A Bigger, Leaner Machine DaimlerChrysler merger puts more of a squeeze onsuppliers

The champagne bottles are in the recycling plant. Investment bankers have spent their fees on new yachts.

Now Co-chairmen Juergen Schrempp of Daimler-Benz AG and Robert J. Eaton of Chrysler Corp. have to make this deal, the biggest industrial merger ever, work.

It may take years. And it'll have an impact on every one of their constituencies: Their salaried work forces, unions, customers and, perhaps most of all, their suppliers.

Mr. Eaton talks about "integration teams" consisting of people from both companies looking for common practices in engineering, marketing and manufacturing.

"Ultimately we will have one head of those activities just as we immediately started with a head of global purchasing," Mr. Eaton says.

Ah, yes, purchasing.

No, they will not tear up contracts. Nor will they lure Inaki Lopez out of retirement.

But information is power, and Daimler's purchasing people will use it. Now they know the price of every component system that goes into Chrysler's cars and trucks.

"This is very bad news for suppliers," says Karl E. Ludvigsen, chairman of Ludvigsen Associates, an automobile consulting firm in London. "Purchasing agents from both companies are rubbing their hands in glee at the prospect of buying in much larger volumes."

Indeed, even before the two chairmen signed the merger agreement, the new partners demonstrated the extent of their leverage.

"As an example, they (Daimler) worked with (Robert) Bosch (AG) to develop an air-bag module," says Mr. Eaton. "We started using that same module. The result was a 40% reduction in price. I believe we'll save about $400 million in the first year."

Suppliers may try to comfort themselves with the theory that Mercedes-Benz uses, and will continue to use, a higher level of engineering content in many of its systems. Supply contracts for vehicles coming to market through the next four years are locked in. Therefore, any major price cuts will be phased in gradually.

Don't bet on it.

"Not all these components are sourced through long-term contracts," says Holger Karsten, vice president of Arthur D. Little Inc.'s automotive consulting practice in Wiesbaden, Germany. "They will dig into that opportunity very fast."

Mercedes-Benz has been more hands-on in its supplier relations. It has a program called Tandem that tries to build cooperation and trust somewhat like Chrysler's highly touted Supplier Cost Reduction Effort (SCORE). But where Chrysler has turned over extensive design and engineering control to its larger suppliers, suppliers say Mercedes still does a lot of shadow engineering. Imagine the physicist father looking over his daughter's shoulder as she builds her science project. That's how Mercedes works with its suppliers, say those who know.

If they handle the integration adeptly, however, and build upon Chrysler's more collaborative model, the combined company could create problems for competitors that go well beyond who gets the lowest price.

"When you have global manufacturers purchasing in these kinds of volumes, the larger suppliers are actually beginning to pick which customers they want to do business with and which ones they can live without," says Jim Mateyka, vice president of AT Kearney's automotive consulting practice in Southfield, MI.

Beyond the obvious geographic benefit to both companies in Europe and North America, the deal enables Daimler and Chrysler to position themselves more effectively in emerging markets. Take Asia, for example. Mercedes already is in India. Chrysler builds Jeep Cherokees in Thailand.

In China, Chrysler has a 40% stake in Beijing Jeep Co. Ltd., where it can build up to 50,000 Jeep Cherokees and simpler Jeep-like vehicles each year. Daimler has a pending agreement to build minivans jointly with Nanfang South China Motor Corp. and a separate agreement to assemble buses with Yangzhou Motor Coach Mfg. Co. But Mr. Eaton says Daimler has cancelled its minivan project, which suggests Chrysler may fill that bill after all in China.

Chrysler is just getting started in South America, where it sold more than 5,000 vehicles in 1997. It is producing Jeep Grand Cherokees and Cherokees in Argentina. This summer, production will begin on Dodge Dakotas in Curitiba, Brazil, where it also is building a joint-venture engine plant with BMW AG. How the merger effects that project remains to be seen.

Daimler, meanwhile, has two truck plants in Brazil and is constructing a third plant where it plans to assemble up to 70,000 small A-class cars annually.

Even if Asian economies recover strongly in the next few years, car plants already up and running will be able to build hundreds of thousands more vehicles than demand can absorb. Brazil and Argentina are becoming crowded with carmakers, too.

Rather than add to the excess capacity already committed in those emerging markets, Daimler and Chrysler can pool their risks, scale their investments more realistically and decide which products are most appropriate, given the living standards and environmental regulations of each country.

Mr. Kolsten sees research and development as another area ripe for pooling resources.

While both companies have been adamant about not combining brands by selling each other's products in the same showrooms, that does not mean future vehicles will not be developed off common platforms. A Mercedes minivan using Chrysler's expertise is hardly unthinkable.

Both use the same computer-aided design and engineering software, Dassault Systemes' CATIA, a serendipitous factor that could accelerate any push toward common parts.

Chrysler, which had taken preliminary steps toward developing a continuously variable transmission, now will take advantage of Mercedes' expertise in that technology. Then there is Mercedes' repertoire of diesel engines and its 20% stake in Ballard Power Systems Inc., the Vancouver, BC, developer of fuel cells. Chrysler has access to all of those resources now.

Each has new families of V-6 engines, but eventually there could be some weeding out.

"There is no question that they have a larger research activity than we do," says Mr. Eaton. "I believe the number is $5.6 billion a year, and that's not counting their product engineering." In contrast, Chrysler spent $1.7 billion on R&D in 1997.

Look for some consolidation in the distribution networks both companies use to get their vehicles from factories to dealers.

"Where there may now be two zone offices on the East and West coasts, they really only need one," says Gerald C. Meyers, a former American Motors Corp. chairman who now teaches at Carnegie-Mellon University School of Business. "The same thing is true in parts distribution. There are also economies in advertising, at least locally."

Phasing out the Plymouth brand, long a Motor City rumor, could lop another layer of marketing cost.

Perhaps the most sensitive and hardest to predict consequence of this merger is its impact on employees.

The freewheeling, go-for-it culture that has fueled Chrysler's envied renaissance stands in stark contrast to Daimler's image of men in white coats building impeccable machines according to exacting regimens. Blending the two into one harmonious enterprise will take the vision of a prophet and the finesse of a Nobel-prize winning diplomat.

If U.S. and European economies keep chugging along, the rosy forecast that jobs will be created rather than cut is not unrealistic. Mercedes has pumped an additional $40 million to expand annual capacity at its Vance, AL, plant by 15,000 (65,000 to 80,000) M-class sport/utility vehicles. Customers in Germany are waiting almost a year for new SLK coupes. It is not inconceivable that some production of niche models could be shifted from Germany to North America.

In a downturn, all bets are off.

Chrysler clearly is the leaner and more productive partner. That does not mean that Chrysler workers are less vulnerable to restructurings or consolidations that unfold as these "integration teams" weave the two companies into one.

The minimal overlap in products - the Jeep Grand Cherokee and Mercedes-Benz's ML 320 and 430 are nearly the only direct competitors - is somewhat comforting to United Auto Workers union President Stephen P. Yokich. In a post-merger press briefing he sounded optimistic about the prospect of closer cooperation with Germany's powerful IG Metall union.

Mr. Yokich says he thinks M-B workers in Vance, AL, "should come under the Chrysler agreement." Mr. Schrempp has said it will be up to the Alabama workers. As for Chrysler, "It's still going to be American workers building American products," Mr. Yokich observes.

Jack Laskowski, UAW VP-Chrysler Dept., says he hammered out a contract at Daimler's Freightliner Corp. subsidiary over a six-month period last year, as well as a separate pact at Sterling Trucks, which Daimler bought last year from Ford Motor Co. "This is not brand spanking new to us," he says.

But any hopes that Daimler is a labor-embracing Teddy Bear could be illusory. Mr. Schrempp has lopped off tens of thousands of jobs in an extremely aggressive restructuring begun in 1995. He hasn't hesitated to shed under-performing assets, most notably the Dutch airline manufacturer NV Fokker, even though it was largely his idea to buy it.

German law gives organized labor clout that struggling American unions can only dream about. Six weeks of vacation for all workers and seats on Daimler's management board aren't won at the bargaining table. They are legislative mandates that likely won't be transferred across the Atlantic.

Former UAW President Doug Fraser, who joined the Chrysler board as a condition of the federal loan-guarantee package that saved Chrysler from bankruptcy nearly 20 years ago, says there are too many unknowns to declare this a positive event for the UAW.

"It's fine when Eaton says production will continue as it has, but that's May of 1998, and you know the auto industry," Mr. Fraser says. "It's clear to me that headquarters is going to be in Stuttgart. As long as things are going well, it's fine, but what happens when difficult decisions must be made? There's an old cliche that you can't divide scarcity."

One could take the oversimplified view that because Daimler employs almost three times as many workers to produce less than half as many cars and commercial trucks, production jobs in Germany are vulnerable.

Reality will be more complex, suggests Mary Yoko Brannen, professor of international business and organizational behavior at the University of Michigan School of Business.

"European labor laws are much more stringent than in the U.S.," Ms. Brannen says. "Germans have much more distinct boundaries between work and private life, and that is equally true for factory workers and management. Where Americans will work as long as there is something to do and as long as they are paid, in Germany it will be much harder to run at the lean manufacturing levels most automakers have achieved in the U.S."

In short, most of the flexibility and organizational change will come within Chrysler. This is a company that has survived two near-death experiences since 1979. Change is not as intimidating to most Chrysler employees as to their counterparts in larger industrial corporations.

"The advantage of being smaller has taught them how to get along with outsiders," says T. Quinn Spitzer, chairman and CEO of Kepner-Tregoe Inc., a Princeton, NJ, management consulting firm that has worked with Chrysler. "They're more likely to be able to adapt."

That's good, because they won't have much choice.