DaimlerChrysler for East Asia[(]
Introduction
On May 6 1998 the management board of Daimler Benz approved the $130 billion merger that created DaimlerChrysler. The merger leapfrogged DaimlerChrysler into the big league of global automobile manufacturers combining Daimler-Benz’s solid engineering and production techniques centered around one of the world’s greatest luxury brands with Chrysler’s famed resilience and creative design strength, especially in the light trucks, minivans, and sport utility vehicles (SUVs). The combined firm ranked fifth in worldwide automobile production.
At some point during his attempt to successfully integrate DaimlerChrysler, Jurgen Schrempp, the CEO of DaimlerChrysler, must have realized that there were two large gaps in his strategy to create a truly global automotive manufacturer. The most obvious was the total lack of a significant presence in East Asia. The other gap was a standard vehicle to sell in East Asia and other growing markets. In the aftermath of the Asian financial crisis, Schrempp must have sensed both the opportunity and the threat that the situation presented: the opportunity to enter markets where cultures, legal restrictions, and ingrained competitors suddenly became loosened in wake of the crisis, and the threat of other strong competitors staking out a share of the same market with more marketable products before DaimlerChrysler could react. With the seismic shifts occurring in the industry, Schrempp wondered what sort of strategy to pursue. Whatever strategy DaimlerChrysler chose would have to take into consideration the ongoing worldwide consolidation, and existing industry relationships in East Asia.
Consolidation in the Worldwide Automobile Industry
Daimler-Benz in Germany and Chrysler in United States made an announcement to merge on May tenth in 1998. They merged after a shareholders meeting in November to form DaimlerChrysler, the third largest automobile manufacture in revenue after GM and Ford Motors, and the fifth largest in market share (see Exhibit 1). It was the largest industrial merger ever. The merger was clearly driven by the industrial logic and growth strategy to win in the global automotive market.
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Several industry trends propelled the large automobile makers towards consolidation. First, the worldwide market for automobile was maturing. Total automobile production in the world was 54.7 million in 1997, 52.9 million in 1998, and 55.9 million in 1999 (see Exhibit 2). There was only a 2% increase in two years, although the growth potential was higher in the markets of developing countries such as Asian and Latin American countries. In a maturing market, competition among established companies tends to intensify because someone’s gain in share means someone’s loss in numbers. Second, all markets but the United States had far more production capabilities than required to satisfy domestic demand. According to 1999 statistics, every major automobile manufacturing country except the United States exported more than 40% of its domestic production (see Exhibit 3). Also it is a known fact that Japan and South Korea had over capacities in automobile production because of Japan’s long recession and the Asian financial crisis in 1997. In a combination of maturing markets and over capacity it would be very difficult for any company to grow by oneself.
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Third, costs for developing new cars are mounting. Environmental technology such as an efficient engines, which cut fuel consumption and CO2 emissions, and fuel cell technology, which eliminate CO2 emissions, is becoming a more pressing issue as people become more concerned about the environment. Developing these new technologies is a huge investment for one company. Also, as the market matures, the demand for passenger cars is becoming more and more diversified, and, subsequently development costs for new models are rising as automobile manufacturers try to accommodate the changes in demand. Bigger companies can more easily bare these costs, and it is easier to buy established names than to build new plants in order to be bigger in maturing and over capacity markets. Considering these conditions, it was natural for automobile manufactures to start engaging in a wide range of strategic alliances and other consolidation tactics.
Chrysler was basically a North American company. It was strong in lower and medium priced cars, and very strong in small trucks, minivans, and sport utility vehicles, but weak internationally. Daimler’s Mercedes Benz was strong in the upper part of the automotive market in Europe, but not in the US. Also, Daimler was considered to have an advantage in environmental technology, which Chrysler lacks. Together, they became a full-range auto company, capable of competing in almost every area, equipped with huge cash flow and technology around the world.
GM and Ford
The two largest automobile producers, GM and Ford, also had taken similar approaches as Chrysler, although in a less significant fashion than DaimlerChrysler’s merger (see Exhibit 4). In 1998, GM already owned a 100% equity stake in Opel, which produced about one-quarter of all German vehicle output, and a 49% equity stake of Isuzu, the ninth largest Japanese automobile manufacturer. Also, Ford owned a 34% equity stake in Mazda, the fifth largest Japanese automobile manufacturer, and 100% equity stakes in Jaguar and Aston Martin, both are small but respected UK automobile manufacturers.
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After the merger of Daimler-Benz and Chrysler, GM increased its holding in Suzuki Motors of Japan to 10% in September 1998, and acquired a 20% equity stake in Fuji Heavy Industries, makers of Subaru automobiles, of Japan, and acquired a 100% equity stake in Saab of Sweden in January 2000. Ford also acquired Volvo’s (Sweden) passenger car division in 1999. Furthermore, GM announced its intentions to acquire a 20% equity stake in Fiat, which is sixth in market share, on March 13th in 2000.
However, after all this GM, the largest automobile manufacture in the world, still holds only a 4% market share in Asian Pacific region, but a 20% share of the world market and 10% share of the European market (see Exhibit 5). Automobile sales earnings of GM and Ford in Asia are minus $218 million for GM and plus $133 million for Ford respectively (see Exhibit 6). These amounts are not very exciting when compared with almost $6 billion income for each company’s automobile sales.
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DaimlerChrysler in Asian Pacific Region
DaimlerChrysler sold only 50 thousand cars in Japan out of 4.9 million productions (see Exhibit 7). This is just 1% of production and a 0.8% share of the Japanese market although its Mercedes-Benz was the best-selling foreign made car in Japan. Also the annual report listed no Asian manufacturer or important subsidiaries in the area except one company in India. In conclusion, while GM and Ford’s presence was weak DaimlerChrysler had no significant presence in the Asian region in 1999.
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The East Asian Market
Production of motor vehicles in Asia reached 16,344,000 cars in 1999, and accounted for 29% of the world production. The East Asian Market with a population of more than 1.7 billion is categorized into four groups: Japan, Korea & Taiwan, ASEAN countries and China. The general characteristics are that Japanese and Korean automotive manufacturers are being restructured and realigned while Chinese and ASEAN markets with huge growth potential are attracting most of the major players from all over the world. More specific features are discussed below (See Exhibits 8 &9).
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Japan. Japan is a developed country and the domestic market is mature with 11 automotive manufacturers. Production in Japan experienced its second straight year of decline in 1999 due to weak exports under the impact of the strong yen, and due to a downturn in domestic sales. This trend has gradually affected each company’s financial status. In addition, some companies have not yet solved their domestic manufacturing over-capacity problems after shifting their manufacturing capacity overseas. Also it is suggested that economies of scale, estimated to be 5 million annual production units for one group, will be necessary for surviving in the coming environmentally-friendly and IT-oriented market of the 21st century. In Japan only Toyota meets this criterion so far. As a result, consolidation is advancing in the domestic market with distinct divisions along worldwide groupings so that Toyota, Honda, GM, Ford, DCM and Renault groups are emerging and competing each against each other in Japan and abroad (See Exhibits 10 & 11).
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Korea and Taiwan. In order to recover from the downturn due to the Asian financial crisis, Korean manufacturers are now being restructured and realigned. Daewoo Motors has been the subject of intense offers from GM, Ford, DaimlerChrysler, and Renault. Recently Ford received exclusive negotiation right from Daewoo’s creditors. Hyundai has also taken a stake in Kia Motors. Taiwanese manufacturers suffered less because of a lack of investment in manufacturing capability, and lack of an export-driven market. Both domestic markets are getting mature (See Exhibits 12, 13, & 14).
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ASEAN countries. Due to the Asian financial crisis in 1997, the production in ASEAN nations, consisting of Indonesia, Malaysia, Thailand, and India, decreased to 70% of the peak level recorded in 1996. It may take 3-5 years to recover to pre-crisis levels, even though each country is seeking to stimulate domestic demand by changing policies from protectionism to liberalization. Japanese manufacturers dominate ASEAN countries, except Malaysia. However, the markets still attract some major players due to the high growth potential in these markets (See Exhibits 8 & 9 shown earlier).
China. Although most automotive manufacturers are interested in the huge potential of the Chinese market, it will take some time to penetrate into the market mainly due to the Chinese government’s strict control. The government sets pricing limitations and regulations on local content and tariffs to prevent ease of entry by outsiders. There are 2-3 big groups and 6-7 middle size groups. The industry is not mature and the demand for trucks still strong. (See Exhibit 15)
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East Asian Market Overview
As outlined, the East Asian auto market is quite diverse. In this market several trends exist. First there is the presence of strong regional players like those in Korea. Second, East Asia is home to several national car manufacturers like Malaysia’s Proton. Third are the global brands and manufacturers in Japan that not only have a history of exporting to markets in East Asia but also have long-standing technical and equity tie-ups throughout the region. Finally, until recently, is the total lack of any significant presence by major American or European manufacturers in the area. This has allowed existing regional players to consolidate their brand name and sales channels in this market.
DaimlerChrysler’s Strategy for East Asia
As Exhibit 16 shows, DaimlerChrysler’s vehicle platform and sales pattern are extremely weak in East Asia. The Asian crisis presented the opportunity to quickly change this without forcing DaimlerChrysler into investing in costly ground up production and sales channel facilities, or an expensive acquisition. Initially DaimlerChrysler pursued Nissan, but fear over the actual extent of Nissan’s debt problems convinced Schrempp to pass on Nissan. Honda was also considered, but Honda’s desire to remain independent as well as the potential for cultural differences scuttled the negotiations. Convinced of the need for a partner Daimler initiated discussions with Mitsubishi Motors in Japan. Mitsubishi seemed the optimum partner due to its longstanding relationship with Chrysler.
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In March of 2000 DaimlerChrysler and Mitsubishi agreed to a strategic purchase where DaimlerChrysler would acquire 34.4% of Mitsubishi for $1.86 billion. This will give DaimlerChrysler needed access to small car engine and platform technology, and to existing sales channels. More importantly, according to the March 27 joint press release, the strategic purchase will mean that DaimlerChrysler Mitsubishi will have a 10.4% market share in Japan and a 9.4% market share in other parts of East Asia. Not satisfied with the Mitsubishi deal DaimlerChrysler initiated a strategic tie up with Hyundai Motors of Korea. For approximately $486 million DaimlerChrysler Mitsubishi will obtain a 10% stake in Hyundai and a seat on its board. In exchange Hyundai and DaimlerChrysler will engage in a 50:50 joint venture to develop commercial vehicles and trucks for the Asian market, and will develop a small car platform “world car” for East Asian and other markets (See Exhibit 17). In two dramatic moves DaimlerChrysler made significant progress in achieving its stated goal of increasing sales in East Asia to 25% of total revenues.
Discussion Questions
1. What are the strengths and weaknesses of DaimlerChrysler’s Strategy?
2. How should DaimlerChrysler-Mitsubishi brand itself in Asia?
3. What cultural issues will DaimlerChrysler have to overcome to succeed with its strategy?
Exhibit 1
Rank/Company / 1997 WorldMarket Share
1 / General Motors / 16.2%
2 / Ford Motor Co. / 12.9%
3 / Toyota Motor Corp. / 9.0%
4 / Volkswagen AG / 7.9%
5 / DaimlerChrysler / 7.4%
6 / Fiat Auto S.p.A. / 5.3%
7 / Nissan Motor Co. / 5.2%
8 / PSA Peugeot Citroen / 3.9%
9 / Honda Motor Co. / 3.8%
10 / Mitsubishi Motors Corp. / 3.5%
Exhibit 2
Automobile production (Units by thousand)1997 / 1998 / 1999
North America / 14,694 / 14,572 / 16,066
South America / 3,870 / 3,503 / 3,186
Western Europe / 15,453 / 16,782 / 16,939
Easton Europe / 2,468 / 2,400 / 2,453
Asia / 17,516 / 15,014 / 16,343
World total / 54,695 / 52,922 / 55,629
Exhibit 3
Export/Domestic Sales Ratio in 1999Export / Domestic sales
Spain / 81.1 / 18.9
Sweden / 80.1 / 19.9
France / 67.8 / 32.2
Germany / 64.6 / 35.4
UK / 61.5 / 38.5
Korea / 53.1 / 46.9
Italy / 46.9 / 53.1
Japan / 44.6 / 55.4
US / 9.6 / 90.4
Exhibit 4
Acquisition Activities in GM and Ford MotorGM
/ Name / Nation / Equity stakeBefore 1998 / Opel AG / Germany / 100%
Isuzu / Japan / 49%
09/16/98 / Suzuki Motor / Japan / 3.3% to 10%
12/10/99 / Fuji Heavy Industry / Japan / 20%
01/31/00 / Saab Automobile AB / Sweden / 50% to 100%
03/13/00 / Fiat / Italy / 20%
Ford
/ Name / Nation / Equity stakeBefore 1998 / Mazda / Japan / 34%
Jaguar, / UK / 100%
Aston Martin / UK / 100%
In 1999 / Volvo / Sweden / 100%
In May 2000 / Land Rover / UK / 100%
Exhibit 5
Vehicle Unit Deliveries (units in thousand)Total / Share / GM / GM share
North America / 19968 / 36% / 5706 / 28.6%
Total US / 17419 / 32% / 5017 / 28.8%
Others / 2549 / 5% / 689 / 27.0%
Europe / 20138 / 37% / 1979 / 9.8%
LAAME / 3231 / 6% / 536 / 16.6%
Asia and Pacific / 11610 / 21% / 457 / 3.9%
World total / 54947 / 100% / 8578 / 15.8%
Exhibit 6
Income in Automobile manufacturing in Ford Motor Co. and GM in 1999