Case Study: Merging IT at DaimlerChrysler

By Paul A. Eisenstein  |  Posted 03-18-2002 Print Email
Three years after the merger of Chrysler and Daimler-Benz, the marriage has run out of gas and the company is leaking red ink. Can technology come to the rescue?

Corporate Headquarters | Stuttgart, Germany and Auburn Hills, Mich.
Year founded | 1998, through the merger of Chrysler Corp. and Daimler-Benz AG
CIO | Susan Unger
IT employees | 4,000 worldwide
Manufacturing plants | 180 in 37 countries
Brands | Mercedes-Benz, Chrysler, Jeep, Dodge, Freightliner, Sterling and others
Alliances | DC owns 34.1% of Mitsubishi Motors Corp. of Japan and 10% of Hyundai Motor Co. of South Korea
*Revenue | $136.1 billion in 2001, down from $144.5 billion in 2000
**Net income | A loss of $589 million in 2001, down from $7 billion in 2000

* Based on an exchange rate of 1 euro = $.89, as of Jan. 1
** Including negative one-time effects due to turnaround activities at Chrysler Group, Freightliner and Mitsubishi Motors Corp.

When Daimler-Benz Ag bought Chrysler Corp. In 1998, the German luxury carmaker was hoping the American mass marketer could show it how to cut spending, squeeze costs and boost profits. Back then, at least on paper, the $36 billion pairing, the biggest-ever among carmakers, seemed unbeatable. Chrysler had $7.5 billion in cash on hand, there was little overlap in the two companies' respective product lines—luxury cars versus mass-market compacts and minivans—and Chrysler was lean and mean, earning more per vehicle than any other major carmaker in the U.S. Best of all, in an industry seeking ever-larger economies of scale, the merger offered an opportunity for cost-cutting, by an estimated $1 billion over the first three years on the cost of parts, alone. At a press conference announcing what was then being proclaimed as a "marriage of equals," Chrysler Chairman Robert Eaton offered a rationale: "This is all about speed and flexibility. It's about converting ideas into profits and doing it faster than our competitors." Crowed Daimler Chairman Jürgen Schrempp: "The two companies are a perfect fit of two leaders in their respective markets."

So much for a perfect fit. Since Eaton and Schrempp, as new cochairmen, shared the balcony of the New York Stock Exchange in November 1998 to ring in the first day of trading for the new company's stock, DaimlerChrysler shares have lost more than the equivalent value of the entire Chrysler Corp. prior to the merger. Market and industry watchers now describe the deal as a sly German takeover that has not only come close to hollowing out the old Chrysler but has endangered the new company's profitability to boot: Last year, Chrysler lost nearly $2 billion—and by its own calculations probably won't make a dollar of profit until 2003. DaimlerChrysler, meanwhile, lost $589 million, and despite offering Chrysler car buyers discounts of as high as $2,000 per vehicle, Chrysler's American market share continues to shrink, from 16.2 percent at the time of the merger to around 13.5 percent today. Management has also taken a beating: Chrysler's Eaton is gone, along with dozens of top U.S. managers responsible for the marketing, product and design savvy Daimler had originally sought from Chrysler—the kind of smarts Schrempp said were needed to help the new DaimlerChrysler develop a vehicle for every kind of driver, from Buenos Aires to Beijing.

Company executives admit now that they greatly underestimated the cultural problems that would form the core of the company's present-day woes. For the past three years, mistrust between Auburn Hills and Stuttgart has made cooperation difficult on even the simplest of matters. Until recently, deciding which parts and, in some cases, which technologies the image-conscious Mercedes will share with Chrysler has been all but impossible. "We initially underestimated what it would take" to understand one another, concedes Vince Morrotti, DC's chief technology officer and previously the top IT executive at Mercedes-Benz of North America Inc. Morrotti and other top DC executives insist the company is getting on track after plenty of detours, but there remain numerous skeptics. Says veteran auto analyst Maryann Keller: "I can't imagine two more different cultures. Some 70 percent of mergers don't work, and this one isn't working, either."

Still, while much has gone wrong, the task of tying the two former companies' technologies together in a push to cut costs and boost efficiencies has marched forward. DaimlerChrysler CIO Susan Unger, a 29-year finance and technology veteran of the old Chrysler, is one of the few Chrysler execs to survive the merger. Her efforts have saved the new company close to $200 million so far, and many of her team-building techniques are being copied throughout the new corporation.

It has helped hugely, of course, that throughout, Unger has had strong support from the top. When Schrempp pulled Unger in during early merger talks and named her CIO, it was clear that whatever DC would become, the Germans saw IT—and Unger, with her track record of using IT to cut costs—as a cornerstone of the new company. "The position of the leaders," recalls Unger, was that "IT is absolutely an essential ingredient for making this merger successful. There was a lot of talk about how the Germans took over everything, but they recognized Chrysler's value on IT."

She had to move fast: Unger was given little more than two months before the merger was formalized in November 1998 to tie together 16 different European e-mail systems to Chrysler's one—"just to enable everyone to share information and best practices," she says—and then to patch together a way for all design teams to start using one global network, and all with no increase in spending, other than what she could squeeze from cost-cutting.

But the cultural challenges have been just as daunting, if not more so (see "Thinking Out Loud"). In the critical, time-crunched weeks before the merger, Unger recalls, even the simplest differences between American English and the British English used by DC's German engineers could lead to frequent misunderstandings.

Unger and Chrysler had faced tough obstacles before. It took a federal bailout to save Chrysler in 1979 and a complete product overhaul—accompanied by technology-led efforts to cut costs, boost quality and accelerate productivity—to recover from near-bankruptcy a decade later. Today, General Motors Corp. claims to be the biggest vendor of microprocessors in the world, thanks to the computing power of today's cars. Ford Motor Co. says its internal computing power is second only to the Pentagon's. But Chrysler has long had a leg up on both, thanks to its history of financial turmoil. "We didn't have the luxury of being anything but efficient," Unger says.

At Chrysler, for example, Unger was instrumental in pushing the early use of collaborative design software, IBM's CATIA CAD/CAM system, to overcome a severe labor shortage in the late 1980s and early 1990s. Using CATIA, engineers "build" a virtual vehicle, which is run through simulated crash testing—and even down a digital assembly line. The goal: to be certain that what's on the drawing board will, indeed, meet cost and design specs. With CATIA, Chrysler cut development costs, and shortened lead times from what had been close to five years down to as little as 20 months on some programs. According to market analysts, CATIA can help cut up to $1 million a day in process costs.

While at Chrysler, Unger also proved her cost-cutting mettle on the quality front. Chrysler was scrapping up to 50 vehicles per month at its Ohio Jeep plant because workers would inadvertently drill the wrong number of holes in them as they moved down the assembly line—they weren't sure which components were needed. Unger convinced IT to start automating the warranty claims process, and also ushered in a barcode system that electronically identified each vehicle as it rolled down the line. The barcodes included information about which accessories were to be installed on which Jeeps, essentially telling the assembly operator how many holes to drill at any given time. The changes cut the number of vehicles being scrapped per month down to three, for savings in the millions. But Unger didn't stop there. The next step was to automate the drilling rig itself so it could only drill the correct pattern. Scrap rates at the plant from drill errors are now down to zero.

Meanwhile, Daimler-Benz, though slower to evolve a corporatewide IT strategy, was on a rapid automation kick at the time of the merger. It, too, had just started to adopt a version of CATIA. But Daimler executives needed the support and expertise of Chrysler's more unified and sophisticated technology to pull the new company together.



 

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