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DaimlerChrysler Merger: The Quest to Create One Company

Tom Stallkamp, Chrysler president and executive in charge of accelerating integration of the recently merged Daimler and Chrysler companies, was feeling great frustration. Why couldnt he move the integration process along more rapidly? He could see clearly the amazing potential for payoffs, but it just wasnt happening. He wasnt used to being unable to move the organization, and he hated the feeling of being able to visualize great things without being able to mobilize people to action. What else could he do? Maybe it was time to let the two cultures duke it out, and allow the stronger one to win. That would be one kind of integration, though not quite what he had been working for.

At 4:00pm on November 12, 1998 as the final bell rang on the New York Stock Exchange, U.S. automaker Chrysler Corporation and German automaker Daimler-Benz ceased to exist. They emerged the next day as a new global conglomerate named DaimlerChrysler AG. With combined revenues of $130 billion and a market capitalization of $92 billion, DaimlerChrysler became the fifth largest automaker in the world in number of vehicles sold and third largest in sales. The $40 billion stock deal was the largest ever in the industrial world. Upon com pl et ion of t he t ransact ion Dai ml er s tockholders owned 57 percent of the new DaimlerChrysler and Chrysler stockholders the remaining 43 percent. After ten months of discussions and negotiations between the two companies, the merger was billed as a marriage of equals. It signaled new levels of consolidation within the automotive industry and was heralded as the beginning of a new era where only truly global players would survive. At the May 7, 1998 London press conference officially announcing the merger, Daimler -Benz Chairman Jrgen Schrempp declared, This is much more than a merger. Today we are creating the worlds leading automotive company for the 21st Century DaimlerChrysler AG. We are combining to merge the two most innovative car companies in the world. We are committed to making DaimlerChrysler the most innovative competitor this industry has ever seen, one that will set the pace in the automotive world in the next Millennium. We are doing this merger because we share a common passion for making great cars and combining and utilizing each others strengths, we will have the pre-eminent strategic position in the global marketplace, for the benefit of our customers. We will be able to exploit new markets, and thereby improve return and value to our shareholders. Chrysler CEO Bob Eaton added,

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We are leading a new trend that we believe will change the future and the face of this industry. As a result of being among the first, we had the ability to choose our favorite partners. Schrempp was convinced the two auto companies could form a powerful partnership. He recalled the first meeting with Eaton, I just presented the case and I was out again. The meeting lasted about 17 minutes. I dont want to create the impression that he was surprised. When the meeting was over, I said, If you think Im nave, this is nonsense Im talking just tell me. He smiled and said, Just give me a chance. We have done some evaluation as well and I will phone you in the next two weeks. I think he phoned me in a week or so. This was not the first discussion Daimler-Benz had with a U.S. auto manufacturer nor was it the first time Chrysler had thought of combining with another major automobile company. In 1997 Chrysler and Daimler-Benz had studied the possibility of a joint venture to merge international operations but the deal never came to fruition. Chrysler had studied various combinations and recognized the need for global presence. The company was financially healthy but industry overcapacity and huge prospective investment outlays created a risky environment for global expansion on their own. Only a small number of automakers, like Toyota, Volkswagen, Ford and GM had the capability to go global without major acquisitions. Eaton had gone so far as to poll investment bankers on their ideas and spoke with executives from BMW on this topic. In 1998 Ford pitched a merger plan of its own to Daimler-Benz, unaware of the already ongoing talks between the German automaker and Chrysler. Ford Chairman Alex Trotman acknowledged the talks but then suggested the talks had not become very serious. But the Ford Chairman reportedly briefed both his board of directors and the Ford family, which controlled 40 percent of the automakers voting stock. It was the familys unwillingness to give up control that apparently ended the discussions, a key reason why merger talks between Ford and Fiat a few years prior also collapsed. Schrempp and Eaton believed the potential benefits from joint product design, development of new technology to meet emissions and fuel economy requirements, efficient manufacturing, combined purchasing, other economies of scale and brand expansion anddiversification would position the combined entity as a powerful global player. In discussing the possibility of a business combination between Daimler-Benz and Chrysler, they considered it essential that their respective companies play a leading role in the process of expected industry consolidation and in choosing a partner with optimal strategic fit. In this respect, both the timing of the proposed business combination and the selection of the parties were considered highly appropriate in order to secure and strengthen their respective market positions. Furthermore, since the companies had virtually no product overlap there was little threat to immediate rationalization of product offerings. Before DaimlerChrysler could hope to unseat GM or Ford, however, it had to create a single company, keeping the best of both former companies in the areas of innovation, cost savings, supplier relationships, quality and brands. The integration of the two
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companies was no small challenge. It required a blending of corporate and national cultures and operations. Former Chrysler President Robert Lutz commented, I do think that managing the cultural issues will indeed be the toughest part of making this marriage work. And the challenge, as always, will be getting the cultures to really meld below the level of senior-most management. The task of integrating the two car companies fell to Chrysler President Tom Stallkamp. Stallkamp had become Chrysler president effective January 1, 1998 ju st days before Schrempp visited Eaton to plant the seeds for the historic merger. Despite the powerful company the merger created on paper, Stallkamp knew the track record for such large mergers, particularly cross border ones, was not good. A global report by KPMG at the time indicated 83 percent of mergers were unsuccessful in producing any business benefit with regard to shareholder value. Daimler- Benz had conducted its own study of previous mergers and found that 70 percent had failed. The world auto industry had already experienced culture clashes that ended various mergers and joint ventures. Autolatina, the Ford Motor Co.-Volkswagen AG venture in Brazil and Argentina collapsed in 1995, the victim of continued arguments over product plans between executives of the two automakers. A proposed merger of Renault S.A. and Volvo AB also fell apart in 1995 due to extreme resistance and cultural friction within each company. Merging two large successful companies, incorporated in different countries, w ith geographically dispersed operations, and with different business cultures and compensation structures created challenges that were quite different from absorbing a smaller acquired company into an existing structure. The attention the merger garnered from the media, industry experts and Wall Street created an environment of speculation. Everyone had an opinion about the merger and its chances for success. Autoline Detroit, a weekly industry news show hosted a special onehour panel discussion on the merger. Csaba Csere, editor of Car and Driver magazine observed, If they really want to integrate they need to figure out how their two different systems can [blend]. Each side has a very proud history and each side thinks they know something/have unique knowledge about how to do things. Paul Ballew, chief economist at J.D. Power asserted, The greatest challenge of any major merger is the culture. It probably will or should be the number one topic on their agenda for the next 3-5 years. Stallkamp thought that, The way you can make the merger work is to get people excited about finding something new, rather than going back to defending their own turf. Its human nature to fall back on whats familiar. We have to take away the fear of the unknown by making it fun and exciting. Both companies had a history of strong turnarounds and recent market success (see Exhibit 1 for company histories), but all eyes were on DaimlerChrysler, as the price of failure for the largest industrial merger in history would be immense.

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Potential Benefits of the Merger

For Chrysler and Daimler-Benz there were high hopes about a number of gains to be achieved through their merger. Daimler-Benz was stronger in Europe; Chrysler, in North America. Daimler-Benz had a global distribution network. Daimler-Benzs reputation for engineering complemented Chryslers reputation for creative styling and product development. Chryslers experience in dealing with US investors would help Daimler-Benz become a pacesetter in bringing modern concepts of corporate governance and shareholder value to the German economy. Chryslers freewheeling methods of vehicle development would kick-start the more bureaucratic Mercedes-Benz. The combination with Chrysler helped reduce the risk associated with Daimler-Benzs dependence on the premium segment of the automobile market by introducing brand diversity. Daimler-Benzs financial clout and technical prowess would bolster Chrysler in the auto wars. Moreover, the combined company had greater financial strength with which to enter new markets. Exhibit 2 summarizes the potential advantages of the merger to both. Of particular importance was the need to improve Daimlers development time and reduce development costs and the need to improve Chryslers quality and engineering. Daimler- Benz typically spent 5 percent on R&D, compared to Chryslers 3 percent. As an engineering company Daimler-Benz had high development costs. Mercedes-Benzs cost structure was considered too high to make a reasonable return on cars below $20,000. Mercedes R&D cost was over $2000 per vehicle compared to Chryslers $590 and it could take as long as 60 days to build a vehicle in Germany (see Exhibit 3 for key performance comparison for the 1997 calendar year). In addition the two companies had promised to deliver synergies totaling $1.4 billion in 1999 and more than $3 billion by 2001. Commenting on the areas for integration and savings Stallkamp explained, Some things will be integrated right away, like global purchasing. Sales and marketing will be among the first, though the brands will remain separate. You wont sell Chrysler products at Mercedes dealerships or Mercedes products through Chrysler. The integration will occur behind the scenes. The next area is engineering. This was the area I was most concerned about. But our technical people have come in and said lets find new ways of doing things. The last area will be manufacturing, and thats driven by product. We need more common product. Well never share the same platforms (between Chrysler and Mercedes), never the same vehicles, but maybe common components, like side impact protection devices. This could save enormous amounts of money. Exhibit 4 indicates the areas where synergies were expected. Achieving these synergies required a focused effort to quickly integrate the necessary functions. Stallkamp knew they had to deliver on the promised synergies but the big savings would come from the combination of back office functions and the streamlining of systems and processes. He envisioned separate marketing and sales to ensure brand integrity. On the operational side he saw numerous opportunities for significant savings. A more strategically focused R&D process would help drive technology transition, the sharing of design expertise from
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Chrysler would keep DaimlerChrysler at the forefront of innovation, a single manufacturing organization with separate plants would provide for the transfer of key manufacturing process technologies and systems. DaimlerChrysler could leverage its unit volume to achieve additional savings and streamline its systems. Bringing this vision to reality however was a formidable challenge. Chrysler and Daimler -Benz had very different ways of operating. Getting both sides to see the benefit of operating in a new way was critical to the success of integration.

The Two Companies before the Merger Recent Change and Structure at Chrysler
Reengineering expert Michael Hammer called Chrysler, overwhelmingly the most 7 innovative auto company in the world. Chrysler garnered this praise following companywide restructuring. Beginning in 1991, Chryslers management had bulldozed its traditional functional organizational structure. It created platform teams for the whole organization, assigning all functional employees to one of five teams, large car, small car, minivan, truck or Jeep (see Exhibit 5 for platform team structure). Corporate staff was all but eliminated. The executive vice presidents were co-located on one floor and were forced to work through issues together. Chrysler established a matrix management structure for these senior managers. Many of the traditional vice presidents were replaced with people who not only had functional expertise but who were able to work together. Each vice president under the new structure had two jobs, creating mutual dependence among them. In order for Tom Stallkamp, then vice president of Procurement and Supply and general manager of Minivan Operations, to obtain good designs for his minivans from Tom Gale, head of design, he needed to provide supply chain support to Gale. Likewise for Gale to receive quality parts from procurement and supply he needed to provide good designs for the platforms. This teamwork ethic applied to the highest levels within Chrysler. CEO Bob Eaton was considered to be one of the more modest chief executives in the world, a mild mannered and even- tempered man who believed in the power of teams. Eaton and former Chrysler President Bob Lutz, a dynamic and outspoken man, had formed a balanced partnership in running the company. When Tom Stallkamp replaced Lutz as Chrysler president, it was believed his self-effacing manner and ability to generate consensus would enable Chrysler to continue on its successful path. With the introduction of the platform teams, management focused on determining the what -- the specific goals, objectives, constraints, and resources -- but the team would determine the how. Teams were empowered to find the best way to deliver the results, providing periodic progress reports to senior management. Chrysler soon began to reap the benefits of its platform team concept and new structure; Chrysler became one of the most profitable automakers in the world. Chryslers brushes with bankruptcy in 1979 and 1990 along with its radical restructuring had forged a culture dedicated to teamwork, speedy product development, lean operations, cost leadership and flashy design. Eaton commented, Were trying to build a culture that is focused on continuous improvement, setting tougher objectives and never being satisfied with where were at.
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Upon taking the position as Chrysler president, Stallkamp commented, At Chrysler were all different personalities. What were trying to do is run the company as a team like weve been doing. The speed in improving quality, improving the company and the way we operate the business. Timing is very important to us. Were very flexible. Were lean. The speed energizes the people within Chrysler. Chryslers management wanted to ensure that speed and adaptability to change remained part of the companys culture. Former Chrysler President Bob Lutz commented, One of our greatest challenges is to prevent our people from thinking everything is OK because Chrysler is no longer on the ropes. With respect to the use of platform teams, Chryslers Vice President for Marketing Bud Liebler stated, At this point there is no way wed be able to even think of managing without them. Nor would we want to. Eaton summed up his thoughts, Perhaps the most important attribute of any company today is to anticipate change, and to move quickly to capitalize on it. Its all about speed and flexibility. Its about converting ideas into profits, and doing it faster than our competitors. Its about speed to market. Above all, we believe its about passion - the passion for designing, developing and building the worlds greatest cars and trucksEveryone is truly passionate about what were trying to do. Recent Change and Structure at Daimler-Benz When Schrempp took over as chairman in May 1995, Daimler was in serious financial trouble. Many of its 35 business units were making little or no profit. Its traditional slow bureaucratic structure and amalgamation of disparate businesses created an unwieldy organization focused on its past successes. Significant levels of streamlining and restructuring were needed. Schrempp created a new Board of Management with many new members who would undertake the fundamental changes to the inherited structure. The Board was determined to see the process through and to keep the momentum going. They attached great importance at the outset to organizing the change process so that there was a clear division of responsibilities with predefined tasks and priorities and, to keep friction to a minimum, as few interfaces as possible. The Board quickly carried out a streamlining of Daimlers business portfolio trimming it to 23 strategic business units (see Exhibit 6 for Daimler-Benz structure). The goal was to achieve a strong market position in first or second place in the world market in each business. As part of the restructuring of the auto business, Mercedes-Benz was merged with the Daimler-Benz group. Helmut Werner, the head of Mercedes-Benz and the man credited with its success, was a vocal opponent of the move. He resigned soon after the decision was made. Profitability became a key measure for the company once restructured, business units were required to earn a 12% return on capital employed in order to remain part of the companys portfolio. In 1995, to improve financial transparency, Daimler -Benz began reporting results externally based on US GAAP. In addition Schrempp and his new Board began preaching the necessity for a strategy focused on shareholder value. This
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approach had not yet been expressly formulated or followed in Germany. The issues surrounding quarterly reporting and focusing on stock price triggered lively debate. One trade union representative expressed the opinion that the obsession with increasing shareholder value rides roughshod over the interests of employees, the environment and society. The Board also undertook an aggressive cost cutting program, which included layoffs of thousands of workers, something unprecedented in Germany. A restructuring of the headquarters group was initiated to reduce the bureaucracy and improve planning and decision-making. Although significant reductions were made Daimler-Benz still maintained a strong centralized corporate staff. At a January 1997 announcement of the new group structure Schrempp announced, The new structure will make us fit for the next century. But we still need a culture shock. The new structure gave business unit managers more autonomy in running their businesses and increased accountability for profits. Each business unit maintained its own staff. By 1997 the restructure had borne its first fruit. For financial year 1997 Daimler-Benz reported an operating profit of DM 4.3 billion, a 79 percent increase over 1996. Our strategy of orienting the group around units that are profitable and offer good prospects for future growth has now borne its first fruit. We must also point out however, that Daimler Benz has still only completed the first stage in its effort to reach world best practice. The significant changes at Daimler-Benz left many managers dazed by its rapid pace. Many of the people working for the century-old company were unable to keep pace or keep track of the changes going on around them. Schrempp, a driven and charismatic individual, earned a reputation as a Rambo, partly due to the speed with which he demanded change and partly because of his direct and sometimes severe nature. Schrempp responded, If Rambo is someone who acts quickly and decisively, the image is an appropriate one. By the end of 1997 the new structure was fully in place. Schrempp reported, We had once again lashed the new organization down at a time when many in the company thought that we were still in the change state. This meant that we had already moved on to refreezing at a time when many thought that we were still in the unfreezing and moving stage. Daimler-Benz had forged a culture focused on (brand) image, quality, engineering, profitability, and business unit autonomy. Reflecting on the significant changes made at Daimler-Benz, Dieter Zetsche, head of sales and marketing, concluded, In many peoples minds Daimler-Benz is this traditional, conservative company of managers wearing dark suits and moving ahead very slowly. I have to say that there are very few companies in the automotive industry that have made as many rapid, daring and basic changes as Daimler-Benz.

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Initial Structure of Management and Integration Process

As a public limited company DaimlerChrysler like Daimler-Benz was required under German law to have a Board of Management and a Supervisory Board. Based on the German Co-Determination Law the Supervisory Board was comprised of ten shareholders representatives and ten employees representatives. Five members from the Supervisory Board of Daimler-Benz and five members of the Chrysler Board of Directors comprised the new Supervisory Board. In order to assist the integration of the two companies, Hilmar Kopper, then chairman of the Supervisory Board of Daimler-Benz, was named chairman of the Supervisory Board of DaimlerChrysler for at least two years. The Board of Management consisted of 18 members, eight from Daimler -Benz, eight from Chrysler and two responsible for the Aerospace and Services divisions. Jrgen Schrempp and Bob Eaton were to be co-chairmen and co-chief executive officers for a period of approximately three years. Eaton announced at the outset of the merger that he would retire within three years, causing considerable consternation at Chrysler, where he was seen as having made himself a lame duck with considerable loss of power. DaimlerChrysler President Tom Stallkamp was put in charge of the integration effort (see Exhibit 7 for profiles of Schrempp, Eaton and Stallkamp). Chrysler also had employment continuation agreements in place with each of its executive officers to cover a period of two years following the merger. The Board of Management formed a committee, called the Chairmans Integration Council, the stated main task of which was to promote the integration of the two companies (see Exhibit 8 for Integration Organization). It was anticipated that the Council would be in place for two years. The companies prepared for integration through 29 Issue Resolving Teams; later approximately 70 working groups were brought together to make recommendations. Final decisions were left to the Board of Management. An overall coordination team, called the Post Merger Integration Team (PMI) was also introduced and headed by managers from both Daimler- Benz and Chrysler. The PMI reported to the chairmens Integration Council and was responsible for ensuring integration occurred in all areas. Integration teams fell into two categories, automotive, and non-automotive areas and corporate functions. Each team was co-led by Daimler-Benz and Chrysler managers.

Automotive Integration Teams: Product Creation Purchasing Marketing and Sales Production Planning Global Strategy-Integration

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Non-automotive and Corporate Functions Teams: Corporate Development Technology and Research Information Technology Finance and Controlling Human Resource and Corporate Structure Corporate Communication Non-automotive Divisions

Commenting on the integration structure Stallkamp noted, We had our own team internally that was getting ready for this, and they had their own team doing the same thing independently. We have now married those two teams together.

The Quest to Create One Company

After the May 1998 public merger announcement Daimler and Chrysler executives initiated efforts to address the challenges of integrating the two companies. Since only a handful of managers were taken into confidence during the negotiation phase the task of bringing the management levels together needed to begin immediately. Commenting on the unique blending of the two organizations, Chris Benko, managing director of Autofacts, a division of PricewaterhouseCoopers stated, They have the best combination of creativity and charisma plus bureaucracy and precision management. Stallkamp commented, All 420,000 employees need to know weve left Chrysler behind and weve left Daimler-Benz behind, he said. We will all be working for a new company. Because of the intense scrutiny the merger was under, analysts and the media sought out benchmarks in other major US-German mergers and acquisitions, of which there were very few. In the May 24,1998 Autoline Detroit special, Dean Langford, President of OSRAM Sylvania, the result of a 1993 acquisition of GTEs Sylvania by Siemens subsidiary OSRAM, gave insight into the challenge of integrating German and American companies. Americans are more free form in their discussions, a little less rigid. The Germans tend to be very rigid, more methodological in their meetings and thought processes. Americans have a tendency to sometimes go off on tangents. With the Germans you dont have to worry about it. When they say theyre going to do something and this is the agenda they stick to it. Charles Jerabek Executive Vice President and General Manager of OSRAM Sylvania added, For the most part Germans dont understand the informalities of American business, everything from casual dress days to drinking coffee throughout a meeting. In that context they dont take the ideas presented as seriously as the y would if they were being presented in their own culture. On the other side Americans often misinterpret the
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Germans need for rules and order as maybe disinterest in doing something. What weve worked hard to overcome and what Daimler and Chrysler will have to work hard to overcome is the separation of Not Invented Here (NIH) syndrome. Both sides of the ocean tend to think that what theyve come up with and developed is the best way to do something. Some close observers believe that the merger was a marriage of oppositesDaimler embraced formality and hierarchy, from its intricately structured decision-making processes to its suit-and-tie dress code and starchy respect for titles and proper names. Chrysler shucked barriers and promoted cross-functional teams that favored open collars, free-form discussions, and casual reparteeVirtually all the German executives spoke English. None of the Americans, with the notable exception of Lutz, [retired Vice Chairman, forced out by Eaton], spoke German. DaimlerChryslers early integration efforts were focused on trying to identify the best process for the new company. Its not our intent to say one side wins and the other loses, said Stallkamp. Take the different ways we conduct meetings. Our approach is more informal, with more give and take. Theirs tends to be more formal, with a lot more work done in advance. The differences in business culture were widespread, as basic as figuring out how Daimler and Chrysler could share product information when the Germans take measurements in centimeters and the Americans use inches, to as complex as ensuring market competitive compensation systems on both sides of the Atlantic. In an effort to improve the likelihood of integration success, Chrysler invited employees to take voluntary culture training. The national cultures are less of an issue than business culture, and its more important to get cultural training than language training, noted Stallkamp. When asked about his approach to the integration Stallkamp responded, More and more of my time, if you include the cultural side, is spent on integrating the two companies. My job is to integrate them as much as possible, so we can get the synergies we signed up for, to get one company out of two. The biggest challenge is the need for face-to-face communications, rather than videophones. You need to meet people in person, rather than long distance, so that means we have to travel more. You have to socialize with each other, you have to meet after business meetings. Otherwise, the comfort factor would keep pushing people back into their own (traditional cliques). The pace of integration was also a concern to the DaimlerChrysler management. To be fair we move faster and theyre much more analytical, said Stallkamp. That is one of the issues. How fast do we go on this? This is a big deal, and we dont want to screw it up by crashing some premature integration. Schrempp added his thoughts,

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We have said to ourselves, lets rather make 80 percent correct decisions now and not wait for the 100 percent decision which might not eventually happen. Because the whole organization expects change. So if you do something now, they will say, yes its necessary. If you do not act for 12-18 months the organization will again get into a sort of stable situation. And then when you want t o m ove and chan ge som et hi n g t he y s a y wh y di dnt t he y do i t immediately?

The Reality of Integration

The Chairmans Integration Council (CIC), ostensibly created to prom ote the integration of the two companies, was in effect an attempt to get around the cumbersome governance structure and run the company using a small group of leaders with a long-term strategic focus. The formation of the CIC, however, met with immediate and equal dissatisfaction from non-CIC members on both sides. These senior officers felt they were once again being left out of the important decisions for the company. Stallkamp saw it as a slap in the face to non-CIC members, and doomed to fail. The CIC met with such retaliation that it was ultimately disbanded. Decisions reverted to the 18-member management board. Schrempp, however, maintained a small cadre of loyal advisors, which the Chrysler managers nicknamed his kitchen cabinet. This small group served as Schrempps primary information network and sounding board for his plans. Topics to be presented before the management board were often previewed by this group. This soon included merger integration updates by the PMI team. Stallkamp had intended to use the PMI team as the catalyst for process redesign. Initially the PMI would identify low hanging fruit that could be used to achieve early synergies. Since the PMI consisted of working level managers from each business unit, not senior officers, Stallkamp believed the PMI could identify processes that, if redesigned, could provide significant improvements and/or savings long term. The framework for process redesign was to be similar to GEs Workout sessions; current systems would be detailed and compared and then new systems developed containing the best aspects of the current ones. Stallkamp and other Chrysler managers felt the PMI could be used to track synergies, measure the morale and culture momentum, and identify new opportunities. Instead of inventing a new best system, however, both sides spent significant time trying to convince the other that their system was superior. The PMI soon became bogged down in the financial accounting of the synergies that had been so publicly touted and its reports to the management board soon were sanitized to discussions of the financials. The soft issues and new processes were not considered important by many of the German managers. Instead they were focused on achieving their portion of the financial synergy target that had been allocated to them.

The different philosophies of organizational structure became a contentious issue early on. Chrysler had matrix management and platform teams and operated in essence as a single strategic business unit. Daimler-Benz had a more traditional structure with direct lines of authority and business unit autonomy for each of its 23 business units. The matrix
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concept of one manager having two jobs, for example the head of Mercedes-Benz also heading DaimlerChrysler Engineering, did not make sense to the Daimler-Benz managers. Even Schrempp himself asked, Who do you shoot when it doesnt work? DaimlerBenz managers were rewarded based primarily on the profit and loss results of their unit. Chrysler managers were rewarded based on the success of their team and Chrysler. The differences in compensation, particularly between Eaton and Schremmp -- one paid at the high American CEO rate with ample stock options, and the other at much lower German salary -were often highlighted in the press. Further, Chrysler executives had rich termination contracts, (golden parachutes), a practice not used in Germany. In addition, Stallkamps title became an issue. In a German AG company there is no president; all board members are considered equal. Even the CEO is not the boss, at least not legally. Stallkamps title of president of DaimlerChrysler caused a disturbance among many of the German managers, who questioned, Why is he called president? At the outset neither side was willing to give up its structure; many managers on both sides wanted to be left alone to run their business units. Despite these major differences Stallkamp believed there were opportunities to demonstrate the benefits of finding th e new way, stating, All we needed was a couple key processes to show the workforce that it could be one company. Stallkamps efforts to integrate the operational systems of the company soon hit another major roadblock. Daimler-Benz managers, particularly those from Mercedes-Benz, were extremely sensitive to the issues of brand image. Schrempp explained, We had to keep brand identity and we see how we do it here. And before closing we were able to come up with a great policy paper on how we wanted to do that, in every detail, describing every brand, describing back offices, infrastructures, identities, etc. The policy paper became known as the brand bible. The Germans pushed for the separation of brands to extend to the back office activities. To the Americans, this seemed unnecessarily conservative. Stallkamp recalled, We had one discussion that lasted for three days. It was that we couldnt have our (Chrysler) Mopar truck, from our after market parts division, arrive at a Mercedes dealer, even with parts not identified as Chysler-connected. We had a protracted discussion on whether we could even use white trucks and unbranded trucks! We wasted a lot of intellectual capital and time on that issue. Financial reporting and investor relations became another battleground. Over the previous several years, the finance staff at Chrysler had implemented several major process redesigns, and established itself as a world-class benchmark. It had received formal recognition for these achievements from the U.S. business community. Its brushes with bankruptcy had ingrained a disciplined approach to cash management. Daimler -Benz had begun reporting according to US GAAP in 1995, but was still developing its approach,
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particularly in the area of cash management. Since all cash was pooled it was difficult to trace the sources and uses of cash for Daimler-Benz business units. This difficulty became a sore point early in the merger. Chrysler executives couldnt believe, for example, that the top finance official at Daimler-Benz could not produce or seem to understand the need for a simple cash flow statement. In addition Chrysler was adept at dealing with the investment community. It had significant experience dealing with analysts, Wall Street and institutional investors. Daimler- enz on the other hand did not have a strong relationship with Wall Street and followed a more traditional approach to the investment community, reporting the required numbers and avoiding significant attention. In addition to the internal 12 percent ROCE hurdle rate, Daimler-Benz primarily measured revenue and number of personnel employed as indicators of its size and success. Chrysler also maintained an external focus with emphasis on quarterly reports and competitor analysis. Daimler-Benz was focused internally on achieving management by objectives and maintaining decentralized responsibilities. Heated debates over methods for data collection, data presentation and discussion with analysts marked some of the earliest political battles within the new company. The Daimler-Benz financial head refused to report a poor quarters earnings separately to Wall Street analysts, insisting on reporting only the combined half-year results (which could be determined by subtracting the previous quarters results from the total), despite dire warnings from Chrysler executives. When brought in to the discussion, Schremmp declared that he wouldnt bother with trying to please young, immature MBA analysts. The day after the public announcement, DaimlerChrysler shares dropped 12 %. The Daimler-Benz managers prevailed in many of the early arguments over positions and functions, setting the tone for later debates and giving the impression that the merger of equals was in fact a takeover. Stallkamp found himself personally embroiled in these debates. Because Chrysler had no corporate staff to complement the staff at Daimler-Benz, Stallkamp selected an employee to become part of his Operations Planning and Strategy Group. He recalled, I was summoned to the management board in Germany because a member complained I was creating a strategic group and strategy belonged to Eckhard Cordes in Daimler-Benz Strategic Planning Group. I said I was just trying to identify someone as a counterpart to their guy and they said OK, but you cant call it strategy. That was one of the real turning points in the political battle. Changing even the minor business norms proved difficult. The use of overhead charts was a tradition at Daimler-Benz. Presentations usually involved significant numbers of detailed and complex flimsies, with many backup slides to address practically any question that might be asked. Chrysler presentations, on the other hand, usually took the form of open a nd pointed discussions with little advance preparation. Chryslers platform teams typically gave updates using a single 12 point chart. Schrempp joked about the difference, The one side a little more off the hip, the other side a bit more analytical, po ssibly too analytical. And you know the wisdom might be somewhere in the middle.
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Daimler-Benz employees also flew first-class in keeping with the companys luxury image. At Chrysler only top officers could fly first-class. Like many other seemingly trivial issues, the travel policy became a focal point and took more than six months to resolve. Issues that should have been handled easily by the teams, such as labor relations, public relations or differences in emissions control policies, were bumped up to the companys management board for resolution. Even the size of the company business cards became fodder for debate. The difficulties in bringing the cultures together was perceived by many in the auto industry and Wall Street, Theres this view within this company that theres Chrysler guys and theres Daimler guys, said Rod Lache, an analyst with Deutsche Bank Securities in New York. Although the functions have been integrated, the cultures have not. Stallkamps frustration with lack of progress on the integration began to take its toll. He lamented, Were missing a golden opportunity to shuck off the past. Were into this our way or their way instead of saying what do we do right, what do they do right, and lets take only the good stuff. The analogy is youre moving. Youre leaving home and you dont have enough room in your new house --you have to throw away something. (You) dont drag all that baggage with you to the new house.

The Frustrations of Managing Up

Part of what made it difficult for Stallkamp to get full cooperation was that he had very little contact with Schrempp: Because of the geographic distance it was hard to establish a relationship with him. His kitchen cabinet of loyal underlings, who he met with daily over drinks, was his information system. We all tried to minimize time away from the office by learning to do trips to Germany in one day, flying overnight, meeting all day, then flying back to Detroit to sleep at home. A few months after the merger agreement but several months before it would be fully completed, Schrempp had taken the very unusual step for a German manager of asking to visit Stallkamp at his home. Schremmps secretary called Stallkamps secretary to say that Mr. Schremmp would accept an invitation to Mr. Stallkamps house. Bewildered, Stallkamps secretary asked him what to do. Stallkamp was also amazed, but went through with the invitation. They talked for two hours, during which Stallkamp became uneasy. Schrempp was reaching a way that was a little uncomfortable. [He] was already wondering when Eaton would leave DaimlerChrysler. It was like, you and I are going to do this, dont worry about Bob, Stallkamp recounted later. It was clear that he didnt want to be viewed as throwing Bob outI thought he might be
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trying to co-opt me to get Bob to leave and I told him I would never do thatBut it was also like Schrempp saying, you and me, buddy, well make this thing work. Stallkamp added that he knew the visit to his home was an important gesture, but being asked to help get Eaton out was not a really fun assignment and one I found personally distasteful. A few months later, after an offsite meeting to discuss post-merger integration, Schrempp invited Stallkamp to lunch in his suite. Heres what were going to do, Schrempp said. You stay close to me. Call me whenever you want. Dont worry about going through Bob Eaton, and all that kind of stuff. Stallkamp felt intensely uncomfortable with the idea of circumventing Eaton. It seemed disloyal, almost unethical. I cant do that, he protested. I wont do that. I dont think its the right thing to do. I wouldnt feel right. Dont worry about it, Schrempp asserted. As the merger and integration efforts moved forward, however, Eaton was no help because, Stallkamp believed, he didnt like confrontation and had abdicated. So Stallkamp was left to raise what he believed were some critical issues that he saw being handled incorrectly. For example, after a while, the management board meetings were moved to New York to reduce travel back and forth to Germany. Fancy suites at expensive hotels were held for board members, even when they did not stay overnight. Stallkamp was worried that the wrong message about spending was being sent to the Chrysler managers who were used to traveling coach and staying at Holiday Inns. He circulated a critical memo, which Schrempp immediately took offense at. he costs, Schrempp scolded Stallkamp, were inconsequential. As president of the Chrysler unit and head of integration, he should be spending more time on making the merger work than sweating meaningless details of hotel rooms and the price of wine. Stallkamp backed off. Another misunderstanding occurred when Stallkamp said to Schremmp, with admiration, that Schremmp was not caught up in details and operated at 50,000 feet. To Schremmp this was an insult, implying that he was not on top of things, and Stallkamp had to explain that he had meant it as a compliment. Soon after the merger was culminated, however, Stallkamp felt compelled to oppose Schrempp on his plan for the potential acquisition of Nissan. Schrempp was excited about the possibility of extending the companys reach into Asia, but Stal lkamp and other longterm Chrysler executives were very concerned about whether the precarious new DaimlerChrysler could handle the added integration burdens. Stallkamp wrote a three page memo of opposition to the board, declaring that Nissan was going to go bankrupt and that it

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would be better off doing so, since the world didnt need it. Schrempp was furious, but ended up calling off the deal for Nissan when he realized how little support he had. This led Schrempp to confront Stallkamp about block voting on the American side. At first Schremmp maintained that creating an analytical team to prepare strategic reports for the American executives was an attempt to vote as a block, though he eventually conceded that it might be because the Americans had no staff while the Daimler executives did. But then Schrempp argued that the Nissan decision was block voting, to which Stallkamp exclaimed, Thats bullshitWe all thought individually it was a stupid idea. There was no block voting. It was in this climate that Stallkamp was trying to figure out what to do about integration. Under the watchful eye of the auto industry and Wall Street, Schrempp and Eaton pushed for results and faster integration. It just didnt feel right to allow Chrysler to become one of 24 SBUs when it was half of the total company size, and other Chrysler executives were incensed about the idea. Stalkamp felt an obligation to protect their interests. But he was beginning to wonder if he should abandon the effort to create one company and let the power struggle between the two systems continue so that the stronger would take over the weak, reverting to a survival of the fittest approach. He was beginning to think there might be no other solution.

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Exhibit 1 Chrysler Corporation and Daimler-Benz Company Histories Chrysler Corporation

In 1908 Walter P. Chrysler bought his first automobile, a Locomobile Phaeton. Not satisfied with merely driving the car, he took the car apart and put it back together several times to get to know its technology. In 1912 Chrysler became production manager at Buick Motor Company, then a subsidiary of GM. From GM, Chrysler moved on to the Maxwell Motor Company. In 1924 the first vehicle to bear the Chrysler name was unveiled. On June 6, 1925 Walter Chrysler purchased the company he chaired, transferring all rights and obligations from the Maxwell Motor Company to the new Chrysler Corporation. In 1928 Chrysler acquired Dodge Brothers, Inc. a company five times its size. In 1942 Chrysler stopped civilian vehicle production in favor of war production. Throughout the post-war period Chrysler nearly succumbed to the effects of the cyclical auto industry. In 1979, with a huge inventory of low-mileage cars at a time of rising fuel prices, Chrysler faced bankruptcy. Chrysler elected Lee Iacocca as Chairman to turn around the company. In 1980, President Jimmy Carter signed the Chrysler Corporation Loan Guarantee Act, providing Chrysler with $1.5 billion in federal loans. Chrysler faced bankruptcy again in 1990 but the Chrysler management team used the crisis to conduct a major restructure of the business, returning Chrysler to profitability by 1992. By 1997 Chrysler Corporation operated in two principal industry segments: Automotive Operations and Financial Services. Automotive Operations included the research, design, manufacture, assembly and sale of cars, trucks and related parts and accessories. Substantially all of Chryslers automotive products were marketed through retail dealerships, most of which were privately owned and financed. Financial Services included the operations of Chrysler Financial Corporation and its consolidated subsidiaries, which were engaged principally in providing consumer and dealer automotive financing for Chryslers products. Chrysler focused heavily on trucks in its product line. In 1997, trucks, including minivans, accounted for about 65 percent of Chryslers vehicle sales in the U.S. and cars made up the remaining 35 percent. Chryslers brands included Jeep, one of the most recognized car brands in the world, Chrysler, Dodge, and Plymouth. One of its most successful products was the minivan, which Chrysler invented in 1983. In 1997, minivans accounted for approximately one third of Chryslers truck sal es. Chryslers larger cars, such as the Stratus, were priced similar to Mercedes-Benz lower midsize car, the C- class. At the bottom end of the range Chrysler offered the Dodge/Plymouth Neon. Its car product line included mass-market cars such as the Neon to niche vehicles such as the Dodge Viper and the Plymouth Prowler.

Daimler-Benz A.G.
Gottlieb Daimler and Karl Benz were two rival German carmakers who went into th business at the turn of the 20 century. While both Daimler and Benz achieved individual success in the early 1900s, the challenge of rebuilding Germany after World War I, as well as

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competing with the burgeoning Ford Motor Company, led the two companies to merge in 1926 to form Daimler-Benz. The company shifted to military production d uring World War II, but Daimler began manufacturing cars again in 1947. By the 1980s, Daimler and its Mercedes brand had become synonymous with premier quality and craftsmanship. Daimler began a program of diversification in the mid-1980s, intending to transform the company into a self-described integrated technology group with product lines ranging from transportation to aerospace to microelectronics to white goods. A string of largely unprofitable acquisitions in the late 1980s left Daimler unfocused and inefficient, culminating in a staggering DM 5.7 billion loss for 1995 the largest peacetime loss ever by a German company. Under the direction of the new chief executive Jrgen Schrempp, Daimler began to shed unprofitable business units, to return the company to its core business of making high quality automobiles and to move towards a more American-style management designed to enhance shareholder value. Under Schrempps direction Daimler-Benz quickly returned to profitability. By 1997, Daimler-Benz was the largest industrial group in Germany with 1997 revenues of DM 124 billion. Daimler-Benz operated in four business segments-Automotive (Passenger Cars and Commercial Vehicles), Aerospace, Services and Directly Managed Businesses. Daimler-Benz was primarily active in Europe, North and South America and Japan and continued to expand in markets such as Eastern Europe and East and Southeast Asia, which were also assuming strategic importance as production locations. In 1997, approximately 33 percent of Daimler-Benz revenues was derived from sales in Germany, 25 percent from sales in other member states of the European Union and 21 percent from sales in the United States and Canada. The Automotive segment contributed approximately 71 percent of Daimler-Benz revenues in 1997.

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Exhibit 7 Executive Profiles Thomas T. Stallkamp, President DaimlerChrysler AG

Stallkamps tenure as president of Chrysler Corp. was unexpectedly short. Stallkamp was appointed Chrysler President in January 1998, just a few short months before the surprising public announcement of the merger with Daimler-Benz AG. Some observers said the merger couldnt have happened without the 52-year-old executive. Prior to taking on the presidents post, hed overseen Chryslers global purchasing program. It was his job to get the most for the more than $60 billion the automaker was spending for parts and components each year. But Stallkamp did more than just demand good prices. He actively sought to make suppliers part of Chryslers extended enterprise, taking on many of the design, engineering and development chores traditionally handled in-house. The process paid off by making Chrysler one of the worlds leanest and most efficient carmakers. He was described as having an easy manner mixed with a wry sense of humor. The reason he is so successful is because he has a small ego, says one longtime friend. His keen sense of humor, often self-effacing attitude and my word is my bond ethic won him the trust of Chrysler suppliers. Tom has an unusual ability to get people to march in the same direction, said Jack Sights, an executive with automotive glass supplier Guardian Industries in Auburn Hills. Tom is sort of custom-made for this role he is playing said Robert Liberatore Chrysler Vice President of Washington Affairs. He is an excellent listener, which is part of the skill set you need when you bring two gigantic entities together.9

Jrgen E. Schrempp, Co-Chairman DaimlerChrysler AG

During his tenure as Chairman of Daimler-Benz, Schrempp proved to be a master of boardroom politics, with the ability to make decisions quickly and the willingness to take risks. He called these decisions digital decisions: uncompromising yes/no determinations that a computer might make. He was responsible for significant restructuring and portfolio rationalization at Daimler-Benz, returning the company to profitability in just one year. He broke German business taboos through his tough labor negotiations, ordering huge layoffs to try to turn the company around. His aggressive American style management practices and his focus on shareholder value were not popular in many German business circles. Schrempp characterized his methods stating, Nobody will ever spread a rumor about my having been brought up at a girls boarding school.33 A driven and charismatic individual Schrempp believed that business always comes before personal or career considerations. When he announced the end to his 35- year marriage in 1999 he explained it by saying he wanted to concentrate on making the merger a success. In an interview with a Dutch newspaper Schrempp stated, This company needs me more than I need the company. Do you think thats arrogant? I can tell. Write it down.
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Schrempp valued decisiveness over protracted consensus building. Hes very much a dont waste my time guy, commented Hypo bank auto analyst Thomas Aney. Schrempp counted GE Chairman Jack Welch among his business heroes.

Robert J. Eaton, Co-Chairman DaimlerChrysler AG

A no-nonsense engineer from Kansas, Eaton spent more than two decades climbing the ladder at GM before jumping to Chrysler in 1992. Prior to accepting the Chrysler chairmanship Eaton was running GMs vast European operations. Eaton was considered to be one of the more modest chief executives of the world, a mild mannered and even- tempered man who believed in the power of teams. His demure, less forceful manner was a significant departure from Schrempps style. One GM executive commented that Eaton had a solid self-worth without being on an ego trip, adding, You always know hes the boss but he doesnt always push to the center stage. He approached problems in a direct, straightforward manner and sought the advice of his management team.

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