Daimler and BMW Get Cozy

The German automakers have been negotiating for a year on a joint procurement deal that could save them each billions—and maybe someday lead to a merger

If you want to see the plight of the ailing automotive industry at the Geneva Motor Show, just visit the stands of the US companies. Take Chrysler: The Detroit-based carmaker has even pinched pennies when it comes to the artificial waterfall that the company usually sets up at trade shows. Now the US brand is presenting its cars as if they were on a parking lot.

But it's another story altogether with the Germans.

Volkswagen (VOWG.DE) has hired pop star Pink to sing the praises of the new Polo. And Daimler's flagship brand Mercedes-Benz has illuminated its new E-Class with huge rows of floodlights. Daimler (DAI) CEO Dieter Zetsche regards the biggest competition as coming from inside Germany but even there he doesn't seem very worried. Munich-based competitor BMW (BMWG.DE) has replaced Mercedes-Benz as the best-selling brand—so what? BMW has "also toned things down," says Zetsche. What about Audi which is moving up in the rankings and selling an increasing number of luxury cars? "Puffing themselves up."

Daimler is Daimler, says Zetsche. If any brand can weather the crisis alone, it's Mercedes-Benz. After all, a car show is primarily just that: a big show and Zetsche is a show master. In real life, however, he has been negotiating with BMW for over a year because Mercedes-Benz needs a partner.

Both companies plan to present the results of their talks soon: BMW will purchase components like batteries, headlamps and speedometers together with Daimler. With a combined purchasing volume of over €50 billion ($63 billion), this should allow them to save hundreds of millions of euros over the short term, and even billions annually over the medium term.

"This cooperation will bring us closer together", says a BMW manager, "and who knows: maybe something more will come of it."

The spree of talks between Zetsche and BMW CEO Norbert Reithofer has focused on more than just sharing engines and platforms and procurement. For nearly a year, they have been discussing a deal that could change the industry: a share swap between the two companies. This would create a corporate group that would dominate the premium car segment in the worldwide automotive industry.

They have even sounded out Chancellor Angela Merkel's chief of staff, Thomas de Maizière, to find out the German government's position on a possible merger of the two traditional big name companies. The carmakers wanted to know if leaders in Berlin would override any objections that might be raised by the country's anti-monopoly watchdog, the Federal Cartel Office. Daimler wanted 7 percent of the BMW shares, and BMW was to receive the same proportion of Daimler shares.

Negotiations between Daimler and BMW were based on the recognition that both companies could be too weak to go it alone in the future. They have to invest more over the coming years because, in addition to conventional models, they also need to develop electric cars and hybrid vehicles. At the same time, profits are declining now that both companies have ventured into the less prestigious compact car business, where they are hardly making any money with the Smart and A and B Classes on the Daimler side, and the 1 Series and the Mini on the BMW side.

This has prompted Daimler and BMW to explore using joint platforms for compact cars. However, even their combined sales in this segment are not enough to make this worthwhile. They can only benefit from these cost advantages if they join forces with a major manufacturer of compact cars. But that prospect appears totally unrealistic.

Different Corporate Cultures

Then they looked into whether they could jointly engineer a small four-cylinder engine. BMW is already cooperating here with Peugeot.

Unfortunately, the French didn't want to accept Daimler as a third party in the alliance. And so nothing came of that, either.

Zetsche was angry with Reithofer because he had failed to convince the French to accept Daimler—and the BMW CEO suspected that the Mercedes side had leaked details of the talks to boost sagging Daimler shares.

The two companies have been fierce rivals for decades, and attempting to forge closer ties between them has turned out to be a difficult endeavor. At times the carmakers resembled two porcupines trying to exchange tender caresses.

Time and again, BMW engineers explained why they couldn't adopt the developments of the potential partner. On other occasions, Mercedes managers used the same argument for their rejection. BMW CEO Reithofer said at a board meeting: "I don't want to hear any more excuses, I want to see results."

Two fundamentally different corporate cultures are at odds here. Daimler has witnessed a dramatic loss in share value and finds itself in danger of being taken over because it lacks a reassuring major shareholder. That's why the Stuttgart-based company is looking to score quick successes. By contrast, BMW can rely on the Quandt family as a stable main owner that is interested in long-term development. This primarily means one thing: BMW can maintain its independence.

Johanna Quandt, her son Stefan and his sister Susanne Klatten—who together control over 46 percent of BMW shares—therefore reject any deal that would lead to a merging of capital between the two companies. They believe this would only help Daimler. What's more, the family is afraid that if Daimler were to come on board in Munich, it could extend its influence. After all, the Stuttgarters quickly took control of key positions following their merger with Chrysler back in 1998.

So the capital-interlocking plans fell through in the end. BMW is now studying whether it can expand its cooperation with Peugeot or launch a new one with Honda. But the Munich-based carmaker will continue to pursue a closer working relationship with Daimler. Only instead of kicking off with a big bang, it will begin more modestly with a joint procurement deal.

Translated from the German by Paul Cohen

Provided by Spiegel Online—Read the latest from Europe's largest newsmagazine

[businessweek.com]