IT IS ONE OF ROBERT EATON'S favorite stories. Early in his tenure as chairman of Chrysler Corp., he took his top managers on a retreat. The company was cruising: its new cars were winning raves, profits were soaring and the press was praising Eaton for turning Detroit's longtime laggard into a nimble competitor. Eaton stood before his staff and read from the headlines lauding Chrysler as the epitome of managerial excellence. There was just one catch. ""The stories were all more than 10 years old,'' Eaton said with a smile, recounting the tale to NEWSWEEK last month. Throughout Chrysler's history, he'd determined, such gushing invariably signaled a peak, and soon afterward the Big Three's scrappy runt would swoon to near bankruptcy, the result of being too small and too dependent on the U.S. economy. That history has obsessed Eaton during his six years in the corner office, and he finishes this story the same way every time, pledging an end to Chrysler's near-death experiences: ""We've decided we're going to quit getting sick,'' he says.
Last week came the world's biggest booster shot. Chrysler's transatlantic marriage to Daimler-Benz--the biggest blending of metalbenders in history--creates a $130 billion carmaking colossus armed with the world's broadest product lineup. The deal marks the end of a storied American company, but perhaps the beginning of a wave of auto-industry mergers. On Wall Street there's talk of Fiat, Peugeot, Renault or Nissan being in larger companies' sights; in Detroit the remaining Big Two, Ford and General Motors (which between them already own Jaguar, Aston Martin and pieces of Mazda, Kia and Saab), are exploring even closer ties with Korean carmakers Kia and Daewoo. The same day DaimlerChrysler was born, Volkswagen beat out BMW in the race to buy Rolls-Royce. Fueling all of this action are simple forces. Cars are fabulously expensive to design and build; bigger companies more easily bear those costs. And as cars become similar--more reliable, more alike in designs and options--brand names matter more, and it's easier to buy established names than to start from scratch.
But there's more to this deal than the race to collect hood ornaments. Witness the man-on-the-street shrugs, the lack of uproar at the thought of the company once saved by a congressional bailout being subsumed by Germany's flagship company. On Wall Street, analysts were too busy exploring the synergies--complementary product lines, a great geographic mix--to worry about nationalistic concerns. In Detroit, union officials and factory workers expressed guarded optimism; local reaction focused more on the payday for Chrysler shareholders and jokes about the Germans' arrival. (Lederhosen on Casual Friday?)
The booming U.S. economy explains some of this. A decade ago trade politics were hot; today they've all but disappeared from the radar screen. With 4.3 percent unemployment and 3 percent annual growth, it's hard to get too excited about trade deficits and foreign ownership. But prosperity isn't the only salve. Slowly it's sunk in that borders don't mean as much as they used to. Driving a Toyota in Detroit was once an invitation for vandalism; now RAV4s crowd the Chrysler Freeway. ""I don't think people are motivated by the nationality of the makers of the vehicles they buy,'' Ford chairman Alex Trotman remarked last fall. That's true in many product categories. ""The globalization we've all talked about is being better understood by people,'' Commerce Secretary William Daley told NEWSWEEK. ""They're not as frightened by it. They understand it's going to continue.''
Most of the time we don't even see it happening. Last year a stunning $411 billion changed hands in cross-border deals that won little fanfare on the nightly news. In some industries--pharmaceuticals, for instance--it's been years since there were any detectable national borders. Think fast: what nationality is SmithKline Beecham or Hoffman LaRoche? (Answers: British and Swiss.) The force that pushed the pill-peddlers together is the same one propelling the automakers. Although a new antibiotic and a new sedan have little in common, both require years of expensive R&D, and big-time investments are best made by big-time companies. As industries consolidate, companies inevitably run out of homegrown partners. Take the U.S. auto industry: it once contained dozens of companies, like Plymouth, Buick and Lincoln, before they congealed into the Big Three. ""Every decade there's been a halving of the number of automakers,'' says consultant John Harbison of Booz Allen. ""Now we've got a level of concentration--one or a few in each country--where you need to do cross-border deals to achieve the same thing.''
For Chrysler, the urge to merge is nothing new. During the '80s chairman Lee Iacocca explored deals with everyone from Ford to Fiat to BMW. Those deals never materialized, in part because no one would risk buying the teetering carmaker. ""We weren't exactly the prettiest lady at the beauty contest,'' says a former board member. When Eaton succeeded Iacocca in 1993, the new boss and his sidekick, Robert Lutz, sparked a corporate renaissance. By the mid-'90s Chrysler designed cars quicker and more profitably than rivals, and had replaced its dowdy K cars with a lineup that looked downright stylish. But Eaton, like other auto barons, believes the world needs a few big carmakers instead of two dozen smaller ones. That's especially true for Chrysler, which has had virtually no success selling its cars outside North America. Quietly, the hunt for a partner continued.
At Daimler-Benz headquarters in Stuttgart, chairman Jurgen Schrempp could sympathize. Like Chrysler, his Mercedes car division had limited growth potential. The brand's tony luxury image prevents a big move into the mass market, and its production base in high-cost Germany means it could never be a low-cost producer. If there was doubt Mercedes could profit from expansion, it disappeared with the arrival of the M320, its hot sport utility. But doing more projects alone would be a slog. Schrempp recognized that Chrysler, the leader in minivans and sport utes, would give Mercedes expertise in the booming light-truck market and a huge beachhead in North America. He decided to make his move.
Schrempp approached Eaton about a deal in January at Detroit's auto show. In February Chrysler's directors were clued in to the talks. Last Wednesday Eaton led Chrysler's board meeting by telephone from London to approve the deal. The terms: the two companies will be merged in a pact that values Chrysler stock, which has hovered in the low $40s, at nearly $60 a share. Eaton and Schrempp will share the chief executive's job until 2001, when Eaton will step down. Managers will shuttle between the two headquarters in Stuttgart and Michigan. In accordance with German law, union members will hold seats on the supervisory board. The last obstacle was deciding the new company's name: Chrysler-Daimler-Benz or Daimler-Benz-Chrysler? Says Eaton: ""We decided DaimlerChrysler sounded classier.''
As they unveiled their ""marriage made in heaven,'' Eaton and Schrempp promised to build better cars, conquer new markets and cut $3 billion in costs--all without layoffs. But beneath the hoopla, big questions remain. Despite the co-CEOs' pledge that the merger will help Chrysler boost sales in Europe and increase Mercedes' share in the States, they're short on specifics. When NEWSWEEK asked Schrempp to explain this, he talked vaguely of Chrysler's ""know-how'' and back-office prowess. Even dealers don't get it. ""As a Mercedes dealer, I don't see how it will help us or hurt us,'' says Hani Nassif of Downtown L.A. Motors. Ditto in Europe, where Chrysler's line of gas-guzzling trucks and a reputation for dubious quality won't win legions of buyers anytime soon.
The same goes for the folks who man the cubicles inside each company's headquarters. Chrysler's team is renowned for informality; many observers fear the Germans will stifle their creativity. ""I still hear a lot of complaints from U.S. subsidiaries of German and Japanese companies,'' says management guru Michael Hammer. ""My worry is that Chrysler is overwhelmingly the most innovative auto company in the world. What's going to happen to those operating methods?'' Gerald Meyers knows about such clashes firsthand: as chairman of American Motors in the '80s, he merged with French-based Renault and became co-chairman. He says such arrangements sound great until there's conflict over, say, whether to build a new Jeep. ""The day comes when there's a disagreement, and it's done the way the controlling company wants,'' he says. ""Chrysler will face that day.''
In a postdeal interview with NEWSWEEK, Eaton downplayed such concerns. Innovation comes mainly from small teams of designers and engineers, he says, and ""they simply aren't going to see much change.'' As for cultural problems, ""my German is very, very poor,'' he admits, ""but I had no problems'' managing GM's German subsidiary in his last job. Maybe he's right. One reason we no longer fear globalization is that it's often a codeword for Americanization. This deal happened, after all, because Daimler's desire to sell U.S. stock led it to mold its financial system to our model, and the new company has already mandated English as the language for meetings. Despite fears of German domination, who knows? Maybe the Americans will win out once again.
Michael Mindel of Corte Madera, Calif., sure hopes so. This month he almost bought a new Mercedes sport utility. He loved the design and handling, but the deal hit a snag: the cupholders. ""They're so shallow that if you take a quick turn, your hot coffee is going to fly all over the car,'' he says. Germans disdain Americans' love for eating and driving, and therefore put little effort into such conveniences. Chrysler, meanwhile, is renowned for designing rolling refreshment stands; its Town & Country minivan has more than a dozen receptacles that accommodate everything from juice boxes to Big Gulps. Inside Chrysler, they're already preparing to ship those designs east. Which goes to prove: synergies can be big or small. It's a big world. But even in a global economy, success can come down to small things.
A WORLD-CLASS MERGERDaimlerChrysler's combined market share in sales of cars and trucks worldwide boosts it into fifth place
CHRYSLER'S ROUGH ROAD: HOW AN EARLY DOWNSHIFT . . .It isn't easy being No. 3. Chrysler's frequent brushes with disaster haunt chief executive Robert Eaton. The union with Daimler-Benz would mean the disappearance of an American industrial icon--but may save it from a past Eaton vows never to repeat.
1923: Walter Chrysler becomes president of ailing Maxwell Motors. Introduces the Chrysler and in 1925 renames the company after himself.
1928: Chrysler buys Dodge, rolls out low-priced Plymouth and upcale De Soto
1933: Chrysler's sales top Ford's; Walter Chrysler retires two years later. Company survives Depression better than other automakers.
1942-50: Converts to war production during WWII. Retains old models; loses market share and slips to third place by 1950.
1960s: Inflation and foreign-car imports hurt U.S. automakers. Chrysler overstocks larger vehicles. Reports $4 million loss in 1969.
1970s: Sales tumble as Chrysler misreads public taste, offering gas guzzlers during Arab oil embargo. More Americans turn to Japanese imports.
1978: Facing bankruptcy, company negotiates $1.5 billion federal loan guarantee. Lee Iacocca becomes CEO. Company loses $1 billion.
1979-80: Huge losses reported: $1.1 billion for 1979 and $1.7 billion for 1980.
. . . LED TO A LONG HISTORY OF NEAR-DEATH EXPERIENCES1983: After reorganization, repays guaranteed loans seven years ahead of schedule. Reports $700 million profit, highest in company's history.
1984: Introduces first minivans--the Plymouth Voyager and Dodge Caravan. Pays 15-cent dividend, first in five years. Exec bonuses reinstated.
1985: Diversifies by buying Gulfstream Aerospace, E.F. Hutton Credit and Finance America.
1986: Enters joint venture with Mitsubishi to sell latter's cars in U.S. Profits slide; Iacocca criticized for $20 million compensation.
1987: Buys American Motors (Jeep, Eagle).
1991: Loses $538 million.
1992: Weak consumer demand and economic downturn force sale of nonautomotive assets worth $3 billion. Iacocca steps down as chairman; replaced by GM's Robert Eaton.
1993-1994: Profits soar with end of recession and the popularity of Jeep Cherokee and LH models. Company hit with several recalls.
1995: With support from Iacocca, financier Kirk Kerkorian makes surprise $20 billion hostile takeover bid, which is repulsed.
1996: Continues to spin off businesses, including most aerospace and defense holdings.
HOW THIS MACHINE'S GEARS MESH""A perfect fit,'' declares boss Jurgen Schrempp. He's right: DaimlerChrysler has great products and strengths in different markets. The question: can a combined management make it work?
Products: From Chrysler's $11,000 Neon to Mercedes's $135,000 S600, the array of iron is breathtaking. A particular strength: Chrysler's dominance in minivans (like the Town & Country, below) and SUVs should help Mercedes build more blockbusters like its super-hot M-Class (above).
Markets: It's unclear whether Chrysler's stronghold in the United States or Mercedes's position in Europe will help the partners boost sales across the pond. But there's no doubt the new company is better equipped to make moves to gain share in growing markets, particularly in Asia and South America.
Management: It has two CEOs, two headquarters, uses two currencies and will spend a fortune on Berlitz lessons. But the real worry is whether Chrysler's nimbleness remains intact in this bigger, German-dominated company. The cochairmen say yes: they get along so well they even smoke the same brand of cigar.
TARA WEINGARTEN AND STEFAN THEIL