The Coastal Post - August 1999

A U.S. Auto Industry Gambit?

By Antonio R. Serna

It is not always that a large American corporation that runs into serious financial problems is bailed out by the U.S. government with American taxpayers' money. It is not always that the American public rallies behind an ailing corporation and buys its products simply in the spirit of patriotism. It is not always that an American executive who saves his moribund company from total bankruptcy is considered by a grateful country for the highest post of the land in recognition of his entrepreneurial skills. And it is not always that an American corporation which symbolizes the very essence of this country's ability to rise above difficult challenges is sold out to no less than the country's leading industrial competitor. Such is the sad and curious story behind the Chrysler Corporation's recent sellout to Daimler-Mercedes Benz of Germany.

Serious-minded Americans who can still put a premium to patriotism over financial gain have somehow maintained a cynical view of the celebrated takeover. Jergen Schremp and Bob Eaton, the chief architects and top men of Daimler-Mercedes Benz and Chrysler, respectively have defended the historic transaction as a healthy move to keep the two auto giants competitive in the world market. There was hardly any opposition to what initially appeared as a merger from either American and German stockholders, mainly because of the equitable distribution of shares in the newly-formed Daimler-Chrysler Corporation. Both had stakes of 44 percent apiece. Furthermore, the Chrysler stockholders got a good deal, a 50 percent premium on the going market price, while Daimler-Mercedes Benz shareholders improved their price-earning multiple from 20 to 10.

The men, however, who really made the modern Chrysler what it is now were curiously given gigantic golden parachutes that would be impossible not to use for an early bailout. Starting with the CEO, Bob Eaton to Thomas Stallkamp (who devised the company's lauded supplier relationship), to Tom Gale (Chrysler's vehicle design whiz) and many others, their stock option packages will bloom into huge multi-million cashouts come November 18, should they elect to leave the new company. Without these movers, the new owners of Daimler-Chrysler will be left with Chrysler's existing models and those in the pipeline, its brand names, manufacturing facilities and the inevitable labor relations problems. These represent an ability to build 18 million more cars than what the global marketplace is estimated to absorb, assuming that the Americans do not all of a sudden lose taste for a product that was once theirs and is now totally German.

Facing such a prospect, it is not surprising that a good number of knowledgeable Chrysler executives are beginning to defect. Mr. Bob Lutz had already left to run battery maker Exide. Chrysler's manufacturing

genius, Dennis Pauley, took early retirement shortly after the sellout. Other lesser but still key movers of Chrysler, the "can do" crowd, recently jumped ship to Ford with most of Chrysler's minivan expertise with them. It is not clear whether all of this is happening by chance or by design. But the Germans apparently understand that Chrysler's manufacturing infrastructure is worth less than its book value. What makes a car company worth owning is its ability to design and build cars that sell in a saturated market. If the Chrysler brain drain continues unabated, its owners will lose its proven expertise in marketing cars to the world consumers that Daimler-Mercedes Benz, with all its proven German genius in the international auto industry have so far failed to serve.

This phenomenon is not escaping the notice of current Chrysler stockholders. In barely six months, the Americans have bailed their stakes in the new corporation from 44 percent to 25 percent, while the Germans, as a consequence, are now in control of 63 percent. The Americans are realizing that what Daimler-Mercedes Benz bought ostensibly as a valuable asset will in the long run prove to be a substantial liability if the cost of labor is not offset by the company's ability to crank out cars that can be sold competitively and in volume to an untapped market. Shaving off that labor cost from the top as the Germans are now doing will, on the other hand, prove counterproductive in the long run. It can be likened to buying the five-time NBA champions, the Chicago Bulls, without Michael Jordan.

It is no wonder that the U.S. government, guided by the shrewdest think tanks available in the capitalist world, have allowed the Germans to take over the weakest of the big three giants in the U.S. auto industry. In chess, we call it a brilliant gambit. In effect, the move strengthened the remaining two American auto manufacturing giants at the expense of their strongest European competitor. We may no longer see American GIs driving the ubiquitous jeep in the next armed confrontation with Germany. The Germans now own it. But who cares, we now have the bigger, more powerful and more versatile hummers.

The toughest hurdle that the Germans have to overcome in their hostile takeover of Chrysler is this deeply ingrained idea in the American mind that Chrysler belongs to the American people. And it is what it is because of American ingenuity and patronage. Those people did not go along with the takeover. And they will never allow the Germans to use something American against Americans, in war or in peace.

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