EMERGING MARKETS ANALYSIS: Chrysler under Cerberus
Divide or conquer? Does Chrysler's future lie with Cerberus - or an emerging markets investor? Mark Bursa investigates what is likely to happen to the bits of DaimlerChrysler in China and India - and wonders whether Chrysler's new owner is in for the long haul.
As the dust settles on Cerberus Capital Management's takeover of Chrysler, lawyers in Auburn Hills and Stuttgart are trying to unscramble some of the more entwined parts of the DaimlerChrysler business.
It's true that there were fewer synergies between Mercedes-Benz and Chrysler than might have been expected after a decade of cooperation. But in some of the former group's international operations, notably in China, there were operations where both the German and US divisions had an involvement.
The global elements of the DaimlerChrysler empire were considered as 'jewels in the crown' - certainly areas of the business with genuine growth potential compared to the static European business and the US operations, which are still in need of some judicious pruning. So who gets what in the shake-out?
The group's long-standing Chinese operation is a joint venture with Beijing Automotive Industry Holding (BAIH), based in China's capital. This was one of the very first foreign ventures in China, originally known as Beijing Jeep and pre-dating even Chrysler's involvement in the Jeep brand.
In September 2003 DaimlerChrysler signed a US$1.1bn deal to make Mercedes C-class compact sedans and E-class mid-sized cars alongside various Jeep SUV models already built by BAIH. Subsequently, the Chrysler 300C sedan has been added, and in late 2005 the Beijing Jeep business was renamed Beijing Benz DaimlerChrysler Automotive (BBDCA), and a new plant has been built.
And this is not the only Chinese venture. DaimlerChrysler set up a deal to build Chrysler minivans in southern China in a separate license agreement with another Chinese firm, Southeast Motors. And in 2003, another US$245m JV called DaimlerChrysler Vans China, located in Fuzhou City, was set up with two partners, China Motor and Fujian Motor Industry Group. This makes Mercedes Sprinter, Vito and Viano models with a capacity of 40,000 vehicles.
On top of these is the much-vaunted venture to build the Dodge Hornet in partnership with Chery. Fears that this plan would collapse in the wake of the Cerberus deal appear to be unfounded judging by noises coming from Chery, which dismissed initial German press reports that the deal was being put on hold.
It will need a certain amount of renegotiation, however, as realistically the agreement needs to be with Cerberus, rather than Daimler. The Hornet is designed to be sold in the US, and there's not a lot in the deal for the new Daimler business. And given the attractiveness of China, it's hard to see Cerberus not seeing the deal as of value.
Chery also has much to gain from the deal, which still has not been approved by the Chinese authorities. But Chery is seen as a rising star in Chinese business, and it's unlikely that its plan would be derailed by red tape.
So reassigning the Chery deal to Chrysler and the DaimlerChrysler Vans business to Daimler is easy to see. But what of the cumbersomely-abbreviated BBDCA? The roots of this business are with Chrysler, but the core of its business now is building Mercedes cars - so BAIH's partner is likely to be German rather than American.
However, Cerberus will surely not want to lose access to the Chinese market for its hot-selling 300C. And remember that Daimler is retaining a minority interest in Chrysler, so it's likely some accommodation will be reached, possibly assembling the Chrysler models under licence, as BBDCA does already with some Mitsubishi models, a legacy of the failed attempt to bring the Japanese firm into the DaimlerChrysler alliance.
It would cause BAIH problems if the venture was split into two separate deals, as the Chinese company has another JV with Hyundai - and Chinese rules forbid manufacturers from holding more than two alliances.
Elsewhere in the world, the situation is perhaps a little simpler. DaimlerChrysler India, based in Pune, is a 100% subsidiary of DaimlerChrysler and builds only Mercedes models. It'll probably revert back to its pre-November 2001 name of Mercedes-Benz India.
What remains of the South American manufacturing operations - mainly the Juiz de Fora plant that now makes the old-style Mercedes C-class coupe - will stay aligned to Daimler. Many of the old Chrysler operations in South and Central America were closed in the last round of shut-downs in 2001.
So while on paper Daimler looks like retaining most of the former DaimlerChrysler operations in emerging markets, Cerberus will want to retain a foothold there too. Chrysler CEO Tom LaSorda has already said he was on the prowl for global partners. And that's not just because of the market potential.
As a private equity firm, Cerberus is unlikely to be a long-term strategic partner for Chrysler. Ultimately, the company will want to make a big return on the US$7.41bn it has shelled out on the struggling US automaker. And there's only one way to achieve this. Cerberus will have to turn the company round and sell it on. Many analysts believe Cerberus will hang around for no more than five years. And the potential buyers five years down the line are likely to be companies based in emerging markets.
Indeed, there were serious enquiries from Asian automakers - though they fell short of Cerberus' proposals. In February 2007, Indian news media had speculated that Tata might acquire Chrysler for a nominal fee, following up the company's opportunistic purchase of Anglo-Dutch steel group Corus.
Chinese companies too are keeping a close watch on Cerberus. Larger Chinese automakers such as Shanghai Automotive Industries Corp (SAIC), First Automobile Works (FAW) and Guangzhou Automobile Industry Group (GAIG), the only Chinese automaker to apply for a sales prospectus, have said they would be interested in parts of Chrysler. FAW would like the Chrysler brand, seeing its potential in luxury brand-hungry China, but not the truck operations. But for now the company would be too large for them to digest.
This is wise thinking - you only need to look at the struggles of Nanjing Automobile in its bid to assimilate MG Rover - a small fish compared to Chrysler. The cultural gulf is still enormous, and understanding foreign brands is a desperate weakness of almost all Chinese businesses.
But in five or ten years time, might Chinese companies be stronger, with more global attitudes? Might a new generation of managers, schooled in western ways, have risen through the ranks? Or might Chery's relationship with Chrysler have blossomed to such an extent that the smaller, but highly ambitious, Chinese firm might even back into Chrysler?
These are realistic scenarios - as would be a firm bid from Tata, a company that would be equipped today to take Chrysler over. And there are other potential suitors too, for example in Russia. But perhaps fears that an emerging markets automaker might move in down the line will prompt an established western or Asian automaker to make a move. Chrysler would be a good fit for any number of car companies, especially those without a major market presence in North America, or those without credible prestige brands like Chrysler or Jeep.
So the companies that wouldn't take the risk in 2007 might be prepared to let Cerberus get on with the turnaround. If Cerberus succeeds, and offers a leaner, profitable Chrysler to the highest bidder in, say, ten years' time, it'll command a high premium for the company. But paying a higher price for a better business could also be a good deal for an established car maker.
If Cerberus fails, there could be bargains to be had in terms of individual brands or divisions in a future fire sale. Whatever happens, it's certain that the bidding will be fierce next time Chrysler is offered for sale - and surely there will be a next time in the not too distant future. As for the eventual winner, the field is wide open.
Mark 'Coolbear' Bursa