segment. Mutual distrust, bad market conditions, increased competition, hostile labor, indifferent management, and many other factors caused the merger to fail. The paper has provided an analysis of the major stakeholders who had a role in the merger, explained what the merger was supposed to do, and has analyzed various factors that caused the downfall. The paper should serve as a learning document for any future mergers and acquisitions that companies may undertake.

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