A Marriage of Convenience

Was the indomitable Juergen Schrempp, chairman of DaimlerChrysler AG, being shrewd or desperate when he finalized the deal that gave him 34% of Mitsubishi Motors Corp. of Japan?There is evidence it was a little of both.Desperate is too strong a word, but Mr. Schrempp was running out of opportunities to achieve his goal of 25% of total revenue share in Asia.Geography and politics have a way of making

Was the indomitable Juergen Schrempp, chairman of DaimlerChrysler AG, being shrewd or desperate when he finalized the deal that gave him 34% of Mitsubishi Motors Corp. of Japan?

There is evidence it was a little of both.

Desperate is too strong a word, but Mr. Schrempp was running out of opportunities to achieve his goal of 25% of total revenue share in Asia.

Geography and politics have a way of making even weak or debt-ridden Asian companies attractive. Asia is still a region of promise behind a wall of tax and non-tariff barriers. There is a strong business case for an alliance with a domestic manufacturer: bargain production costs, a ready-made distribution system and a shot at vigorous growth.

Apart from a Jeep plant in China, DaimlerChrysler's presence in the region is limited primarily to small knockdown assembly operations. Mitsubishi produces vehicles in Japan, Indonesia, the Philippines, Taiwan, Thailand and Vietnam and has ties with Hyundai Motor Co. in South Korea and Perusahaan Otomobil Nasional Bhd. in Malaysia.

The alliance gives DaimlerChrysler combined market share of 10.8% in Japan and 9.4% in other parts of Asia/Pacific for almost 21%. It's enough that Mr. Schrempp no longer feels he is trailing General Motors Corp. and Ford Motor Co. in establishing a base in Asia, and he says he has no more need for major acquisitions. He may top up with smaller alliances such as South Korea's Hyundai Motor Co. Ltd., but his global empire is largely complete.

Now he must make sure it pays off.

There is a positive spin that Mr. Schrempp and MMC President Katsuhiko Kawasoe put on the March 27 announcement that they would team up to create the world's third largest automotive group, with combined sales of 6.4 million units.

They stressed how they meet one another's needs: DaimlerChrysler's cash addresses MMC's crippling $l6 billion debt load; Daimler-Benz offers engineering excellence and European presence; Chrysler brings innovative styling (despite continued quality issues). Mitsubishi has minicar, small car and direct-injection engine technology, Japanese quality, an Asian presence and some North American capacity (even though it suffers from weak brand image, a poor model mix and inept marketing).

"This deal was inevitable," says Stephen Usher, Tokyo analyst for Jardine Fleming Securities.

"Daimler is lucky to get Mitsubishi's business in the region, and if and when Mitsubishi is available for sale, Daimler should have the inside track." says Takaki Nakanishi, first vice president and senior analyst for Merrill Lynch Japan Inc.

But the deal, which should clear all legal obstacles by fall, is not perfect. Nor was it DaimlerChrysler's first choice (Honda Motor Co. Ltd. was).

DC has been criticized for not swallowing MMC whole and gaining full control to force Mitsubishi to aggressively reduce its debt load to target levels of $9.4 billion (Yen1 trillion) by fiscal 2004. Under the agreement, the Mitsubishi Group, led by Mitsubishi Heavy Industries Ltd. and The Bank of Tokyo-Mitsubishi Ltd., retains 34% share, as does DaimlerChrysler.

It is enough to buy veto power under Japanese law without adding the debt to DaimlerChrysler's balance sheet. And the $2.1 billion purchase price (Yen225 billion) is easily covered by a sale announced the same day: Deutsche Telekom AG paid more than $5.3 billion for a 50.1% stake in DC's Debis Systemhaus GmbH. The company was sold for the specific purpose of raising money for future corporate takeovers.

It is only money well spent if MMC sticks to its restructuring plan that calls for its labor force to be cut to 79,000 by fiscal 2004, from a 1997 peak of 91,300. Says Merrill Lynch's Mr. Nakanishi: "Mitsubishi's debt is still enormous. If it doesn't move aggressively with its restructuring program, it might have to come back to Daimler for another cash infusion in a couple years' time."

The arm's-length arrangement also saves DaimlerChrysler from another cultural merger fiasco. The melding of Daimler-Benz and Chrysler Corp. left much to be desired, and the ghosts of departed Chrysler executives still haunt the Auburn Hills, MI, complex. Assimilating a third, Asian culture may constitute more pain than gain.

Mr. Schrempp is unhappy he could not get his hands on MMC's commercial truck operations, jointly owned by AB Volvo. It will become a subsidiary of MMC within two years, owned 80% by MMC and 20% by Volvo.

What does make Mr. Schrempp smile is his pending purchase of Volvo Car's 50% stake in the five-year-old Netherlands Car B.V., Mitsubishi's joint venture with Volvo in Bern, The Netherlands.

Nedcar produced 262,405 cars in 1999, 43% of which were allocated to Mitsubishi and represent 40% of Mitsubishi sales in Europe. It will be home to a four-door Smart to augment the underperforming minicar company, a move that could spell the demise of the French plant that produces the 2-door.

Nedcar also produces the Mitsubishi Space Star minivan, the Carisma sedan, and the Volvo S/V40. Mitsubishi may build the Space Star and Carisma on one line, freeing the second line for the Smart, says Hans Tolenaar, executive vice president of Mitsubishi Motor Sales Europe.

Mitsubishi would be a much cheaper source of small engines than Daimler-Chrysler's own Berlin engine plant, says analyst Peter Schmidt, of the AID consultant group in Warwick, U.K. In Berlin, last year, DaimlerChrysler made only 80,000 units combined of the Smart's 0.6L gasoline and 0.8L diesel engines. Capacity is 200,000.

"DaimlerChrysler can cut significant costs by adopting or switching to Mitsubishi engines and gearboxes," says Mr. Schmidt. "They will have the option to throw in the towel on uneconomical engines used for Smart only. If you consider the original aspirations of Mercedes for Smart, they laid down capacity for unique engines, gearbox and suspensions for a volume about twice what they do now. By implication, the plants that produce engines and gearboxes are working at half capacity."

Smart's 1999 sales of 80,604 were a far cry from original projections of 200,000. Daimler-Chrysler estimates it lost about $500 million on the car in 1999, but refused to pull the plug on the venture. This year, the French consulting company Mavel SA forecasts sales of 120,000 units with the introduction late last year of the 41-hp diesel that gets nearly 3L/100 km (78 mpg), but losses are expected to continue until at least 2005.

In North America, DaimlerChrysler hopes to gain plant capacity. Some plants are running as high as 120% capacity, says DaimlerChrysler Corp. President Jim Holden, among the Auburn Hills executives noticeably absent from the press conferences in Germany and Tokyo to announce the alliance.

Ironically it is the former Chrysler Corp. that has a successful history with MMC, while Daimler-Benz and MMC tried once before and failed. In 1987, Daimler-Benz and Mitsubishi reached a broad agreement to jointly develop small commercial vehicles, explore the feasibility of Mitsubishi producing commercial vehicles at Daimler facilities in Europe and sell Mercedes vehicles through Mitsubishi facilities in Japan. All that came of the agreement was production and sale of Mitsubishi products at Mercedes-Benz South Africa. The agreement finally ended in 1996.

The Chrysler-MMC relationship proved much more fruitful.

Mitsubishi Motor Mfg. of America Inc. in Normal, IL, produces Dodge Avengers and Chrysler Sebrings for DaimlerChrysler under a contract that was set to expire in four years.

Mitsubishi's only North American plant may not provide much relief. Pierre Gagnon, executive vice president of Mitsubishi Motor Sales of America Inc., says the plant is finally reaching capacity itself. And there are plans to move the Montero Sport there in '03. A redesigned Galant in '04 and Eclipse in '05, the only two MMC vehicles at Normal now, could put a strain on capacity.

That is not to say the product mix could not change to include some shared platform product with Chrysler.

Mitsubishi products were sold in Canada from 1971 to 1995 through the former Chrysler Canada Ltd., badged as Chrysler, Dodge and Jeep vehicles. Mitsubishi canceled plans to set up its own Canadian dealer network in 1997 due to the company's poor health back in Japan. Mitsubishi Motor Sales of America would like to revive those plans to get Mitsubishi products into the Canadian market.

There are no immediate plans to enter the Mexican market.

MMC remains largely intact with Takemune Kimura continuing as chairman and Katsuhiko Kawasoe as president while DaimlerChrysler picks up three of 10 seats on the executive board. Mitsubishi retains a production base in Europe, and no change in distribution in Europe. "This means that Mitsubishi will continue its relationships with DaimlerChrysler competitors like Fiat SpA and Industrie Pininfarina SpA (sport/utility), and Peugeot SA and Volvo Cars (gasoline direct-injection engines)," says David Miles, spokesman for Mitsubishi's importer in the U.K., the Colt Car Co.

Both companies should benefit from pooling their research and development. Mitsubishi is an industry leader in direct-injection gasoline engines and has a strong powertrain tradition, while DaimlerChrysler is partnered with Ford, Mazda Motor Corp. and Ballard Power Systems as leaders in fuel cell technology that MMC could not afford to pursue otherwise. DaimlerChrysler also is a leader in luxury cars and diesel powerplants.

- with Bill Diem in Paris and Roger Schreffler in Tokyo

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