Daimler-Chrysler Dis-assembly

IT WAS supposed to be a “merger of equals”, but has turned out to be just another disastrous car-industry takeover. Since Daimler-Benz swallowed Chrysler in 1998, it has brought the struggling American carmaker to the verge of recovery three times, only to see the patient repeatedly relapse. This time the high price of petrol and raw materials turned the market against the big sport-utility vehicles, minivans and saloons around which Chrysler had built its latest plans for recovery. Although Chrysler had dramatically improved its designs and production lines, it failed to predict the fashions of the forecourt. Now Daimler, chafing at Chrysler's mounting losses and slumping market share, is contemplating divorce.

“We do not exclude any option in order to find the best solution,” said Dieter Zetsche, DaimlerChrysler's boss, on February 14th. He won the top job thanks in part to an earlier and seemingly successful effort to save Chrysler. But for the first time he refused to reiterate past protestations that Chrysler was not for sale.

Despite a healthy performance by the rest of DaimlerChrysler (Mercedes-Benz, trucks, finance and so on), the firm's net earnings in the final quarter of 2006 plunged to a meagre €577m ($724m), fully 40% lower than a year earlier. There was no hiding the blame. The American side of the company had a dire year, with operating losses of $1.4 billion.

Observers had expected 10,000 jobs to be cut in what insiders were calling the “Saint Valentine's Day Massacre”. The true figure turned out to be 13,000, about 16% of the workforce. It included 2,000 salaried employees, mainly from the sprawling headquarters in suburban Detroit. The latest sackings come on top of a previous cull in 2001, when Mr Zetsche cut a third of Chrysler's payroll. This time, Chrysler's assembly line in Newark, Delaware, and several other plants will bear many losses.

By 2009, the car firm expects to have cut production by about 400,000 vehicles a year. Even so, Mr Zetsche insisted the long-term goal is to raise Chrysler's sales, which have fallen obstinately short of the 3m target set in the 2001 turnaround plan. But executives at Chrysler grudgingly acknowledge that in North America they cannot sell many more cars—even smaller ones.

Chery-picking
The big opportunity, according to both Mr Zetsche and Tom LaSorda, Chrysler's boss, lies overseas, where the firm is little more than an asterisk on the sales charts. Its international business grew by 15% last year. But that was from a tiny base. Although vehicles like the big Jeep Grand Cherokee have some appeal in places like China and the Middle East, most foreign buyers are looking for something more modest. Every big car company outside America is betting that sales of small cars in emerging markets will boom. Renault's success with its basic, ultra-cheap Romanian-built Logan saloon has inspired imitations among competitors such as Toyota of Japan and South Korea's Hyundai.

In December Chrysler revealed plans to farm out production of a new model to Chery, an independent Chinese carmaker. That is one of the tactics it plans to employ more widely to help revive its fortunes. At its new Jeep assembly line in Toledo, Ohio, for example, parts of the plant are owned and operated by partners like Hyundai Mobis. Mr LaSorda hopes these deals will allow Chrysler to penetrate new markets faster and more cheaply.

Could something even bigger be in the works? Carlos Ghosn, the chief executive of both Japan's Nissan and France's Renault, is still interested in having an American pillar to his alliance. But he has enough to do, as both companies are on the defensive. There might even be a bid from China. Asian companies would love the quick access to the American market that Chrysler would bring.

Meanwhile Mr LaSorda will have to reduce costs further. He expects to trim $1.5 billion from his bill for raw materials. Chrysler will demand concessions from the UAW union, on health care in particular. Mr LaSorda suggested that one dealer in five could be dropped. Despite all this he accepts Chrysler will make another loss in 2007, although, he hopes, a smaller one.

Chrysler stumbled after having briefly seemed a beacon for beleaguered Detroit, thanks to its flashy 300C sedan, which was touted as a trendsetting design. But then the group ran into what Mr LaSorda called “unexpected headwinds”, including the huge surge in oil prices, which weighed especially heavily on a firm that normally sells roughly two gas-guzzling light trucks for every car.

It did not help that Mercedes never fully integrated with Chrysler, for fear of tainting the cherished German brand. It shared some technology, but did not allow Chrysler to piggy-back on its basic designs. Many ask whether Chrysler might have fared better in different hands.

But Chrysler's managers also made mistakes. They kept production high, even as sales stalled. No one flying into Motown last year could miss the fields of unsold Jeeps and Ram pickups. It was the discounts offered to get this stock moving that caused the financial meltdown.

Mr Zetsche was asked this week whether there were similarities between Daimler's merger with Chrysler and BMW's ill-fated takeover of Britain's Rover Group. He bridled at the suggestion, and still seems reluctant to cut Daimler's losses and sell its ailing acquisition, as BMW eventually did. But he is running out of other paths to take.