By on November 27, 2008

Will Daimler and BMW be Germany’s Ford and GM? Germany is worried about its two prides and joys: “Some senior executives already question whether Daimler and BMW will survive the crisis as independent companies,” writes Der Spiegel, translation via Business Week. “And close examination reveals that both companies have significant Achilles heels.”

“The biggest risk for BMW stems from its successes in recent years,” writes Der Spiegel. “BMW has almost doubled its car sales since 1999, and since 2007 the Bavarian carmaker has been the world’s top seller in the premium class.” Now, BMW sits on $25b of car loans and leases, backed by cars with increasingly dubious residual value.

Second risk for BMW: Customers, shame on them, buy the wrong cars. Instead of buying big bore 7 and 5-Series Beemers, as they should, customers suddenly insist on smaller models and lesser engines. BMW’s Munich-based engine factory is caught unprepared. “We are producing the wrong engines,” says Manfred Schoch, the chairman of BMW’s works council. Eight-bangers, even six-cylinder engines are piling up unsold. Daimler is even more distressed.

Daimler got hit with a double punch: Even the affluent don’t want to flaunt their wealth in these critical times. The Mercedes truck business has come to a “virtual standstill.”  Very often, both big rigs and fancy wheels are sold through the same Daimler-owned dealerships. These days, they are lucky if they sell a car a day. More often than not, it’s a used one “with 3,100 miles on the odometer – but already available at a 40 percent markdown.” Benz suffers the same problem as BMW: They were betting on the bigger models, their A and B class offerings are produced in numbers that are way too small. And, “small car, small profit.”

BMW’s Reithofer and Daimler’s Zetsche have long agreed that they should face the enemy united. For instance, by sharing the cost of developing new entry-level offerings. Reithofer and Zetsche indeed face a common enemy:Their own engineers. At meetings between BMW and Daimler, BMW engineers preach to Daimler that BMW’s technology is best. Daimler engineers answer: “Hey, we invented the car.” Then, in typical German fashion, both groups return to their top management and report that there are just much too many problems. Reithofer and Zetsche may pound the table as much as they want, in the next presentation, they get more problems. If you think South Korea and North Korea have communication problems, then you should be in a meeting between Daimler and BMW engineers. All both companies could come up with was a food co-op for Chinese parts. And even that is going slower than planned. Currently, Daimler and BMW don’t share much more than common pain.

BMW is in a teensy-weensy better position: They have a major share owner, the Quandt family. Sex scandals or not, the Quandts are – so far – faithful to BMW. Daimler’s shares on the other hand are dispersed all over the place. The lower their stock goes, the higher the risk of being taken over, sliced and diced. So what’s in the car(d)s? A merger between BMW and Daimler? A united Korea is more likely. (Which doesn’t mean it can’t happen.)

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32 Comments on “Uh-Oh: Trouble Brewing At Daimler And BMW...”


  • avatar
    Vega

    “Even the affluent don’t want to flaunt their wealth in these critical times. The Mercedes truck business has come to a “virtual standstill.”

    Strange connection between affluent customers and Mercedes Trucks. You know that Mercedes Trucks means real Trucks (like in 40t), not SUV’s, right?

  • avatar
    gsp

    I would like to think that BMW’s Quandts would have enough money to scrape together if times are tough for a couple of years. Like many people with money, they may not be thinking all doom and gloom. Weaker companies are damaged more by recessions. Long term, good companies with good business plans fare quite well, usually.

  • avatar

    The NYTimes put together an article with a depressing slideshow that clearly outlined Mercedes’ problem. They have thousands of cars coming off ships in the US, and headed for lots, instead of dealers.

    Tells the story as clearly as you can.

    Article:
    http://www.nytimes.com/slideshow/2008/11/17/business/1117-PORTS_index.html

    Slideshow:
    http://www.nytimes.com/slideshow/2008/11/17/business/1117-PORTS_index.html?adxnnl=1&adxnnlx=1227788037-kUAtD5xZtad258qpFuKKDQ

  • avatar
    tom

    Daimler is really trapped between a rock and a hard place. If they want to remain profitable and independent, they need a white knight fast. If I was Zetsche, I’d go to the local state government and ask them to buy 30% of Daimler stock.

    They already said that they’d do it in order to protect Daimler, should someone attempt a hostile takeover.

    With a strong share holder, be that the local government, or someone else, Daimler would finally be free to concentrate on their core business instead of having to dance to the music of the financial markets.

    The market is not interested in long term success, but only in short term profit.

  • avatar
    JJ

    A merger between BMW and Daimler? A united Korea is more likely.

    Especially since BMW drivers and Mercedes drivers (in Europe at least) are much like supporters of rivalling football teams. Many people who swear by BMW wouldn’t set foot in a Mercedes and vice versa.

    Obviously, with the lease market and everything, these sentiments have cooled off a little over the years, but still, the really brand faithful people build the image of a company, so neither can afford to loose those in the long run.

    Personally I could always enjoy the sight of another Mercedes F1-engine blown up every fortnight a few years ago when engines weren’t limited to 19000rpm yet. Although concerning drivers I would much rather have seen Raikkonen or Montoya win than Schuey (sorry Bertel) but that’s another story.

  • avatar
    Stingray

    EPIC!!!

    BMW engineers preach to Daimler that BMW’s technology is best. Daimler engineers answer: “Hey, we invented the car.”

    So we have here a pissing contest…

    BMW started by making airplane engines. Airplane > Cars. They may have a point there.

    Personal taste, I dig BMWs.

  • avatar
    tom

    Especially since BMW drivers and Mercedes drivers (in Europe at least) are much like supporters of rivalling football teams. Many people who swear by BMW wouldn’t set foot in a Mercedes and vice versa.

    Which would actually be another good reason for cooperation: They wouldn’t be wildering in each others territory.

    Of course they would have to remain independent…nothing more than mutually buying some stock for security reasons and combined purchasing and development of small cars. A merger would delude both brands. But I don’t think that this would be a real option anyways…you know, the Koreas and all…

    BTW, I was alsways cheering for Hakkinen.

  • avatar
    SherbornSean

    I think the specter of a takeover is over-stated. Who would buy BMW or M-B? The only carmaker with any real cash right now is Toyota, and they have always grown organically.

  • avatar
    psarhjinian

    But German auto executives never make mistakes! It’s always the customers who fail to appreciate the product, or market downturns that no one could plan for, or unfair cost issues versus other makes, or government meddling, or bad mergers, or…

    Anyways, everyone knows they’re perfect, have been around forever, and have better stuff, so why cooperate or look outside?

    Does any of this sound familiar?

  • avatar
    Runfromcheney

    The same exact thing happened to Daimler back around 1998. And that is why they took over Chrysler.

  • avatar
    golden2husky

    Mr. Schmitt, I expect better from TTAC. No single self respecting auto enthusiast would be caught dead saying “Beemer”.
    http://www.bmwccbc.org/misc/tech-and-trivia/bimmer.html

    This story made me think of a Bob Dylan song. Paraphrasing: “The slow one now will later be fast…the present will later be passed..” I’ll be in line to grab a good used 330i…

    psarhjinian: your link to GM popped up a bar on how we can all help GM and the industry in general. Who would of ever thought of a corporation of that size begging for help on a website. Thanks for the morning chuckle!!

  • avatar
    windswords

    ‘ “The biggest risk for BMW stems from its successes in recent years,” writes Der Spiegel.’

    Sounds like the same writer for the NYT and the Washington Post. When times are bad, write about doom and gloom. When times are good, write about doom and gloom.

  • avatar
    tom

    I think the specter of a takeover is over-stated. Who would buy BMW or M-B? The only carmaker with any real cash right now is Toyota, and they have always grown organically.

    Well, BMW is safe anyway. As for MB, they’re probably most afraid of some investment fund, ripping them apart and selling off the pieces, while keeping the cash reserves to themselves.

  • avatar
    windswords

    ‘At meetings between BMW and Daimler, BMW engineers preach to Daimler that BMW’s technology is best. Daimler engineers answer: “Hey, we invented the car.” ‘

    Sounds just like Daimler-Chrysler. “Hey, we don’t know jack about making low-cost mass produced autos, but we are going to tell you how”. Result? Caliber, Sebring, Nitro.

  • avatar
    windswords

    Hey I got an idea how the good folks at Stuttgart can remain an independent auto maker. Maybe Dumbler can buy an American company, raid their bank account, reek havoc with their engineering, force out many of their top execs, and make themselves too big (and too poor) to be acquired by someone else. Oh, wait!

  • avatar

    @Vega: I know the difference. Luxury limos and huge rigs are very often sold through the same company-owned dealerships in Germany. I’ll work that out a bit more.

    @golden2husky: Ever since my (first) wife brought a 3series into the family and called it a “Beemer” I call it a Beemer. I won’t change at my old age.

  • avatar
    tom

    Sounds just like Daimler-Chrysler. “Hey, we don’t know jack about making low-cost mass produced autos, but we are going to tell you how”. Result? Caliber, Sebring, Nitro.

    You have to be fair here…Chrysler was “very proud” that those cars were completely American designed/made. The only cars with some German influence are the 300 and the Crossfire.

    It’s ridiculous to blame Daimler for Chryslers problems, they were there all along. Before the merger, Chrysler was even more dependent on Trucks and SUVs than the other two Detroit auto makers, plus they already had the same structural problems concerning legacy costs and Unions.

    Also, your claims are not even consistent. If Daimler was stealing Chryslers money, why are they poorer now? Easy, because in fact, Daimler pumped billions into Chrysler. And for a short time, it looked as if Dr. Z was able to turn it around.

    Well, he wasn’t, so the first thing he did as head of DCX was to find someone who’d take Chrysler off his hands.

    The only winners here were the original Chrysler shareholders like Kirk K who made a fortune with an already doomed auto maker.

  • avatar
    JJ

    @golden2husky

    …Unfortunately, in the US and Canada, and perhaps other countries, there was a time (kind of still is) where for various reasons, a BMW owner was considered an upwardly mobile person, and of course due to the fun in driving their BMWs most all of them had big grins on their faces….Hence it is little surprise that the non enthusiast types out there incorrectly labeled BMW cars and their owners as ‘beamers’ or ‘beemers’

    Awesome.

  • avatar
    tedj101

    >>I think the specter of a takeover is over-stated. Who would buy BMW or M-B? The only carmaker with any real cash right now is Toyota, and they have always grown organically.<<

    Well, cough cough, there is always Porche… Oh, I almost forgot. They aren’t really a carmaker, they are a bank that also builds cars…

  • avatar
    no_slushbox

    “Second risk for BMW: Customers, shame on them, buy the wrong cars. Instead of buying big bore 7 and 5-Series Beemers, as they should, customers suddenly insist on smaller models and lesser engines.”

    If Honda came out with a rear wheel drive Civic sized car, gave it the same equipment levels and engines as the Civic line has (unless the FWD Honda engines still spin the wrong way, then I guess they could just use S2000 engines in various levels of tune),DX to Si, and was able to keep the premium over the Civic at about $4,000 to $5,000 BMW would loose half its US sales to that car.

  • avatar
    LamborghiniZ

    A couple of things…BMW does have better technology….Daimler’s engineers excuse that “they invented the car” has nothing to do with anything. That’s like if the Chicago Bulls claimed to be the best in the NBA because “they used to have Michael Jordan”, it’s an irrelevant fact, one that is interesting no doubt, but it doesn’t happen to influence or affect their current products, technology, or situation.

    Lastly, I own a big body, 4.4L V8 BMW 540i M-Sport, 6 speed, and it’s a dream come true. Amen.

  • avatar
    RedStapler

    No_Slushbox:

    Hyundai is actively gunning for the RWD market with the Genesis Coupe. The only thing handicapping them is their Steinbrenneresque management of their sales team in the US.

  • avatar
    tom

    @LamborghiniZ:

    You’re taking Bertel’s writing a little too literally. If you read the Business Week article, you’ll see that it’s not about who built the first car. That was just a metaphor on the childish play that’s going on in those meeting between BMW and Mercedes.

  • avatar
    RedStapler

    It does not help that sales for the Truck Group in North America are off 40-60% from their 2006 peak.

    2006 was something of a special case as everyone bought as much equipment as they could get their hands on to beat the 2007 emissions standards for diesel.

    Compared to its 2006 equivalent a 07+ truck costs $5k more, has 5-10% lower fuel economy and has far more down time. Many trucking companies are waiting for business to improve and running existing equipment longer.

    The $5/gal diesel earlier this year combined with much lower freight volumes has trucking in a deep recession. Daimler has already announced that they are doing and Oldsmobile with their vocational brand Sterling.

  • avatar
    psarhjinian

    The only cars with some German influence are the 300 and the Crossfire

    No.

    Those were the the only cars that share Mercedes components. But the design and engineering methodology change that Daimler rammed down Chrysler’s throat resulted in the Caliber, Sebring and their twins. Amusingly, the 300 and Magnum are mostly Chrysler designs and were well into development before the Germans got their sticky fingers into the works. Daimler’s contribution to the LX cars was a transmission and a few rear suspension bits from the old E-Class.

    Read up about the process, software and engineering changes that Daimler forced. It’s rather sad, and it resulted in both Chrysler having to go back to the drawing board, unable to draw upon past or partner experience, and was also responsible for the torpedoing of their otherwise-useful partnership with Mitsubishi.

    Mercedes wrecked Chrysler. The trashed their product development for a decade and raided their cash pile. That they got off without lawsuits is a testament to dumb luck and good PR.

  • avatar
    windswords

    Tom,

    Fair has nothing to do with it. Dumbler raided Chrysler’s cash and it’s never been accounted for. This is not the only company they have done this too. At the time of the merger Chrysler was not only the most profitable automaker in the world (like Porsche is today) but they actually had popular and well liked CARS to sell. It’s a myth that they only had trucks. In 1998 they had the LH (whose 2nd generation was about to be introduced, which included the 300M), the 1st gen Stratus/Cirrus (JA) which today are horribly represented by the Avenger/Sebring, and the Neon, which despite having some quality issues was still making money (the biggest failure was head gaskets – because Bob Eaton – Lido’s successor – wanted to save a few dollars a car, despite the warning of engineers (as you might be able to tell, Eaton was a former career GM man)). That’s right, a small car actually making money for an American maker.

    The only fair comment I can make is that the current Caliber and Sebring platforms are Mitsubishi derived – but that was because Dumbler ordered it to be done – to save money. As for the 300, as I’ve stated before that car was already slated to go rwd. Tom Gale in an interview with MT I believe, said all the engineering had been done, the prototypes were being tested and a design concept (the 300N) had been making the rounds of the auto shows. Then Dumbler insisted that they use pieces of the old E class platform – pieces that had to be re-engineered. That pushed the program back about 18 months. Oh and they overcharged them in various fees for their fine “German engineering”.

    Some other tidbits:

    In 1998 Chrysler was able to bring a complete new car to market for less money and more importantly time, than any other automaker, including Toyota. Toyota’s manufacturing was still cheaper per car, but not their development costs.

    Chrysler was the number one pick of suppliers as the best company to do business with in N.A. This was due to Thomas Stallkamp’s “extended enterprise” initiative that journalists had labeled “an American Keretsu”. That system was demolished by Dumbler in favor of old style confrontational business practices. Now they are at the bottom.

    Chrysler had copied many of the development methodologies of Honda. The line workers and component engineers were give more authority in the development process. Dumbler dismantled all that.

    Until this years terrible economic conditions all of Chrysler’s losses from 2000 thru 2007 would have been covered by the $10 billion cash reserve they had built up. But the money would not have been used to cover losses. Instead it would have funded new development even in years that they lost money. They would have had all new vehicles to sell – not warmed over mods of existing platforms (2nd gen JA, 2nd gen Neon, and a borrowed small car Mitsubishi platform used to make a medium car).

  • avatar
    NickR

    Three things that would make me happiest:
    - something to do with Megan Fox
    - winning the lottery
    - seeing Daimler on it’s bloated ass

  • avatar
    50merc

    psarhjinian: “Read up about the process, software and engineering changes that Daimler forced.”

    Can you give us a link? (To a subscription-free website.)

    Windswords: “the Neon, which despite having some quality issues was still making money (the biggest failure was head gaskets – because Bob Eaton – Lido’s successor – wanted to save a few dollars a car, despite the warning of engineers”

    Yet another head gasket fiasco! Did Chrysler, Ford and GM all decide to change to cardboard gaskets? What was the difference in gaskets?

  • avatar
    mistrernee

    Gaskets didn’t change, the material the heads was made out of did. Eventually they did have to stop using asbestos and that didn’t help things at all. Everyone had some issues in the late 80′s though.

    Iron block + aluminum heads = bad for head gaskets.

    Some standouts from companies that people thought knew better:

    Toyota 3.0l 3VZ-E V6, this one was catastrophic and embarassing for Toyota. You could probably still get one fixed for free if it’s the first failure and you pout enough at the right dealer.

    Subaru Legacy DOHC 2.5l, these fail like clockwork when they near 160,000km. Subaru doesn’t care. Just the first version of the engine, they fixed in the later ones but owners with them are still SOL.

    Not even the Chevy Cavalier could come anywhere close to the Neon though, that thing was just special. Pointing that car up a hill at highway speed on a warm day was extremely risky. Dead Neons were a common sight on the sides of mountain roads around here for a while. Now you just see the odd Pontiac 6000 or Olds Cutlass Ciera, all the Neons were crushed or something.

  • avatar
    windswords

    50merc:

    “psarhjinian: “Read up about the process, software and engineering changes that Daimler forced.”

    Can you give us a link? (To a subscription-free website.)”

    Try this: http://www.allpar.com/forums/index.php?showtopic=103289

    You will have to register. but it’s free (in money and SPAM)

    ‘Windswords: “the Neon, which despite having some quality issues was still making money (the biggest failure was head gaskets – because Bob Eaton – Lido’s successor – wanted to save a few dollars a car, despite the warning of engineers”

    Yet another head gasket fiasco! Did Chrysler, Ford and GM all decide to change to cardboard gaskets? What was the difference in gaskets?’

    From the same link:

    “Much attention was paid to effeciency in the original vehicle. The Neon was Iacocca’s answer to the statement that American auto manufacturers could not build anything decent to compete against the Japanese cars (Sidebar-this is why I laugh at the kids on here saying that the Japanese are a new phenomenon-that fight has been going on since 1968 or so…hehehe)…

    Unfortunately, Eaton had come in and replaced Iacocca before the launch of the Neon, and demanded several changes that were to prove to be the undoing of the car in the general public’s eyes…the infamous exhaust donut and headgasket. About $2.00 saved per vehicle (a chunk of change over the life of the original headgasket design- over $2,000,000 total) and easily 10 times that in lost customer value (this is exaggeration and hyperbole, not fact) in my opinion.”

  • avatar
    psarhjinian

    50merc,

    Have a read of http://www.allpar.com/neon/engineering.html

    Allpar has, shall we say, a bit of bias, but independent sources who dealt with Daimler said similar things: the Germans were always right, Chrysler people were always wrong, and the Chrysler people paid for it.

    The most interesting bit is how Mercedes actually charged Chrysler consulting fees to screw them up. Amazing. Usually only SAP, PeopleSoft or JD Edwards get to do that kind of thing.

  • avatar
    tom

    @windswords:

    Thanks for the link. But I still can’t see where all the blame was coming from.

    First of all, allpar isn’t exactly what you’d call an unbiased source. For example, I have read a book about the merger, written from a German point of view (by an insider who was involved at every point of the merger) and it was naturally exactly the opposite. Now I won’t claim that this book is right on, actually, I think it’s BS. But I think the same about this forum entry by someone who used to work for Chrysler in the early 1990s and who was not involved at the time of the merger.

    Also, the German media at that time (from 1998 onwards) basically said unanimously that Daimler wasn’t hard enough on Chrysler. The reasoning was, that mergers basically never work out, while acquisitions only seem to work when the acquired company is completely dissolved within the acquiring company and its former corporate identity gets wiped out.

    Secondly, this forum entry is indeed interesting, but I fail to see the major problem. Of course mistakes were made on both sides. And he gives some interesting examples. Most of which could be put down to misunderstanding or bad timing/execution (like the introduction of the new software).
    But there was nothing earth shattering there, until he gets to the last part where he says that “The terms rape, pillage, and plunder really DO describe the mess that caused probably the most noted destruction of a carline ever”,
    without really saying why. At that point, all his nice examples went to waste, because they in no way justify a conclusion like that.

    I guess it all comes down to previously held convictions. If you loved Chrysler before the merger, then you’ll blame Daimler (and you can find examples that seem to prove your point) otherwise, you may blame Chrysler for the mess they’re in now (and you’ll also find examples that prove your point).

    By the way, some of the “facts” don’t seem to add up. If the LX paltform was almost done before the Germans came in and it “only” got some Mercedes parts, then why was it introduced in 2005, 7 years (!!!) after the merger? At the point the Germans entered the picture, there were some sketches at best, nothing more. I think there’s a lot of wishful thinking going on: Everything good, Chrysler; everything bad, Daimler. It’s most definitely not as easy as this. Daimler did its best to turn Chrysler around and when they saw that they couldn’t do it, they left, which was the sensible thing to do.

    Schrempp loved the idea of a world automaker. DaimlerChrysler was his baby and he didn’t want to abandon it. He did everything to make it work out (including Mitsubishi). So when it became obvious that Chrysler couldn’t be saved, Schrempp had to leave. It basically was an internal DCX revolution that led to the divorce. The revolutionaries refused to further pay for the bottomless pit in Detroit and on their helm was Dieter Zetsche, former Chrysler CEO who was mentioned rather favourably by the poster you linked to and who must have known best what was going on. So it wasn’t “raping and pillaging”, but rather an expensive settlement with the former trophy wife who got fat and was a drain on the credit card.

    And another minor detail that leads me to believe that this forum entry has a very narrow field of view is what was written about Bernhard, that he was fired because of some warranty problems with Mitsu. Well, in fact he wasn’t fired, but he left because of internal power struggels. In 2004, Mercedes CEO Hubbert retired. Many favoured Bernhard to become his successor, but the Unions were afraid of him and ultimately, Schrempp put his old buddy Cordes in that position. Bernhard felt cheated and left for Volkswagen (where he had a similar fate).

    When Schrempp had to go, Cordes also left (he was Zetsche’s arch enemy). Now Zetsche is both, CEO of Daimler as well as of Mercedes. Had Bernhard endured a little longer, he’d surely be Mercedes CEO now.


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