Repost from: The Wall Street Journal -- May 7, 1998
Crossroads: The Daimler-Chrysler Deal
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Proposed Merger of Automobile Titans
May Spur Global Shakeout of Industry
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Weaker Rivals Are Likely
To Feel Pressure to Wed;
New World for GM, Ford
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By Gabriella Stern and Steven Lipin
Staff Reporters of The Wall Street Journal
The proposed $38.3 billion merger between Chrysler Corp. and Daimler-Benz AG of Germany could trigger a reshuffling of the global auto industry, throwing weaker manufacturers into the arms of big global players and possibly forcing additional combinations of automotive titans, according to auto executives and others.
Thanks to the negotiations between Chrysler and Daimler, the world looks very different now to a fistful of struggling auto makers in Europe and Asia, while in the U.S., life has certainly changed for General Motors Corp. and Ford Motor Co.
A merger of Chrysler, one of the world's most innovative, profitable manufacturers, and cash-rich, debt-free Daimler, would likely put additional pressure on GM, the No. 1 auto maker, and Ford, the No. 2 producer, to consolidate internal operations, slash costs and shore up business in key markets.
Richard Recchia, vice chairman of Mitsubishi Motor Sales of America, a unit of Japan's Mitsubishi Motors Corp., believes large Japanese companies such as Toyota Motor Co. and Honda Motor Co. -- "or a European company that wants a presence in Japan, perhaps Volkswagen" -- are probable buyers of smaller Japanese manufacturers.
Morgan Stanley analyst Stephen Girsky predicts an initial wave of global mergers between "strong players first, leaving the weak guys to fend for themselves."
Possible Asian takeover targets include Japan's Nissan Motor Co., the Subaru unit of Fuji Heavy Industries Ltd., and Mitsubishi, and Korea's Hyundai Motor Co., Daewoo Corp. and Kia Motors Corp., auto executives and consultants said. In Europe, regional players Renault SA, Volvo AB, PSA Peugeot-Citroen and Fiat SpA become likely acquisition targets.
Germany's Bayerische Motoren Werke AG could be a buyout candidate -- or a buyer. David Cole, director of the University of Michigan's Office for the Study of Automotive Transportation, believes "BMW is in play." Possible suitors could include GM and Ford, he said.
As for other auto companies likely to go shopping, a person close to the DaimlerChrysler talks said that if the two merge, they would have more than enough cash to acquire smaller auto makers, particularly in Japan, where neither Chrysler nor Daimler has much of a presence. Germany's Volkswagen AG also could be looking for opportunities.
The last shakeout of this magnitude began in the 1970s when the Japanese companies emerged as major forces in the U.S., catapulting American auto manufacturers into a protracted and painful cost-cutting process. The 1990s have been a period of relative stability for the U.S. auto industry, with GM finally gaining its financial foothold in recent years. A Chrysler-Daimler combination-driven by the prospect of huge engineering and purchasing economies-of-scale, complementary products and global manufacturing and distribution-could signal the next earthquake in the world of car making.
Ford Chairman Alex Trotman, in New York yesterday, told some money managers that because of weak Asian economies and excess global auto-manufacturing capacity, the world-wide auto industry is due for a shakeout. On top of that, the strong U.S. auto market of the past few years appears to have peaked, as a price war and mounting customer incentives indicate, said Kevin Risen, co-manager of Neuberger & Berman Guardian Fund, which owns 1% of Chrysler stock.
"What all this does is allow companies that have no long-term strategy to compete globally to say, 'Maybe I should be part of the consolidation,'" Mr. Risen said. "I believe the ability of regional operators, like Fiat, Renault and BMW, to compete on a global basis is pretty limited, longer term."
To survive in an era when cars are being stuffed with expensive technology but customers don't want to pay more, auto makers have to merge -- or at least form purchasing and parts-sharing alliances -- to keep costs down, Mr. Recchia said. Chrysler and BMW already are jointly building an engine-manufacturing plant in Brazil (a pact whose future is uncertain in light of the proposed Chrysler-Daimler merger), and Mitsubishi supplies V-6 engines to Chrysler. Mr. Recchia predicts a wave of such alliances "before you'll see a lot of mergers" of auto manufacturers.
GM and Ford have the wherewithal to achieve major economies-of-scale on their own, given their vast global operations. Yet Mr. Recchia believes a combined Daimler-Chrysler could do some damage to GM and Ford. In a few years, he said, Daimler-Chrysler could become a formidable small-car threat -- possibly with a jointly engineered version of Chrysler's Neon -- in Europe, where GM (through its Opel unit) and Ford both compete.
Indeed, the entire automobile industry, from manufacturers to suppliers to dealers, is in the throes of consolidation. Last year, there were 750 deals announced world-wide valued at $28 billion, according to Price Waterhouse.
John Casesa, an analyst at Schroders PLC, believes a full-blown acquisition of Mazda Motor Corp. by Ford is more likely in the wake of Daimler-Chrysler; Ford now owns 33.4% of the Japanese manufacturer. As for Nissan, "on its own, it's stuck between Toyota and an increasingly aggressive Big Three," he said. BMW, he added, "is so profitable, so focused and has a stable ownership, it has the luxury of choice to choose their partner. They're in no panic to find the right partner." Meanwhile, "Volkswagen will be even more on the prowl than it already is."
Melding two giant auto makers such as Chrysler and Daimler, of course, is a daunting cultural and logistical challenge, cautioned Scott Sprinzen, auto analyst at Standard & Poor's. It has been tough enough for Ford and GM individually to consolidate their vast global purchasing, engineering and parts-making operations, he points out, without having to merge separate cultures.
"I would say there are some big hurdles," he said. "These are now vastly different companies on the marketing side and likewise on the design and production side. The challenges here to fit the two together are going to be huge."
Why did Chrysler and Daimler act now? While the U.S. auto market was booming, Chrysler could afford to take an incremental approach to globalization. Meanwhile, its U.S. competitors poured money into developing markets abroadand, in some cases, had to scale back when local economies collapsed.
Now, however, the time seems right for Chrysler to seek a partner with more of a presence outside the U.S. -- one with enough capital to finance major new projects, Neuberger's Mr. Risen said. "Right now, Chrysler is tied to one market [the U.S.], which, in a cyclical business, is a very vulnerable position," he said.
As for Daimler, "it's their move for diversification," said James Barrow of Barrow, Hanley, Mewhinney & Strauss, a Dallas money manager with 17 million Chrysler shares. The German maker of high-end Mercedes cars gains access to Chrysler's popular sport-utility vehicles and minivans and its strong North American base of business.
Bottom line, Mr. Risen said, is that because Chrysler and Daimler have few overlapping operations, "this is a revenueenhancement story more than a cost-cutting story because there's no overlap in terms of product lines."
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Who's Next?
The world auto industry is ripe for massive consolidation in the wake of the proposed Daimler-Chrysler merger. Likeliest buyers: "strong" players, according to David Cole, director of the University of Michigan's Office for the Study of Automotive Transportation. Most susceptible targets: "weak" players. Then there are those in "limbo."
- Strong:
GM, Ford, Chrysler-Daimler, Toyota, Honda, Volkswagen, Mercedes, BMW
Reason: Cash-rich; robust manufacturing; global operations; appealing products
- Weak:
Nissan, Subaru, Hyundai, Kia, Daewood, Samsung
Reason:
High debt levels; declining market share; limited cash; dealing with turmoil in local economy
- Limbo:
Mitsubishi, Peugeot, Renault, Volvo, Fiat
Reason: Regional, without North American or global presence; making progress after struggling in tough local economies
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The Global Picture
Here is a look at the largest auto makers in the world, based on 1997 production of cars and light trucks, in thousands of vehicles.
RANK AUTO MAKER 1997 1998* 2000*
1 -- General Motors -- 7,774 -- 7,188 -- 7,880
2 -- Ford Motors -- 6,543 -- 6,179 -- 6,359
3 -- Toyota -- 4,013 -- 4,074 -- 4,580
4 -- Volkswagen -- 3,931 -- 4,008 -- 4,161
5 -- Chrysler -- 2,695 -- 2,795 -- 2,968
6 -- Nissan -- 2,612 -- 2,579 -- 2,646
7 -- Honda -- 2,291 -- 2,357 -- 2,436
8 -- Fiat -- 2,432 -- 2,241 -- 2,264
9 -- Peugeot -- 1,608 -- 1,585 -- 1,767
10 - Renault -- 1,421 -- 1,568 -- 1,567
11 - Mitsubishi -- 1,448 -- 1,477 -- 1,535
12 - Hyundai -- 1,287 -- 1,199 -- 1,434
13 - BMW -- 1,143 -- 1,169 -- 1,341
14 - Daimler-Benz -- 909 -- 1,082 -- 1,227
15 - Daewoo -- 738 -- 731 -- 898
Source: AutoFacts unit of Coopers & Lybrand Consulting *Projected
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(c) The WSJ
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