Is the future a thing of the past?

April 27, 2007
Today's global economy needs leadership and innovation in manufacturing the sort of vision that came from the former future DaimlerChrysler.

Almost a decade ago Daimler AG shook up the manufacturing world by its $36-billion merger with Chrysler Corp. The historic tie-up is coming untied, reportedly, and the prospective separation is being accepted without any of the surprise or speculation that gripped the automotive supply chain in 1998. The difference is striking. Back then, the partners had a vision of what they hoped to accomplish, a persuasive argument built on expectations of a global economy. Today, there is no clear explanation for the sell-off, and worse, no confident forecast of what it will mean for either company going forward.

Remember 1998? Manufacturing industries were not part of what was known then as "the new economy." Technology stocks got all the analysts' praise and investors' focus. Automakers, their suppliers, and other basic industries were high-cost operations locked into regional markets, and bound by labor and regulatory obligations. It was quite different than the freespending, dotcom utopia that lingers as the official record of business in the late 1990s.

Getting ahead meant planning ahead, which demanded investing, which called for raising capital — and that was a big challenge for manufacturers. Daimler AG had some assets to work with: the Mercedes brand and superior product engineering. It couldn't easily sell many more luxury cars, but Daimler execs believed they could maximize the value of their engineering by extending those developments into more cars and trucks, and beyond.

Chrysler had typical automaking problems in 1998 — high costs and long-term debts — but it had 3 million customers per year, and the manufacturing capacity and sales channels to reach them. That product volume would support Daimler's engineering costs, and the Chrysler vehicles would be made more valuable by the brand extension.

It was a merger based on needs, but it came with a vision: It would have market positions in Europe and North America, and in Asia through stakes in Hyundai and Mitsubishi; and the engineering prowess would be extended into higher technology sectors, like aerospace.

It has not been an easy alliance. There have been cultural conflicts between Germany and the U.S., and leveraging the design expertise has been more complicated than anyone predicted. Every change took too long to execute. The organization lost $1.5 billion in 2006, but that was far from the worst financial result in the auto industry last year. DaimlerChrysler remains the world's second-largest automaker, and size means even more now than it did in 1998. The vision should be as powerful as ever.

The economy is more globally integrated than it was in 1998. Investors embrace basic industries now, because such companies are leaner and more advanced technologically, and have fewer competitors and more consumers. Markets reward global brands, and buyers crave well designed products. But, it's an economy driven by value, not vision. It needs leadership and innovation — especially in manufacturing — the sort of vision that came from the former future DaimlerChrysler.

There is a vision for Chrysler — a $3-billion strategy for new engines, transmissions, and axles, and a template for 20 new and 13 improved models by 2009 — but how likely is it to be completed without Daimler? And, what becomes of Daimler? What's the justification for undoing the economies of scale in R&D, purchasing, organizational costs, marketing, distribution, and so on? What about access to new consumers, or the advantages of a global workforce? Are there advantages to separating Daimler from Chrysler? Perhaps so, but the current management isn't identifying any. It's a decision based on current values.

Most likely, the separated companies will be taken over and later sold off in pieces by speculating investors. Let's hope they sell to manufacturers that haven't stopped planning for the future.