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Frost & Sullivan Analyzes the Potential Chrysler Daimler-Benz Merger

7 May 1998

Frost & Sullivan Analyzes the Potential Chrysler Daimler-Benz Merger
    MOUNTAIN VIEW, Calif., May 7 -- The talks announced between
Chrysler(C) and Daimler-Benz (DAI) is not news -- rather it is an
inevitability.  Each has problems that the other can ideally solve.  These are
ongoing problems that need to be solved if each is to survive -- much less
succeed -- in the next century.
    Analysis done three years ago suggested that Chrysler would cease to exist
as an independent company before the millennium.
    Chrysler has two major problems.  The first is that it has never developed
a significant presence in international markets.  An alliance with Daimler
will give it that, particularly in Europe.
    The second problem is that Chrysler continues to be plagued with quality
problems.  Some Chrysler dealers tell Frost & Sullivan that "almost one out of
every 20 cars produced by Chrysler is a lemon.  "The negative image thus
created for Chrysler reduces customer loyalty and limits repeat purchases of
vehicles in their number one market.  Daimler can help Chrysler fix not only
its quality problems, but more importantly, the perception of Chrysler
    Daimler, on the other hand, is faced with the problem that its cars have,
for the past few years, been viewed as too staid.  Daimler needs to change
this perception in order to entice younger vehicle buyers who are currently
not attracted to Daimler vehicles.
    An alliance with Chrysler allows Daimler access to new designs that they
could develop themselves only with a significant investment.  We may see that
future generations of Daimler vehicles represent a major departure from their
current product designs.
    Chrysler has invested a lot in new product design and development.
Whatever problems with quality that Chrysler may face, an undeniable fact is
that they have some of the best designed vehicles on the road.
    Chrysler's minivans and Ram Trucks are also hit products that Daimler
could successfully market in other parts of the world.
    Further, as the automotive industry continues to add more value to
lower-end vehicles, Daimler's product differentiation advantage is already
being hurt.  With the luxury brands introduced by the Japanese OEMs in the
last decade, Daimler was forced to come in with lower priced models.  As
manufacturers of vehicles continue to add luxury car-type features to more
economical vehicles, Daimler will be forced to come up with a new strategy.
    The ability to differentiate has been limited in higher-end vehicles, as
vehicles, infrastructure and social development await a new event that changes
the world.  Frost & Sullivan believes that transportation described in
science-fiction will remain in that realm for some time.  Features that add to
the convenience of the driver within a vehicle will be circumvented by
products that are not part of the vehicle but provide the same features.
    All this points to a need for Daimler to have a presence in lower segments
of the market.  They have already developed the A-class.  However, they may
find it difficult to continue to develop lower-end vehicles without seriously
diluting their brand-equity at the high-end of the market.  Daimler's
miserable performance in a future growth market like India underlines the
urgency to have vehicles at the lower-end of the market.

    Why not someone else?
    The Japanese companies would have no interest in Chrysler.  They have
already developed what they need and where they need it.  Besides, the
problems they face within their economy are enough for them to handle without
adding Chrysler.
    Of the other European companies:

    * Volkswagen already has a low through high-end presence.  However, they
want a super high-end presence.  They have chased Rolls-Royce and Lamborghini.
    * The timing is not right for BMW, Volvo, and Saab.  Currently, it does
seem to fit their strategy or they cannot afford to absorb Chrysler.
    * The French are weak, the Italians don't seem to be interested.

    All of this leaves just Daimler.

    What might happen?
    Daimler will probably avoid diluting the Mercedes brand name.  They may
re-badge Chrysler vehicles for selected markets depending on the marketing
value to be gained from doing so.
    "We believe they will force Chrysler to consolidate its current Chrysler,
Plymouth and Dodge brands into one or at most two brands," says
Frost & Sullivan Automotive Industry Research Manager Subroto Banerjee.  This
would be done in order to reduce marketing costs, enhance product
differentiation and reduce sales cannibalization.  Jeep will remain.
    Daimler will take selected Chrysler vehicles into other regions.  Latin
America and Asia may see certain Jeep vehicles as well as some vehicles like
the Neon and lower-end LH-class sedans.  Daimler will most definitely take
some of the Chrysler light trucks and minivans into other regions.
    This is our opinion.  Others reading this may differ in their analysis.
We would particularly love to hear what the wedding couple have to say about
their plans.
    Visit Frost & Sullivan's Web site:

SOURCE  Frost & Sullivan