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
