Should BMW buy Mercedes? [morgan stanley]

0497

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Volvo and/or Saab would be be a good fit. Neither GM or Ford are confident with their Scandinavian holdings. Volvo is probably better suited to BMW since Daimler already has a heavy vehicles division (buses, truck trailers).

I like the Peugeot idea. The French supplies the world with a lot of luxury products, seems right to be involved with luxury vehicles.

http://www.detnews.com/apps/pbcs.dll/article?AID=/20071123/OPINION03/711230303/1031
Friday, November 23, 2007
Neil Winton: European Perspective

Should BMW buy Mercedes stake to thwart Audi, Lexus?

German luxury car manufacturers BMW and Mercedes are riding the crest of a wave, growing richer as they sell more and more premium vehicles to traditional and emerging markets around the world.

But increasingly effective competition from Audi, Lexus, and Porsche, is ganging up against the traditional market leaders, and according to a report from investment banker Morgan Stanley, the interlopers have two ace cards which are likely to become ever more powerful.

Audi is owned by German mass car maker Volkswagen, and Lexus by Japan's gigantic Toyota. This means that the cost of many basic components like engines, transmissions and components, which are used under the skin of ordinary as well as exotic machines, can be spread over huge numbers of vehicles allowing the interlopers what could be a killer long-term cost advantage.

And there's another huge cost problem looming over the horizon.

New rules expected from the European Union will force all car manufacturers to raise the fuel efficiency of their engines in the name of saving the planet from global warming caused, it says, by excess carbon dioxide (CO2) from energy in general and cars in particular. This will mean another hugely expensive investment which will inevitably cost BMW and Mercedes more per car than its massive rivals, giving Audi and Lexus another cost advantage.

Morgan Stanley, in its report, paints a chilling picture of BMW and Mercedes parent company Daimler's prospects.

Creeping threat

"As the auto industry consolidates, both BMW and Daimler face increasing risk of being marginalised as larger competitors benefit from greater economies of scale in research and development. Strong brands provide above sector average profitability today. However, the relative deterioration in their cost positions is a creeping threat," said Morgan Stanley auto analyst Adam Jonas in the report.

Jonas said BMW has acknowledged a readiness to start alliances with other car makers, and for joint projects to produce engines, or perhaps even a small car. BMW already cooperates with Daimler and General Motors to produce petrol-electric hybrid engines. It also uses diesel engines and small petrol motors made by Peugeot of France. Daimler CEO Dieter Zetsche told the Detroit News at the Frankfurt Car Show in September he is willing to join ad hoc alliances, as long as brand values are not compromised.

But Jonas is thinking the unthinkable.

"We believe BMW would benefit from a strategic alliance with Daimler," his report says, in the form of buying 20 per cent of Daimler.

Jonas says expected E.U. CO2 rules strengthen the rationale for cooperation.

Cost advantage

"Over time, we believe Lexus derives a cost advantage from being part of the 9 million unit Toyota group. Closer to home, Porsche's takeover of Volkswagen has global implications, in our opinion, as Audi and Porsche enjoy the scale advantages of VW's 6 million unit global volume," said Jonas.

In 2006, BMW sold close to 1.4 million vehicles, while Mercedes sold about 1-1/4 million. BMW has raised sales by 40 per cent since 2002

"We have used 20 per cent as a level that would give BMW a material voting influence at Daimler without potentially dominating the strategic direction of the company," said Jonas.

"While many companies collaborate without involving equity tie-ups, we believe a deep collaboration involving BMW's or Mercedes engineering and intellectual property would best be executed as an equity partnership," Jonas said.

This doesn't make any sense at all to Professor Ferdinand Dudenhoeffer, managing director of Bochum, Germany based B&D Forecast, who points to the chronic series of merger failures in the automotive business, not least by BMW and Daimler.

"Be aware of all what we have learned about mergers in the last 20 years was a lesson of failure. The car industry is more complex than just saying let's pool anything at anytime," he said.

Morgan Stanley profits

"Just look at great mergers like Daimler and Chrysler, GM-Fiat, BMW-Rover, or Ford and its Premier Automotive Group. We learned that BMW is far better alone as compared with its time with Rover. The success of Toyota is its own and not that of strange synergies; the success of Porsche is its own. The only thing that makes sense is that Morgan Stanley as investment bankers is going to make strong profits if they can sell someone a merger," Dudenhoeffer said.

Dudenhoeffer agrees that BMW and Mercedes need to cut costs, but their brand power will trump any cost advantage which the likes of Lexus and Audi can achieve.

Phil Dunne, London based vice-president of automotive consultancy A.T. Kearney, agrees that BMW and Mercedes face tough challenges, but getting together in the way Morgan Stanley suggests would be a dead end.

"I don't think an equity position would be the way forward, but I could see some kind of alliance on a particular product, like the rumoured small car tieup," he said.

The German luxury maker's brand power will be their most powerful tool.

Premium prices

"BMW and Mercedes must concentrate on relentlessly driving down costs, but they still have stronger brand positioning in most markets, certainly in Europe and that enables them to charge premium prices," Dunne said.

Professor David Bailey of Birmingham University's Business School is also disdainful of mergers, and reckons that the German luxury leaders' brand power will win in the end.

"I think BMW has got a particular structure which doesn't sit well with takeovers. It had a terrible time when it bought Rover; it's not cut out for mergers, and most mergers fail anyway. And Daimler has just got itself out of a messy divorce. But a joint venture could be very fruitful," Bailey said.

Bailey agrees with Morgan Stanley's Jonas that Audi and Lexus have a built in advantage, but that won't worry BMW and Mercedes.

"In an absolute cost sense they are at an absolute disadvantage, that's right, but they do have very strong brands and can recoup much more per car. They can cooperate though with engines, yes, and sharing platforms for small cars," Bailey said.

BMW and Mercedes are said to be exploring the possibility of collaborating on producing a new small car. Experts like the idea, but hope that any collaboration by BMW and Mercedes is not with each other, but with a company that knows how to make and profit from little cars.

Use small car specialist

"If they want to do an alliance for a small car, better to go with someone who knows how, like Fiat (of Italy) or Peugeot. Neither of them (BMW or Mercedes) are very good at doing small cars, and they are going to need smaller vehicles because of the CO2 rules to get average emissions down," said A.T. Kearney's Dunne.

Morgan Stanley's Jonas though is sticking to his guns. The problems are worsening and the need for action becoming critical.

"We see a compelling strategic rationale for an alliance between BMW and Daimler. ........ We believe an alliance of BMW and Daimler could be a win-win result for both companies. The regulatory environment is changing faster than BMW's or Daimler's ability to adapt," said Jonas.

Neil Winton, European columnist for Autos Insider, is based in Sussex, England. E-mail him at neil.winton@btinternet.com
 

Elmo187

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if BMW bought Mercedes, then a monopoly would ensue. BMW and MB are direct rivals to each other and always have been. even though they share technology (BlueTec), it would just be wrong on so many levels. this is EXACTLY like the time there were talks of GM and FoMoCo merging. it isn't going to happen.
 

MadCow809

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doubt it will happen. its like ferrari buying lamborghini.

and isnt MB owned by Chrysler?
 

cdbob

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It will not work ever two premium brands can go together (I know some of you would point to partnerships such as Rolls-Royce, Bentley, Mayback with the each of the German big three however these are ultra brands and only sell 500 units a year so can not be compared to the big three). Anyways the mergers that work best are an cheaper brand (VW) and a more prestigous brand (Audi). This would be the death of both companies if they merged they need to find a good cheap car company to sell someone like VW and Toyota (I don't mean them because they are obviously already taken, just ones like them).
 

Elmo187

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doubt it will happen. its like ferrari buying lamborghini.

and isnt MB owned by Chrysler?

wow, been living under a rock have we?

MB was never "owned" by Chrysler. MB and Chrysler Corp were partnered to create DaimlerChrysler. MB left earlier this year and is now just DaimlerBenz. Chrysler Corp is now called Chrysler LLC and is owned by a firm by the name of Cerberus (3 headed dog demon that stands at the gates of Hell). their CEO used to be the CEO of Home Depot also.
 

bone

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doubt it will happen. its like ferrari buying lamborghini.

and isnt MB owned by Chrysler?

long story short, MB bought chrysler, changed most US chrysler dealers to MB dealers, and then sold chrysler again :lol:
 

stevanford1

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I thought that MB was the larger of the two companies.
 

Elmo187

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long story short, MB bought chrysler, changed most US chrysler dealers to MB dealers, and then sold chrysler again :lol:

MB never bought Chrysler. Daimler did. and they were partnered, neither of em owned each other. that's always been a misconception just for the reason of MB being a much larger automaker than Chrysler.
 

Mopar Man

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Daimler-Benz bought Chrysler in 1998, though told everyone it was a "merger of equals" and pretty much turned Chrysler, and extremely profitable company at the time into a wimpering dog with its leg broken. Thanks Daimler for clobbering Chrysler, thanks a bunch. :lol:
 

argatoga

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BMW merging with Daimler would be just as retarded as when HP merged with Compaq. As has been mentioned above both compete in the same field, there would be too many redundancies. Also Volvo Cars does not manufacture "heavy vehicles", Volvo proper does. Volvo sold off their car division to Ford so they could buy out all the bus and semi-truck companies in the world.
 

thedguy

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Daimler-Benz bought Chrysler in 1998, though told everyone it was a "merger of equals" and pretty much turned Chrysler, and extremely profitable company at the time into a wimpering dog with its leg broken. Thanks Daimler for clobbering Chrysler, thanks a bunch. :lol:

For once a good post from you :thumbsup: Many of Chrysler execs were pissed off about the "merger" within a year of it happening. Many were forced out, it was just a veiled take-over.
 

un-dee

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Daimler-Benz bought Chrysler in 1998, though told everyone it was a "merger of equals" and pretty much turned Chrysler, and extremely profitable company at the time into a wimpering dog with its leg broken. Thanks Daimler for clobbering Chrysler, thanks a bunch. :lol:

I really doubt that Chrysler would exist today hadn't it been for that takeover.
But yeah, its always nice to blame it on the germans. We all know Americans are great at running car companies.
 

thedguy

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I really doubt that Chrysler would exist today hadn't it been for that takeover.
But yeah, its always nice to blame it on the germans. We all know Americans are great at running car companies.

Chrysler was sitting on a huge chunk of cash from all the profits they were making on the LH platform. Mercedes destroyed that company, all to keep themselves afloat while building piece of shit cars.
 

Karoug

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So isn't the whole MB-Chrysler thing more a "who's the bigger fool" thing?
 

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That would be a bad move. Eliminating your main competitor can only result in worse cars.

If I recall correcly a situation like that presented itself in back in the day where one of the companies was thinking about buying the competition. They said that in retrospective it was the best idea not to do it, since one giant German car company would have most likely gone down like most of Europe's manufacturers.
 

tigger

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We all know Americans are great at running car companies.
Yeah, it's not like any of the "Big 3" have been around for a century or anything :lol:.
So isn't the whole MB-Chrysler thing more a "who's the bigger fool" thing?
Sounds that way to me. Although I think that Chrysler was the bigger fool there. Daimler cleaned them out.
That would be a bad move. Eliminating your main competitor can only result in worse cars.
I agree, but I don't think that's what they're talking about here. It sounds like he's just talking about some component and maybe platform sharing between MB and BMW for luxury cars, and working with someone like Fiat for a small car. Sure it might look good on paper, but none of them have had good luck with mergers recently.
 

thedguy

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I agree, but I don't think that's what they're talking about here. It sounds like he's just talking about some component and maybe platform sharing between MB and BMW for luxury cars, and working with someone like Fiat for a small car. Sure it might look good on paper, but none of them have had good luck with mergers recently.

Must resist .... invoking... Godwin's law!
 

Uwe

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How many mergers did we already see going wrong?

Whenever I hear a so-called analyst from an investment bank spout his rubbish the cold coffee I had at morning wants to visit me again. These idiots don't know anything and are simply talking out of their arse in order to collect the commissions that could be gained by such a merger.
 

tigger

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Must resist .... invoking... Godwin's law!
Good restraint on your part :lmao:! I've got to pay more attention to what I'm typing, now I'm having trouble not invoking it.
 
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