Taking the Right Lessons from DaimlerChrysler

Now that the DaimlerChrysler saga has ended with a whimper – Daimler paying $678 million for Cerberus Capital Management to take Chrysler off its hands – the critics have had been quick to lay blame.  Analysts and journalists tell us that the $36 billion deal to buy Chrysler was a mistake from the start.  It was a blunder, a misadventure based on miscalculation and arrogance.  How could a German luxury car maker imagine it could make a success out of Chrysler, a Detroit-based company that turned out cars and trucks?  What could Daimler’s executives possibly have been thinking? 

Such post-mortems are pure Orwellian revisionism, a re-writing of history to make events appear sensible and coherent.  In fact the truth was more complex.

In the early 1990s, demand for Mercedes Benz luxury cars had slowed and company profits were on a downward spiral.  Japanese rivals had successfully moved up-market with new brands like Lexus, Acura, and Infiniti.  The auto industry was undergoing a massive restructuring, with smaller companies like Jaguar and Volvo snapped up by larger firms, eager to capture the benefits of scale.  DaimlerBenz, a traditional German company with a narrow product line and a cost disadvantage, seemed on the road to nowhere.

Then, in 1993, DaimlerBenz announced a bold move:  it would set up a new plant to build SUVs in Alabama.  The critics scoffed — an entirely new product line, to be built in a country far from Germany, in a state not exactly known for automobiles?  It hardly made sense.  But the experiment worked.  The cross-cultural disaster that many had predicted – could Heinz the engineer really get along with Billy Bob the mechanic? – never materialized.  Daimler’s new SUV, the M-series, was a success in every respect. 

Heartened, Daimler took an even more audacious step, buying Chrysler, the number three US automaker in 1998.  Few observers doubted the wisdom of Daimler’s move at the time.  In a single stroke, Daimler would vault into the front ranks of world automakers and grasp the benefits of global scale and scope.  Was Juergen Schremp’s move risky?  Absolutely.  But that’s the nature of strategic choice in a competitive market economy.  Strategy is about making decisions under conditions of uncertainty, and risky decisions always involve risk.  The global auto industry offers no guarantees.For the next few years there was reason for optimism.  But the benefits never materialized, costs mounted, and rivals continued to get better.  Reorganization followed rationalization followed reorganization.  Eventually, after years of underperformance, Daimler’s German bosses threw in the towel.  Surely there are lessons here in integration management.

Now that Daimler has ended its American adventure, it’s natural to question whether the deal made sense in the first place.  But before we condemn the Chrysler acquisition as ill-conceived, we should ask where Daimler would be today if it had not made a bold move toward global scale and full product lines.  Where would it be if it had stood pat while rivals like Renault and Nissan were joining together, and while Toyota and Hyundai were surging ahead to build a global position.  Of course, history doesn’t let us turn back the clock, change one variable, and run the experiment again.  But it’s sobering to speculate.  My guess is that a German-based luxury car maker would be struggling today – and the same critics who are blaming it for the Chrysler deal would be hammering it for its complacency, for its reluctance to make bold moves, and for its arrogance.  Why, they would be asking, did Daimler’s bosses stay with a sinking ship and not take a bold gamble to break into new areas? 

In our rush to tell a simple and satisfying story – whether about a great success or a dismal failure – we often let eventual the outcomes shape our thinking.  We forget that competition is about risk taking, and that in a competitive market economy, even good decisions may turn out badly.  The difference between confidence and arrogance, between a visionary master-stroke and a failed gamble, is usually only clear in retrospect, once we know how the story ended, and then only because we conveniently forget the challenges that managers faced at the time of the decision.

Comments

[Mauro Mello Jr.]

Excellent analysis, particularly the reminder that risk is ever-present under conditions of uncertainty; no amount of managerialism will be able to bring an enterprise's environment under control, except for the simplest of cases.

It is very easy (and convenient, one could add) to lambast others for unforeseen outcomes, after the fact. As I once read, "In hindsight, we are all geniuses!" (I can't recall the source of this observation, though.)

[keyless remote replacement]

Yes, lessons to be learned there.