Lets Try This One. More. Time.

Fool me once, shame on you. Fool me twice, shame on me. Fool me thrice, and call me Chrysler?

The automotive industry has been abuzz with discussion of a potential merger between two of the larger firms in the industry. Earlier this year, Fiat-Chrysler CEO Sergio Marchionne reached out to the CEO of General Motors, Mary Barra and suggested the two companies merge.

As details of the suggestion became public, Marchionne made his position clear. Marchionne argued that R&D costs in the automotive industry are simply too high, and that mergers across the industry are coming. General Motors, for their part, did their best to appear equal parts surprised, confused, and uninterested by the offer. Barra recently announced that GM stockholders seemed decidedly listless in regards to the potential deal.

While Marchionne has done a number of positive things for Chrysler, I would argue that this merger, were it to occur, would likely do more harm than good for both firms. Not only would Marchionne’s dreams of reduced R&D costs likely never be realized, but Chryslers own experience with mergers should suggest that shared management structures rarely end well for the company.

On the surface it seems quite intuitive. Company A spends billions of dollars in R&D every year developing cars, and company B spends billions a year doing the same. Slap them together and they could develop the same stuff with half the billions, right? While the intuition is pleasant, a study of 31 mergers by Cassiman et al. (2005) suggest that horizontally merged firms with similar R&D departments actually reduced R&D. “When merged firms are technologically substitutive, key employees tend to leave more often, the R&D portfolio becomes more focused, the R&D horizon becomes shorter and internal funds available to R&D decrease.”

 

In the case of Chrysler and GM, who both spend significant amounts of money developing their full size pickup trucks (The RAM and Silverado), it is unlikely that the merger would either reduce costs or produce significantly higher quality trucks for the same R&D input.

Marchionne has another thing working against him, history. In my lifetime alone Chrysler has changed ownership three separate times, usually with less than stellar success. The most recent merger with Fiat automobiles, completed in 2012 does not seem to be going terribly, however the investment firm Cerberus, who bought the company at the pit of the recession, handled the company less than wonderfully. Cerberus, a company normally well equipped to swoop in and clean up management structures and flip firms for a profit, was not even remotely prepared for the massive monster that was the Chrysler they inherited.

Why was the company Cerberus inherited such a mess? Because the previous owner, Daimler-Benz had wrung Chrysler dry. In 1998 Daimler-Benz merged with Chrysler, promising huge synergies and massive R&D benefits for both firms. A merger of equals it was called. The reality differed significantly from the sales pitch. Daimler ran the show, took what it wanted, gave Chrysler very little, and in general left Chrysler out to dry. In the end the merger left Chrysler with nothing but a bad reputation a billions lost.

Marchionne is an impressive businessman, and one who seems to have done right by Chrysler thus far, but he has both a mountain of history, and a battle against empirically evidence suggesting systematic overestimations of synergy savings to overcome if he wants to make a GM-Chrysler merger work.

2 thoughts on “Lets Try This One. More. Time.

  1. If Chrysler merged with GM, what would have to happen to save costs? Are there some alternatives short of a merger that might allow R&D budgets to be stretched for the industry as a whole? Tyler hints at this; spell it out!

    We can take a step back and ask whether the merger of Chrysler and Fiat looked different / has turned out well? If so, why then and not (prospectively) with GM?

    • Other mergers can provide data on whether cost savings or marketing synergies are realistic. Tyler notes the Cassiman paper. But there’s data if we merely stick to Chrysler.

      For example:
      – The Jeep was developed for the Army in 1940, prior to the entry of the US into the war, with Willys-Overland as contractor;
      – Willys sold Jeep to Kaiser in1953;
      – Kaiser sold Jeep to American Motors in 1970 [this was after the 1954-1962 tenure of George Romney as CEO, who became Governor of Michigan in 1963];
      – Renault in turn bought a stake in AMC in 1980 and full control in 1983;
      – Renault sold AMC to Chrysler in 1987;
      – As noted, Daimler then bought Chrysler in 1998;
      – Again as noted, Cerberus bought Chrysler in 2007;
      – Chrysler entered bankruptcy in April 2009, and was briefly the bankruptcy court in 2009;
      – Fiat then bought “New Chrysler” from the bankruptcy creditors in 2009, and as of October 2015 still owned Jeep.

      Most Jeep production remains in Toledo, where it has been for the past 75 years. The current plant is about a mile east of the historic plant, begun in 1904 to make bicycles, and which made jeeps from 1941 to 2006. It stood at the intersection of Jeep and Willys but has since been demolished, and was the oldest assembly plant in the US. Does that change your sense of possible cost savings from an acquisition? Or is there no particular benefit to a merger in the ability to build a new plant in place of a very old one?

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