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Zetsche to keep Renault pact ‘on Earth,' avoid Chrysler replay

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Zetsche to keep Renault pact ‘on Earth,' avoid Chrysler replay

Automotive News Europe -- April 8, 2010 06:54 CET

BERLIN (Bloomberg) -- Dieter Zetsche says he has learned from Daimler AG's failed merger with Chrysler and will make a linkup with Renault-Nissan pay off by focusing on cost savings and car development projects rather than control.

A 12-person group overseeing the partnership will have equal representation from each of the three companies. The alliance with Renault SA and Nissan Motor Co. is sealed by a “symbolic” 3.1 percent share swap rather than a full merger.

Zetsche was sales chief of Daimler-Benz AG when it bought Chrysler in 1998. Juergen Schrempp, CEO at the time, masterminded the combination with the third-biggest U.S. carmaker to create a global manufacturer that included an attempt to absorb Mitsubishi Motors Corp. In the nine years that followed, DaimlerChrysler lost $12.6 billion in market value. BMW AG's value more than doubled.

“That was a marriage in heaven but didn't end up in heaven,” Zetsche, CEO of Daimler, told reporters yesterday after a press conference to announce the new alliance. “We start on earth this time and stay there.”

Zetsche and Carlos Ghosn, who runs Renault and Nissan, want 4 billion euros ($5.3 billion) in savings and additional revenue from the pact by 2015 by sharing development costs for small cars and engines.

Hyundai, Mitsubishi

Zetsche, who ran Chrysler from 2000 to 2005 and took over the top job at Daimler from Schrempp in 2006, handed control of the U.S. automaker to Cerberus Capital Management LP in May 2007. Zetsche blamed limits on cost savings and technology sharing for the failure of the merger, saying U.S. consumers wouldn't pay extra for Chrysler vehicles supplied by its Mercedes-Benz luxury brand.

Daimler sold a stake in Hyundai Motor Co. in 2004 following management squabbles with the Korean carmaker. It disposed of the Mitsubishi stake, which rose as high as 37 percent, in 2005. The holding was unwound after two years of sales declines at the Japanese carmaker, which admitted to hiding defects, pushing it to a record 215.4 billion yen ($2.3 billion) loss in the year to March 2004.

Now Daimler needs to boost its small-car operations in response to regulatory pressure to cut carbon-dioxide emissions, or face fines. Renault wants to improve capacity utilization and coverage of fixed costs at its French plants, where it is politically difficult to fire workers.

‘Past Mistakes'

“The chances are clearly better that Daimler will make it work because the company has learned from past mistakes and is taking a more rational approach,” said Stefan Bratzel, director of the Center of Automotive at the University of Bergisch Gladbach, Germany. “Instead of a marriage in heaven, it's a relationship of convenience that can grow into something more.”

Under yesterday's accord, the automakers will develop common parts and design for a new generation of Renault Twingo and Daimler Smart small cars to go on sale in 2013 with conventional and electric powertrains.

Cooperation on engines and transmissions will extend further, with Renault-Nissan providing powertrains for a future range of Mercedes-Benz compacts. Daimler in turn will make its larger gasoline and diesel engines available for Nissan's luxury Infiniti brand.

“Mercedes doesn't feel threatened by Renault in higher-end cars, and Renault doesn't feel vulnerable in smaller cars,” said Simon Empson, managing director of U.K. auto retail Web site Broadspeed.com. “From that point of view, it's probably quite a good fit.”

“Our weakness is their strength and their weakness is our strength,” Ghosn said in an interview. “Our clients aren't prepared to pay the prices that Mercedes customers do. That's why there's no mistrust.”


Still, the 4 billion euros in savings, split between Daimler and Renault-Nissan, may be too ambitious, said Juergen Pieper, a Frankfurt-based analyst with Bankhaus Metzler, who estimates Daimler's savings will probably reach only 500 million euros over the next five years.

By mandating that the next-generation Smart and Renault Twingo be based on Daimler's rear-wheel, rear-engine design, the Mercedes-Benz manufacturer may raise the question of how the brand will win the scale needed to justify a “complex arrangement,” said Paul Newton, an analyst with IHS Global Insight in London.

“Daimler can't afford the eight years it took for Renault and Nissan to work out their relationship, and the Mercedes maker still needs to prove that its corporate culture has changed sufficiently to accept partners,” Newton said.

For Ghosn as well as Zetsche, the agreement may also reflect a new approach to consolidation that draws on the lessons of past failures.

No Haggling

Renault and Nissan tried to set up an alliance with the former General Motors Corp. in 2006 to save costs by sharing production, development and purchasing. Talks between Ghosn and former GM CEO Rick Wagoner ended without an agreement. Haggling over savings “was one of the reasons that our discussions with GM failed,” Ghosn said.

Renault-Nissan and Daimler struck agreement on a first round of joint projects without revealing how much they expected to benefit or negotiating an equitable redistribution of synergies, Ghosn said yesterday. “I don't know what Daimler's synergies are -- they haven't shown me their accounts and I haven't shown them ours.”

A cross-shareholding underpins Renault and Nissan's 11- year-old alliance. Renault owns 44 percent of Nissan, which in turn owns 15 percent of Renault. Renault, France's second-biggest carmaker, bought a controlling stake in Nissan in 1999 when the Japanese automaker was nearing bankruptcy.

‘Arms length'

The pact with Daimler may be the first of other similar “arms-length” cooperation deals among carmakers determined to maintain autonomy while sharing more costs, Ghosn said. Renault-Nissan is open to further partnerships as it seeks opportunities in new markets and product areas, he said.

For Zetsche, who had his employment contract extended through 2013 seven weeks ago, to prove that the Renault-Nissan linkup works may be his top priority in the next years.

“Daimler doesn't have the option to fail again,” said Bratzel, the Center of Automotive director. “It's existentially critical that Daimler makes its small cars a success.”

Read more: http://www.autonews.com/apps/pbcs.dll/article?AID=/20100408/COPY/304089978/1193#ixzz0kWOZJe9D

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