Global Reforming---DaimlerChrysler could open new world markets for suppliers

Automotive suppliers have good reason to celebrate the coming together of Daimler-Benz AG and Chrysler Corp. into the world's fifth largest automaker.

True, the combined DaimlerChrysler AG now has a great opportunity to consolidate its supply chain. But both U.S. and European partsmakers say they would be surprised to see significant movement anytime soon. Suppliers play a key role in the success of both companies, and sudden moves are sure to upset the apple cart.

Daimler-Benz and Chrysler are committed to a long-term partnership with suppliers, who in turn hold both companies in high regard for their fairness and for respecting the technology they have to offer. Both have launched initiatives to involve suppliers early in product development and to reward them for cost savings they suggest. Chrysler calls it Score, while Daimler-Benz calls it Tandem.

And the ability of DaimlerChrysler to apply even greater pricing pressure on suppliers could be offset by expanded volumes for partsmakers.

Chrysler outsources about 65% of its parts from suppliers, while Daimler-Benz outsources slightly less, about 60%, based on some estimates. n the M-Class sport/utility vehicle, the first Mercedes built in North America, 80% of the parts come from suppliers. Daimler-Benz supplies the engines and transmissions. Some 65% of the Alabama-built M-Class is sourced within North America.

Will these supplier relationships change, and will the combined company outsource even more work to suppliers?

That's the $38 billion question, and suppliers, at least publicly, are not too concerned about the answer.

"I think both will go to more outsourcing in the future," says Helmut Schwarz, president of Robert Bosch Corp.'s Automotive Group, Germany's largest automotive supplier. The company does about 9% of its business with Daimler-Benz and around 3% with Chrysler.

"I don't see a lot of change in the relationship," Mr. Schwarz says. "Daimler-Benz is loyal to its suppliers, as long as they are meeting performance requirements."

But that often can be difficult. Daimler-Benz is more demanding than the Big Three. After all, customers are paying for more than just image when they invest in the Mercedes-Benz experience. Technology, engineering and quality are never sacrificed, and suppliers had best be prepared for some harsh feedback from their German customer.

"Daimler-Benz considers itself an expert in technology, so they are very critical in their evaluation process," says ITT Automotive President Frank Macher. His company supplies antilock brakes for the M-Class. "Their engineers work with you more than they do at the Big Three."

"I call it the best of the best," says John Mooney, director of technical development for catalyst supplier Engelhard Corp. "It's never 'just good enough' for Mercedes. The Japanese are the same way."

Engelhard does extensive business with Daimler-Benz in Europe, and executives hope the merger will open a door for the company to do business with Chrysler as well. Competitor Johnson-Matthey is Chrysler's dominant catalyst supplier.

But Daimler-Benz should not be perceived as a company that dictates to its suppliers, says Peter Hoffer, director of strategic planning for German-based Siemens Automotive. DaimlerChrysler will be Siemens' largest worldwide customer, generating about $500 million of business annually.

"German companies tend to be more hierarchical in nature," Mr. Hoffer says. "Sometimes you have to be more patient in the decision-making process. They're just looking for alternatives."

Mr. Hoffer says European automakers, including Daimler-Benz, were among the first to outsource systems work to suppliers, even before Chrysler.

For now, any supplier working for one of the companies is likely to push for business with the other.

At exhaust supplier Arvin Industries Inc., President and CEO Bill Hunt has been looking to expand into Europe. The merger opens the door to do just that. The company does about 14% of its business with Chrysler, but has very little Daimler-Benz business.

"The only area where we are under-represented is in Germany, and making inroads with German carmakers has been a highest priority for us," Mr. Hunt says.

Beyond their self-interest, many executives seem just as interested in the merger's effect on the future of Chrysler, an American icon.

Mr. Macher of ITT says he is surprised Chrysler was willing to give up control to Daimler-Benz after three years.

"Control is the biggest issue," Mr. Macher says. "But this says a lot about Bob Eaton. It's a testimony to the man and his vision for the future. With any company that is taken over, there will be cultural issues. But if anyone could adapt to change, Chrysler could. They've been through so much, and have had to change."

Another executive, speaking on condition of anonymity, had less kind words for Mr. Eaton. "I'm just disappointed because he basically sold the company," the executive says. "Chrysler could have taken some time and grown globally on its own. It could have bought a few smallerplayers, like Mitsubishi."

Another puzzle for supplier executives: How is it that none of them caught wind of the discussions before it was made public? It was truly a well kept secret.