Crisler Corporation. Senior thesis (стр. 2 из 3)

Chrysler has not penetrated the European market very deeply. It certainly will be a good opportunity for Chrysler Corporation to start cooperation with Daimler-Benz in order to penetrate the European market without additional costs for opening its offices and stores.

At the same time, Chrysler has very a good market in North America and can facilitate Daimler-Benz’s deep penetration into that market with a new program of minivan production.

Decrease in Price of Materials Bought from Suppliers

One major benefit of the merger is that both companies can save lots of money on external purchases. First, saving will take place in purchasing raw materials from suppliers. Before the merger, both companies had to buy from supplier separately. Everyone knows this law of the market: “the more you buy, the less you have to pay.” Now the companies purchase everything together and the quantity of one batch is doubled, this bad led to significant decrease in price on per-unit basis. For example, DaimlerChrysler already saved $1.4 billions in 1998. In turn, decreases in price for raw materials will provide lower prices for the cars in total and increase compatibility of the new company.

Decrease in R&D expenses per production unit

Another positive aspect of the merger is that both of the companies can combine their efforts in researching and developing new products. Before the merger each of the companies had to conduct research for itself and these costs were spread on per unit basis among all products. Now these costs are spread on a significantly larger quantity of products, which allows decreasing costs of the research and development per every production unit. In addition, intellectual powers of both companies will now work for one huge company—DaimlerChrysler. This factor will bring new, combined ideas into the new company.

Facts:

“On April 17, 2000, DaimlerChrysler announced a new Virtual Reality Center in Sindelfingen, Germany. The Company estimates the new facility will reduce costs of making Mercedes-Benz prototype models by up to twenty percent a shorten product development times while improving quality.”

Confluence of Technologies of Both Corporations

Both of the companies have their own advantages, in terms of technological development. Now, when all these advantages represent one solid company, the new company has more chances for surviving in the car manufacturing industry. The following are evidences of recent innovations in DaimlerChrysler.

“DaimlerChrysler researchers in Ulm, Germany, have developed an infrared-laser night vision system that significantly increases a driver’s visibility at night. The system allows drivers to recognize darkly clothed pedestrians and cyclists even at great distances. It also illuminates the road ahead over a distance of around 500 feet without blinding the drivers of oncoming vehicles.

The system functions as follows: two laser headlights on the vehicle’s front end illuminate the road by means of infrared light that is invisible to the human eye. A video camera records the reflected image, which then appears in black and white on a screen located directly in the drivers’ field of vision, or else as a so-called head-up display on the windshield.”(Auburn Hills, April 5, 2000)

Double Strength of New Corporation

One of the factors that investors are looking for before making their investment decision is a company’s overall stability. Usually the large corporations are considered to be stronger than small ones.

The new size of DaimlerChrysler might lead to more stability, which in turn could mean lower rates of return required by investors. It might be one of the new savings aspects of the company.

Market concerns

The automotive industry has seen increased global consolidation over the past two years, The New York Times reported. According to industry analysts, the consolidation is fueled by three major trends: brands growing in importance, manufacturers forging into difficult markets, and rising costs of technology. While many industry experts see the consolidation as inevitable and strategically beneficial, some analysts warn excessive consolidation could lead to diminishing choices and higher prices for consumers.

The Daimler-Chrysler merger is one of the few examples when the merger benefits the competitiveness of the market. Chrysler Corporation manufactures lower-range trucks, minivans, and sport utilities, when Daimler-Benz majors in high-priced vehicles. No significant overlap in production will take place. Since both of the companies specialize in different areas, neither of them will have to give up on some of their production. “There was no real overlap in products –they filled in each other’s blank spaces” said David Cole, the head of the University of Michigan’s Office for the Study of Automotive Transportation. In turn, this meant that there will be no decrease in competition in the market place, which is one of the main concerns of the Federal Trade Commission when a merger takes place. (In a horizontal merger, the acquisition of a competitor could increase market concentration and increase the likelihood of collusion. The elimination of head-to-head competition between two leading firms may result in unilateral anticompetitive effects).

Another concern of The Federal Trade Commission and European Commission is the possibility of monopolization of the market. The automobile market is very large and diversified. For example, July 1999 car sales in the USA for the three largest companies are as shown on the graph:

Even after the merger, Daimler-Chrysler is not capable of keeping such a huge market under control. As one can see on the above chart, Daimler-Chrysler (243420 vehicles) is on the third place in production after General Motors (422029 vehicles) and Ford Motor Co. (355765 vehicles).

In the case of Chrysler Corporation and Daimler-Benz, the hazard of competition decrease does not exist, because the companies produce different types of cars. There would be a decrease of competition if after the merger, one of the companies would have to give up some of its production plans and eventually consumers would be hurt. Instead, it will just intensify competition in the car manufacturing world. On July 24 and July 31 of 1998, the European Commission and the Federal Trade Commission, respectively, approved the merger of Chrysler and Daimler-Benz Corporation, and appearance of Daimler-Chrysler. This merger is classified as a “horizontal merger.”

In order to become the largest car-producing corporation in the world, Daimler-Chrysler has to acquire or merger with some other companies, and this is in fact, what Daimler-Chrysler is looking at right now. On March 10, 1999, Daimler-Chrysler broke off talks about buying a stake in Nissan Motor of Japan, but it has not given up. On March 22, 1999, Schrempp held negotiations with Japan’s Mitsubishi Motors about a possible merger. As it can be seen, the new corporation very actively looks for partners in Asia, but the question that might rise soon will be whether the next merger will be approved by the Federal Trade Commission.

Another fact that might alert the US government is that on February 25, 2000, General Motors Corporation, Ford Motor Corp. and DaimlerChrysler jointly announced that they are planning to combine their efforts to form a business-to-business integrated supplier exchange through a single global portal. Some view this fact as a slow movement towards market monopolization.

Facts:

German-American automaker DaimlerChryslter agreed on March 27, 2000, to buy a controlling 34% stake in Japan’ Mitsubishi Motors Corp. for 2.1 billion, extending its international reach.

The agreement gives DaimlerChrysler access to the Asian market and small-car expertise of Mitsubishi, Japan’s fourth-largest automaker. Carmakers are increasingly seeking cross-border alliances as overcapacity prompts them to cut costs through the sharing of parts and vehicle platforms with manufacturers in a range of markets.

DaimlerChrysler’s deal excludes Mitsubishi’s trucks division, which has an alliance with Sweden’s AB Volvo. Together DaimlerChrysler and Mitsubishi will have a combined market share of about 10.8% in Japan and 9.4% in other parts of the Asia-Pacific region. Daimler’s purchase gives it the right to veto board-level decisions at Mitsubishi.”[i]

New Corporation

Daimler-Chrysler provides a variety of transportation products and financial and other services. It operates seven business segments: passenger cars and trucks (Chrysler, Plymouth, Jeep, Dodge; 43% of 1998 sales), passenger cars (Mercedes-Benz, Smart; 23%), commercial vehicles (Mercedes-Benz, Freightliner, Sterling, Setra; 17%), aerospace (7%), services (6%), Chrysler financial services (2%), and other (2%).

Daimler-Chrysler Corporation is primarily active in Europe, North and South America and Japan and is continuing to expand in markets such as Eastern Europe and East and Southeast Asia (intensive negotiations with Asian companies are obvious evidences of that).

Another aspect of penetrating new markets is that developing new products, opening new stores and offices, hiring managers, and training stuff requires a lot of funds. There are two ways of raising these funds: internal and external. Internal funds come from Retained Earnings. External funds come from loans, bonds, issuance of common stock and other sources. The merger would increase the amount of money in Retained Earnings that could be used in an expansion program. Through the pooling of resources, DaimlerChrysler will be excellently placed to develop and introduce new products even more quickly into the markets, thus gaining an edge over competitors.

Achievements of the New Corporation

“DaimlerChrysler AG today reported a record operating profit of EUR 11.0/$11.1 billion in 1999, the company’s first full year of operations. This is an increase of 28% compared to the 1998 figure of EUR 8.6/$8.7 billion. Adjusted for one-time effects, principally the sale of debitel shares and restructuring expenses at Adtranz, operating profit grew by 20% to EUR 10.3/$10.4 billion. Operating profit thus outpaced revenues which rose by 14% to a record EUR 150.0/$151.0 billion.”

Recently, the German financial magazine “Capital” conducted a survey on the provision of shareholders’ information on the Internet. The overall winner was DaimlerChrysler, which was recognized as the best provider of company information on the Internet.

Survey of recent stock performance

Immediately after the merger, the stock price of the new company went up very drastically. The reason for this is that investors strongly believe in the future success of DaimlerChrysler.

Currently, the stock price is down. This fact can be explained by the general performance of the market, which is experiencing very sudden slumps. Many huge companies do not trade at all out of fear of prices drop. Below is the chart of stock price performance of the DaimlerChrysler since the merger.

Below is a valuation of DaimlerChrysler by analysts at Standard & Poor’s.

“DCX has fallen sharply from its early 1999 peak. The automotive sector has been out of investor favor for some time, with DaimlerChrysler contributing to the negative sentiment with its much lower than expected earnings in the second quarter. Despite DCX’s attempt to portray the divergence from expectations as mostly accounting and temporary items, the honeymoon for investors and DaimlerChrysler is clearly over. DaimlerChrysler has a strong balance sheet, with significant cash reserves available for the next industry downturn, as well as for strategic investments and alliances. With strong sales through September, we expect 1999 domestic automotive volume, led by minivans and sport utility vehicles, DCX strengths, to reach a record. Still, given negative investor sentiment and uncertainty in the company’s ability to meet financial objectives, despite a strong third quarter, we would not add to positions.”[ii]

Comments on some of the Financial Ratios of the New Corporation

As the ratios reveals new corporation by some of the ratios overcome industry average. Valuation ratios show us DaimlerChrysler is in better standing in comparison with the industry. Dividends payout ratio proves that the company pays more dividends than average, but I think it is not what investors expected and this lead to a drop in price of the stock.

Financial strength of the company in terms of LT Debt to Equity and Total Debt to Equity ratios is almost twice stronger than the average in the industry. Low return on Equity ratio might be explained by the fact that the company keeps a lot of cash for the purpose of new investment. In general, the company shows strong figures and this view is supported by Standards & Poor’s specialists’ statement. “DaimlerChrysler has a strong balance sheet, with significant cash reserves available for the next industry downturn, as well as for strategic investments and alliances.”[iii]

Government Concerned that...

One of the problems that can arise for the economies of the US and Germany is downsizing of some of the departments. For example, one company does not need two raw material purchase departments. In this case, the new company will need both of its departments because of different languages. The new company will provide more job opportunities for both countries. There are two reasons why this might be so:

1) Expansion plans will require more people to be hired for the new company

2) Because of different languages, much of the documentation has to be translated back and forth.

This figure shows expansion so far:

Since both companies are introduced to new markets and new opportunities, they will have to increase their production capacities in order to meet demand in the new market. This factor will require more labor ( as can be seen from the above graph), so more people will be hired. Government does its best to support companies that can provide more employment opportunities for the population, because this contributes to the solution to the unemployment problem. Simultaneously, with the increase of labor involved in the production process, there will be an increase in gross domestic product.

Environmental Issues in the New Corporation

Protection of the surrounding environment and conserving the natural foundations of life should be one of the main concerns of every company and every human being on the Earth. Due to lack of attention to these issues the current environment conditions of the earth have changed dramatically for the worse.

DaimlerChrysler is one of the world corporations that pays a great deal of attention to environmental issues. Its management clearly understands the importance of these issues in the long run. The following facts speak up for themselves:

“DaimlerChrysler and the European Nature Heritage Fund (Euronatur) presented an upbeat review of ten years of environmental cooperation at a press conference in Berlin today. "The concerted efforts of DaimlerChrysler and Euronatur have decisively moved forward environmental protection and habitat security in important large natural landscapes," a joint statement said.[iv]

“On March 29, 2000, DaimlerChrysler’s manufacturing facility in Toluca, Mexico, introduced to production a new wastewater recycling facility. The recycling facility will conserve precious water resources and reduce the potential for pollution by totally recycling all of the water used in the plant.”