Mergers & Acquisitions
Why do German carmakers fail at love outside of Germany?
Around the world and back again: Mercedes and BMW venture out of Germany but find no place like home
A comparative and detailed look into the expansion strategies (mergers and acquisitions, foreign direct investment) of Mercedes Benz and BMW through the 1990s to 2000s.
multinational corporations • international expansion • culture alignment • brand conflict • economies of scale • managerial control • intangible assets • synergies fit • diversification & growth strategies • brand equity dilution • technology transfer • etc
---
This study has been adopted for teaching purposes for undergraduate, graduate and executive education. The case study along with teaching notes is distributed to business schools across the world by The Case Centre, Cranfield, United Kingdom. Information regarding purchase and usage permissions may be seen on their website here.
A tale from two cities
Traveling from the Mercedes-Benz corporate headquarters in Stuttgart to BMW’s in Munich, you would have to drive eastwards, eventually down either of two autobahns. If you chose the older A8, you might cut your travel time by up to thirty minutes, otherwise choosing the A96 - by first going south, down the A7 - might take you the full complement of 2 hours and 38 minutes, a total travel distance of about 160 miles. Much of Germany’s autobahns haven’t speed limits, however, so your time might be even shorter, depending on your speed proclivities. But both Mercedes and BMW would argue that the trip, in either direction, is most pleasurable if done in their car. What isn’t arguable, though, is that the long transatlantic trips they both made by mergers and acquisitions in the 90s and 2000s, thousands of miles from the A8 and across the Atlantic, in search of larger market shares and heavier profits, were not pleasurable at all. Both since packed their bags and trudged back to Stuttgart and Munich with little appetite for similar further travel.
Mercedes-Benz (Germany) acquires Chrysler (USA) as horizontal FDI to expand global market share and boost profits
The Mercedes-Benz vehicle is one of the world’s most recognizable brands and has consistently stood for class, reliability and exclusivity for most of its history. The company itself is a multinational division of Daimler AG, headquartered in Stuttgart, Germany. Along with Audi and BMW, it makes up the so-called German Big 3 and, indeed, the other two companies are its main competition worldwide in the luxury car segment. The company was founded in 1886 and was an early venturer into worldwide markets, quickly establishing a presence in major countries and cities of the world, especially (in the early years) those that offered a market that craved the luxury and exclusivity that the brand fast became famous and respected for.
As at 2020, Mercedes-Benz has production facilities where its vehicles are manufactured (or assembled) and produced in 30 countries and territories across the world besides Germany:
-
Africa: Algeria, Egypt, Nigeria, South Africa
-
Asia: China, India, Indonesia, Iran, Malaysia, South Korea, Taiwan, Thailand, Vietnam
-
Australia
-
Europe: Germany, Austria, Bosnia and Herzegovina, Finland, Hungary, Serbia, Spain, Russia, United Kingdom
-
North America: Canada, Mexico, United States
-
South America: Argentina, Brazil, Colombia
-
Middle East: Jordan, Turkey
By the late 1990s, Mercedes-Benz was immersed in strong competition with other major luxury car manufacturers, especially BMW, which had stuck vehemently to producing vehicles for the luxury segment and was not as diversified as Mercedes was. Profit margins at Mercedes-Benz and its parent company, Daimler-Benz, were being stretched thin and the company decided to take the surprise and daring option to expand outwards by venturing strongly into the USA automobile industry. This move was unprecedented for a company like Daimler-Benz that was so steeped in its own local and well entrenched German corporate and work culture. Entering America was just as shocking to analysts because the American car industry also had its own strong (some would say, stubborn) culture and sense of independence. All eyes were on this new marriage to see how it would proceed and where it would lead.
Chrysler was America’s third-largest company and although the union was classified as a merger, many believed it was actually a purchase by Daimler-Benz; its stockholders held the majority of the new company’s shares, anyway. It was the largest acquisition by a foreign buyer of any USA company in history. The new company was christened DaimlerChrysler. It was valued at $92bn and immediately became one of the world’s top three automobile companies by market capitalization, revenues and earnings. It was also at that time, the largest industrial merger ever.
However, it wasn’t long before Main Street USA had a new running joke. The question went: How do you pronounce DaimlerChrysler? Answer: Daimler; the Chrysler’s silent. Behind the somewhat irreverent humour lay a significant element of truth, and reality. While the new company boasted trusted pedigree on either side of the Atlantic and strong economic performance in its markets (indeed Chrysler had made a textbook-miracle comeback from the brink, almost single-handedly pulled from disaster into astounding profitability by the iconic CEO, Lee Iacocca), observers were still unsure just how well the new combination would work. As it turned out, the resulting story would be a classic case study of the role that culture and corporate practice play in company operations and ambition. In this particular instance, it would also highlight the perhaps understated challenges and pitfalls that confront multinationals when they venture abroad in bold and heavy foreign direct investment outlays.
Starry-eyed lovers
At the time Daimler-Benz acquired Chrysler (effectively 1999), the German company was the market leader around the world in the luxury (or premium) car category, and it was Europe’s largest industrial company; but it had not adequately penetrated the lucrative and seemingly inexhaustible North America market. Its sales revenues were at record levels, but the company knew only too well that in the fast emerging global one-market world, it could not afford to sit pretty and thereby open itself to being caught out by more ambitious and hungry rivals. And so, this opportunity to go arm in arm with North America’s third largest vehicle manufacturer (behind General Motors and Ford) was - at first sight - one begging to be taken. It would present an opportunity to add a second brand of non-luxury moderately priced cars and trucks on to its portfolio and provide a wide entry point into the North America market with its promising and tempting implications for economies of scale and resources rationalization and pooling.
Chrysler, in 1998, was America’s third largest car company, and in the mid-nineties was the most profitable car company in the world. But for years, it had been trying to break into the European markets and take its products there. It made a concerted effort in that direction in the 1970s but was forced to pull back after losses piled up. It had tried to work with the Italian car company, Fiat, but the Turin, Italy, based automaker backed off after reviewing Chrysler’s books and deciding it didn’t like what it saw. Chrysler eventually went it alone when it bought American Motors Corporation from France’s Renault. That proved to be prescient as it allowed it lean more towards sport utility vehicles rather than passenger cars at a time when the American taste was shifting towards the former. This new opportunity to re-engage with Europe, this time from a position of strength, was - as it was for Daimler-Benz - too good to pass up.
It wasn’t surprising therefore that Robert Eaton, Chrysler Chairman and CEO, described it as a “merger of equals”. At a press conference to introduce the marriage, he said the union would “catapult DaimlerChrysler into the industry’s top three in market capitalization with an equally strong credit position.” He had also jubilantly proclaimed that, “Both companies have product ranges with world class brands that complement each other perfectly. We will continue to maintain the current brands and their distinct identities. What is more important for success: Our companies share a common culture and mission. We are both clearly focused on serving the customer by building world class cars and trucks, we both have a reputation for innovation and quality, and we are both committed to increasing value for our shareholders. DaimlerChrysler has the most skilled and innovative workforce in the industry and we are committed to making their future as bright as the new company's. By realizing synergies and with our combined financial and strategic strengths, we will be ideally positioned in tomorrow's marketplace."
For his part, Daimler-Benz Chairman, Juergen Schrempp, was just as enthusiastic and raring to go. "The two companies are a perfect fit of two leaders in their respective markets," he said. "Both companies have dedicated and skilled workforces and successful products, but in different markets and different parts of the world. By combining and utilizing each other's strengths, we will have a pre-eminent strategic position in the global marketplace for the benefit of our customers. We will be able to exploit new markets, and we will improve return and value for our shareholders. This is a historic merger that will change the face of the automotive industry."
There was initial fear that American workers unions would fatally block the deal, fearing what it portended for their jobs and work conditions. As it turned out, optimists were proved right when the American government gave the deal its green light, and when nothing else stood in its way, Messrs. Eaton and Schrempp smiled at the cameras and announced the happy beginning of what they expected to be a long-lived and abundantly fruitful lovers’ marriage.
The expectations of the new union
Such was the almost universal euphoria that greeted the eventual union of these two auto giants that industry watchers predicted a rash of similar mergers would soon sweep through the sector. As one of them put it, "This represents a wave of consolidation in the automotive industry. Over the last 10 years assemblers have worked with suppliers to reduce costs. What we're going to see now, for the next 10 years, is consolidation to take out capacity, reduce the pricing pressure in the market that's being caused by the tremendous burden of excess capacity around the world."
DaimlerChrysler began to lay out what it expected to be solid gains from the consummated union, even though it said both partners would effectively retain their maiden names. As Eaton put it, "We believe very strongly that a brand is the most important thing a company owns and I can assure you we will do nothing but improve those brands, and yeah, they will clearly be separate brands forever." He had also said that there were synergies to be realized that would make the new company ideally suited for growth. Schrempp said they were creating the world’s leading automotive company for the 21st century, “We are combining the two most innovative car companies in the world”. Those synergies were stated sometimes explicitly, and other times implied, but were generally taken to be the following.
-
Cost savings of $1.4bn in the first year after the merger (1999) and $3bn in savings over the medium term (the next three to five years), through the exchange of components and technologies, combined purchasing power, and shared distribution logistics. These did not include ongoing cost reduction programs.
-
Executives said no layoffs or plant closings were planned.
-
The company would be headquartered in both Germany and Michigan but it would be incorporated in Germany and have a traditional German structure with separate supervisory and management boards.
-
The combined company would have $92bn in market value and an estimated $130bn in annual revenue as the fifth-largest automaker in the world (behind Chrysler's two U.S. rivals, Ford Motor Co. and General Motors Corp., and just behind Japan's Toyota Motor Corp. and Germany's Volkswagen AG).
-
DaimlerChrysler would be uniquely positioned to exploit the growth opportunities of the global automotive market in terms of geographical and product segment coverage.
-
The merger would create the premier global automotive company with one of the strongest portfolios of world class brands in both passenger cars and trucks.
-
The creation of DaimlerChrysler would also allow the growth of Daimler-Benz's non-automotive businesses which would continue to pursue their respective strategies of expansion.
-
With Daimler-Benz's non-automotive businesses, including aerospace, services and rail systems, diesel engines and automotive electronics operations, DaimlerChrysler would be a world leader in transportation.
-
DaimlerChrysler would have 421,000 employees worldwide, and with its excellent growth opportunities, expected to increase this number.
-
There would be immediate growth opportunities by using each other's facilities, capacities and infrastructure. Product strategies would be developed to enhance growth in mature markets as well as in Asia and other emerging markets.
-
DaimlerChrysler would have a portfolio of strong brands covering most product segments around the world which would be maintained and strengthened through the combination of the businesses.
-
Corporate Governance would reflect strengths from Europe and the USA: The new company would be jointly led by Juergen E. Schrempp and Robert J. Eaton as Co-Chairmen and Co-CEOs, for a three-year period. The senior management would have 18 members drawn from both companies. There would be a Chairmen's integration council with 7 members who would focus on realizing the combined strengths of DaimlerChrysler.
Best laid plans of mice and men
It is easy to look back from the standpoint of today’s knowledge
and advancement and shake one’s head in disbelief that such an ambitious marriage of such disparate partners could have been attempted, and that it even wowed the corporate world. But one must resist that and plant feet firmly in the early 2000s in order to understand why the merger inevitably fell apart. To be fair to both companies, there were few doomsayers among analysts, who instead generally greeted the new company as an adventure that would revolutionize the way business would be done in the 21st century and would represent the new developing spectres of globalization and seemingly all powerful information and communications technology.
DaimlerChrysler did not meet its lofty ambitions: it was dead within nine years. The company whose merger deal was valued at $36bn (the amount Daimler paid for Chrysler) was dissolved in May 2007 for a fifth of that price. A private equity firm, Cerberus Capital Management, bought out 80 percent of Chrysler’s stake for that amount, effectively returning the company to American hands. Daimler-Benz kept the remaining 20 percent.
Upon the breakup, the DaimlerChrysler CEO, Dieter Zetsche, told a news conference at the company’s headquarters in Germany, "We obviously overestimated the potential of synergies. I don't know if any amount of due diligence could have given us a better estimation in that regard." In those two sentences was encapsulated the tricky nature of the terrain that is foreign direct investment, which in this case was largely horizontal investment, although there were elements of vertical investment, too.
Many put the collapse down to the impossible mixture of two companies from different countries with different languages and different cultures. Deferring to the “Chrysler is silent” joke, they saw the fatal venture as a case of “empire building” by the Germans from day one; it wasn’t meant to evolve synergies - they maintained - but to display and strengthen German corporate and industrial strength, exporting this into, and imposing it on, the great American industrial enterprise.
A major cause of the marital strains, it is said, was Daimler’s Mercedes-Benz luxury division refusing to share with its more mass-market Chrysler partner: Chrysler was supposed to use components from Mercedes-Benz. This perhaps signifies the major risk that combining high-end products with lower-market “partners” represents; the high-end secrets are jealously guarded ones which would feel insecure and unprotected when thrown into a mass-market public square. All Chrysler got in the end, apparently, were a transmission, a diesel engine and some purchasing deals.
From the Daimler perspective, Chrysler was supposed to drive it into the long coveted elephantine North American automobile market but instead seemed to wilt under competition from Asian carmakers so that it fell frustratingly short and didn’t deliver.
Underhand moves and skulduggery
Other analysts opine that those were not all there was to the merger’s demise; indeed, not all there was to the merger’s emergence in the first place. They claim that the billionaire American investor, Kirk Kerkorian, badly wanted control of Chrysler but Chairman Bob Eaton would not have that and plumped for Daimler-Benz’s arms instead. Even though Eaton described his choice of partner as a “marriage of equals”, people always believed it was nothing of the sort and weren’t surprised when control effectively fell to his German counterpart, Schrempp. Lee Iacocca’s opinion was that “Eaton panicked.” He was Eaton’s predecessor. "We were making $1bn a quarter and had $12bn in cash, and while he said it was a merger of equals, he sold Chrysler to Daimler-Benz, when we should have bought them."
Chrysler’s sales performance plunged soon after the merger and Dieter Zetsche was the man dispatched from Stuttgart to Detroit in 2000 to fix the tumbling spiral. He made a decent job of that, returning Chrysler to admirable profitability. But some say that by the time he returned to Germany, now as DaimlerChrysler CEO, he had made up his mind to spin off Chrysler and cut losses. Actually, by that time, Chrysler had plunged back into a $1.47bn loss. Cue Cerberus, the venture capitalists, waiting eagerly but patiently on the wings.
DaimlerChrysler will for a long time remain a vivid etching on the memories of all multinational corporation CEOs and a forceful reminder to dot i’s and cross t’s, and even then, still look several times in both traffic directions before crossing that merger road, and to make certain still to do so long afterwards. ◼︎
BMW expansion and production strategy during the same period
Meanwhile, 145 miles to the east, in the city of Munich, is where BMW has retained its corporate headquarters almost since it was founded in 1916. Like Daimler, its neighbour to the west, the company has focused on the luxury car segment and has maintained keen competition for the world premium car market share. Like Daimler, BMW realized early on that it would have to utilize and exploit advantages to be gained from worldwide expansion and alliances if it was to pursue ambitious growth levels and volumes. BMW strategy differed from Daimler’s during the latter’s ill-fated 1999 to 2007 DaimlerChrysler project in that they continued a seemingly steady non-hasty but gradual setting up of locations at different strategic points around the world, to serve very specific markets with equally specific products. There was no attempt at a mega-project or mega-acquisition.
As at 2020, BMW has vehicle production facilities in 16 countries:
Africa: Egypt, South Africa
Asia: China, India, Indonesia, Malaysia, Thailand
Europe: Germany, Austria, Hungary, Netherlands, Russia, United kingdom
North America: Mexico, United States
South America: Brazil
Different markets, different strokes
BMW appear to have tailored markets closely to their overseas expansion; every venture abroad appears systematic and specific. The very first foreign FDI outlay was the South Africa plant, which started assembling vehicles in 1968 and producing them in 1973. The BMW strategy was to buy shares in a production factory called Praetor Monteerders, before fully acquiring it in 1975. This seems to have been a deliberate and cautious strategy that allowed for a bedding in period before full commitment, as it were. And so, South Africa’s became the first fully owned subsidiary of BMW to be established outside Germany. It represents a Horizontal FDI initiative, producing various models of the vehicle for various markets. Those models have even included unique ones created specifically for the South African market: the M745i (1983), 333i (1986) and 325i (1989), each powered by already existing engines. When US manufacturers pulled out of the South Africa market during the apartheid sanction years in the 1980s, BMW remained. After the end of apartheid in 1994 and import tariffs for the country were lowered, the South Africa plant ended production of the higher end models (5 and 7-series) to concentrate on the 3-series targeted at export markets, which include Japan, Australia, New Zealand, the UK, Indonesia, Malaysia, Singapore, Hong Kong (all right-hand drive countries) as well as Taiwan, the US, Iran, and countries of Latin America and Sub-Saharan Africa.
The next target country for overseas production was the United States, where a factory was opened in 1994, in South Carolina. This, again, was Horizontal FDI, with that factory producing an average of 600 vehicles a day. Again, with models specific to this plant: the SUVs X3 and X5, as well as the sports Z4. A good chunk of the engines are still made in Munich, Germany. The US market at the time was BMW’s largest single market and it is not surprising that they chose to locate the SUV factory there, given the proclivity of the North American consumers for that class of vehicle. In 2010 BMW undertook a nearly $1bn expansion to that production facility that would allow it roll out 240,000 vehicles a year, making it the largest automobile factory in the US by number of employees.
BMW placed a strong Horizontal FDI presence in Africa again when it established the Bavarian Auto Group multinational in 2003 and made it the sole importer of BMW and Mini (more on this brand below) vehicles in Egypt. This company had monopoly rights for import, assembly, distribution, sales and after-sales support of BMW products in Egypt. This Egypt facility, which has expanded greatly with more BMW investment, offers the full range of locally assembled and imported models, and presumably makes BMW better able to serve some of the markets in the Middle East as well.
The company had followed a similar expansion strategy in Japan, where it utilized a subsidiary, Yanase Company Limited, as exclusive retailer of all imported BMW vehicles to all of Japan.
The China factory came in 2004, and BMW chose to enter into a joint venture project with a company called Brilliance Auto. The same company already was producing mini-bus vehicles in a joint venture with Toyota, and BMW quite likely spotted efficiency there, as well as the all important factor that the vehicle model that the Toyota agreement involved was a non-competing one. Brilliance Auto began producing BMW-branded sedans. Its joint venture agreement allowed it to produce BMW 3 and 5 series particularly tailored to the China market requirements.
After the success of the China production location came India in 2006, where the company began with a sales subsidiary in the city of Gurgeon. That subsidiary was elevated to the status of a production plant in 2007 with the construction of an ultra modern factory to build the 3 and 5 series vehicles, targeting the India market.
The family expands: enter Rover, Land Rover, MG, Triumph, Mini
BMW’s creation of worldwide subsidiaries actually started in 1973 when its then Sales Director, Bob Lutz, initiated the policy of taking back responsibility for all the world’s major markets from importers into the BMW family itself, effectively ditching the arms-length outsourcing strategy for a hands-on one. France was the first country where this subsidiary spread-out strategy began and it has continued throughout the world since.
At about the same period when Daimler-Benz was mulling over a North American FDI drive, BMW decided to preempt competition and attempt to expand its range of vehicle marques in order to bring it into the more mass market mid-car segment. It is quite likely that BMW sought to have a head start on Daimler-Benz, since up to this time the latter had resorted to expanding its market reach organically by turning out new models of its same Mercedes luxury car in an effort to dip a foot in the critical mass market segment and not price itself out of healthy profits in offering just the high ticket price models. For both companies, it was all a matter of finding not just a wider market, but harnessing the economies of scale that such a situation would provide.
And so, even before Daimler-Benz would travel the same road 5 years later, BMW decided on growth by acquisition. In 1994 it planted feet in the United Kingdom by paying $1.4bn for the Rover Group, taking it off the hands of British Aerospace and the Honda Motor Company. In the years immediately following this, BMW spent almost as much in subsequent investment.
$1.4bn at the time was viewed as a steal; Ford had paid $2.4bn acquiring Jaguar, which was a much smaller company. The Rover Group had 5 vehicle brand names in its fold: Rover, Land Rover, MG, Triumph and Mini. Besides affording BMW a wider range of vehicle marques in its stable, with their new penetration into the mass market segment, the German company expected the new acquisitions and their locations abroad to bring great economies of scale savings. Before then, BMW had seen thirty years of increasing sales and profits and an ascent to the status of the major competitor to the all powerful Mercedes-Benz. Buying the Rover Group could only consolidate that status and quite possibly even bring it to overtake Mercedes.
But the story didn’t follow the desired plot.
The family expands, with some pain: exit Rover, Land Rover, MG
Rover, the car, had been doing badly for some years before BMW took it on. There were not only issues of quality, there were painful issues of production disruption and rising costs due to labour unrests, for which - in the UK - the company became particularly notorious. In 1952, Rover was the fourth largest car maker in the world; by 1992 it had dropped 16 places. The company had become better known for hemorrhaging cash. Even though by the time BMW bought it, Rover Group was a smaller and better focused company, it still was plagued with problems. While under Honda ownership, the Japanese had improved operations through technology transfer from Japan headquarters, but this still wasn’t enough to work a definitive turnaround. BMW thought they could do that.
As BMW saw it, if there was proper financing and management supervision, Rover Group would thrive. So, the company threw in investment infrastructure but largely left the new British subsidiary to carry on with its own models, engineering, purchasing, production, sales and distribution. BMW just made sure to establish the broad strategy strokes. And so, BMW and Rover were effectively separate companies under common ownership: BMW’s.
The plan didn’t work. Losses at the Rover Group mounted and five years later, BMW decided to make a 180 degrees change in strategy; Rover Group lost its operating autonomy and its chairman (who was German) left the company. Less than a year later, BMW chairman, Bernd Pischetsrieder, also left the company and BMW revealed plans to sell off the Rover Group in parcels, effectively cutting that umbilical cord. The new BMW chairman, Joachim Milberg, in response to reporters, said, “The multibrand strategy which was pursued was right in principle. The type of group leadership, however, proved to be wrong.'' But that didn’t tell the entire story.
BMW broke up Rover Group. Land Rover went to Ford in 2000 for $2.8bn; and Land Rover was the best performing of the Rover Group portfolio; BMW selling it off indicated just how desperate the company was to exit the disappointing expansion-by-acquisition strategy. The nature of the sale of the remainder of the group was even more astounding. MG and Rover were sold to a British company called Phoenix Consortium for a token £10 (i.e. ten pounds; equivalent twenty dollars at the time) in a complex deal involving a £500m (equivalent $1bn) “dowry payment” payment by BMW. John Lawson, an industry analyst, put it this way: “What this tells us is there has been a major rethink in strategy at BMW. The Rover brand, they discovered, really was a bankrupt brand, and they walked away from it."
The Rover Group had cost BMW just over $6bn in all, purchase price plus investments and operations, but had continued to lose money. Rover Group came to be known in the industry by the monicker, “The English Patient”.
One vehicle of the portfolio, though, BMW chose to keep; and that was the Mini, which it redesigned and relaunched, and which has proven to be a huge success since. It also kept the Triumph brand name trademark, which is what it had purchased when it bought the Rover Group: Triumph, the vehicle, had long ceased to exist since 1984, fifteen years before BMW came on to the scene. ◼︎
Around the world and home again
The moral of these stories might depend on who’s doing the narrating. For giant multinationals like Mercedes-Benz and BMW, the striking lesson would be that some aspects of a firm’s character, philosophy, spirit or whatever they choose to label their zeitgeist, cannot be transferred via FDI in the way technology could. There are “glass” barriers - for some industries, or for some firms - to investing laterally in another country by merger or acquisition and successfully wringing out increased revenue and profits.
Home, the saying goes after all, is wherever your heart is.