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Billed As A Marriage Made In Heaven, Daimler And Chrysler Go Separate Ways

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FRANKFURT, Germany (AP) _ The merger between Daimler-Benz and Chrysler Corp. was billed as a merger of equals and a marriage made in heaven _ the perfect model for the future of auto manufacturing worldwide.

After nine tumultuous years, it was neither.

The $36 billion deal that saw Daimler-Benz AG take over Chrysler Corp. in 1998 sputtered through nearly a decade of up-and-down Chrysler earnings and repeated cost-cutting. Through it all, there was the simmering resentment of German shareholders, who felt that something pedestrian, unimpressive _ indeed, American _ had dulled the lustrous sheen of one of their country's greatest carmakers.

Now, with the company set to split in a $7.4 billion deal _ a fraction of Chrysler's value a decade ago _ it serves as a very public illustration of the pitfalls inherent in attempting to bring carmakers from Asia, Europe and the United States into large-scale partnerships.

``Big cross-border mergers in the auto industry have never worked,'' said Stephen Cheetham, a European auto analyst at Sanford C. Bernstein Ltd. in London. ``Mega-deals in the auto space are very problematic.''

Cheetham said the creation of DaimlerChrysler was the peak of transnational tie-ups from the late 1990s, such as General Motors Corp. and Korea's Daewoo Motor. Now, he said, ``globalization in the auto business these days is not very pragmatic.''

The drawbacks include the higher costs of shipping and transportation, rising health care and pension funding costs in the United States, and cultural differences.

``The Germans never knew really quite what to do with Chrysler,'' Cheetham said. ``Managing across the pond and managing this very, very different business is very difficult.''

DaimlerChrysler's split is one of many auto partnerships to collapse in the past few years. GM paid $2 billion in 2005 to break off its alliance with Fiat SPA after the Italian company's finances and market share deteriorated. In the 1990s, BMW AG lost billions after buying Britain's MG Rover, which it sold for a token 10 pounds in 2000.

It all looked different in the mid-1990s. Daimler-Benz was eagerly searching for new markets and new opportunities, at the dawn of what many thought would be an age of global consolidation. Chrysler was an ideal target, with a line of cleverly designed, efficiently built minivans, pickups and Jeeps.

Throw in a rich country that was car crazy and it made perfect sense.

Daimler and Chrysler said it was a ``merger of equals,'' but then-Chief Executive Juergen Schrempp later dismissed that in an interview, leading to a lawsuit from billionaire investor Kirk Kerkorian. He lost, and it was clear the center of power had shifted to Stuttgart, Germany.

The company rebounded from a brutal 2001 restructuring and launched hits like the 300C, only to see earnings slip again. After declining sales and recalls over defects, DaimlerChrysler dumped its other cross-border venture, with Mitsubishi in Asia, in 2004.

And as gas prices rose, consumers looked to smaller cars with better mileage. Ferocious competition with rivals General Motors Corp. and Ford Motor Co., along with Japan's Toyota Motor Co. _ unencumbered by the crippling legacy costs the U.S. automakers were facing _ led to flat prices and thin margins.

Losses at Chrysler were one thing. But when the company's jewel, Mercedes, posted its first quarterly loss in 10 years in 2005 amid concerns over costs and quality, the virtues of size faded even more. Shareholders looked enviously at other German automakers such as BMW and Porsche, who kept a sharp focus on high-margin luxury cars.

That disappointment hastened the departure in 2005 of Schrempp, who masterminded the DaimlerChrysler deal _ dubbing it a ``marriage made in heaven.'' Finally, in February, DaimlerChrysler said it was considering all its options for Chrysler.

``Certainly anyone contemplating a major mega deal will use DaimlerChrysler as a very large warning,'' Cheetham said.

Some analysts say major automakers such as Japan's Nissan Motor Co. and France's Renault SA _ which have a partnership many cite as cooperation that works _ and Fiat show that they have learned their lessons.

Nissan and Renault CEO Carlos Ghosn have touted the seven-year-old alliance between their companies _ which is, perhaps significantly, short of a merger _ saying that Renault's market worth has tripled, while Nissan's has grown fivefold. The French automaker has a 44% stake in Nissan.

``In today's global business landscape, the creation of transnational partnerships is becoming a familiar and valid practice,'' Ghosn said then. But talks about a partnership with GM to give the company a U.S. foothold did not lead to a deal.

Since dissolving its alliance with GM, Fiat has signed limited partnership deals with other companies, including Ford Motor Co. and PSA Peugeot Citroen SA, to share development costs, a move that has enabled it to make inroads in lucrative and burgeoning new markets such as China and India.

DaimlerChrysler CEO Dieter Zetsche, who tried to fix Chrysler as the division's head until 2006, laid out the trouble: thin pricing power, high health care costs.

``When we announced the merger not only the management, the entire media and the financial markets shared our very positive expectations of the outcome of this merger,'' he told reporters in Stuttgart.

But the company ``obviously overestimated the potential of synergies and I don't know if any due diligence or any extended sphere of time could have at that time given us a better... picture.''

DaimlerChrysler shareholders who clamored for dissolution rued the costs of the struggle.

``The decision is right, but it comes late and it has cost DaimlerChrysler a lot of money,'' said Juergen Kurz, a spokesman for the shareholders group DSW. ``That is a very, very expensive adventure, a costly dream.''
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