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Irresistible logic of Daimler and BMW collaborating

Publication date: 17 February 2009

Irresistible logic of Daimler and BMW collaborating

It is a sign of the times. Until recently, there could not be two fiercer rivals than Germany's luxury carmakers - Stuttgart-based Daimler's Mercedes-Benz division and Munich's BMW. They have been competing since the 1930s. Their rivalry intensified in the postwar era, especially after Daimler tried and failed to take over BMW in 1959. Yet these best of enemies have, of late, been accelerating moves to collaborate to revive falling profit margins without losing their respective brand identities. They are now working on a plan to order jointly secondary equipment such as switches, seat frames and air-conditioning modules, as well as developing new engine components.


The logic of such collaboration looks pretty irresistible. Indeed, so irresistible that the two arch-rivals had started talking well before the current crisis in the car sector. They are already working together on new hybrid engine technologies. But with the car industry slumping, Daimler and BMW have decided the moment has come to step up their collaboration.Even before the latest crisis, the two German mid-sized luxury brands recognised that they faced a problem of scale. After all, they could not rely on a mass-market parent to help contain development costs, nor provide them with greater leverage to negotiate lower product prices from suppliers. The classic example of this is the way Volkswagen's luxury brand, Audi, has benefited from its VW ties in a broad collaborative system that also includes Porsche, VW's new owner. VW alone produces more cars than Daimler and BMW combined. Toyota, Daimler and BMW both originally tried to address their strategic issue of scale by merging with mass-market brands, efforts that proved colossal financial disasters. BMW ended up taking a €3.5bn ($4.5bn) charge to sell Rover of the UK, while Daimler has shed 80 per cent of Chrysler of Detroit, which it bought for around $36bn.


The pressure for Daimler and BMW to collaborate has become all the greater not just because of the crisis but also because of the profound evolution in consumer demand for smaller, fuel-efficient and environmentally friendly cars. This has been forcing the luxury brands to rethink their entire business models and consider co-operating with volume manufacturers of smaller green cars. Hence all the recent talk of possible collaborations between Fiat and BMW, or BMW with Peugeot-Citroën. While Berlin has rushed to the support of its domestic car industry, its incentives so far have not really helped the luxury brands. Berlin is offering a €2,500 incentive to car owners for scrapping their old cars and buying a new one. The programme has propped up the sales of cheaper cars such as Opels and VWs. But it has so far done little to revive more expensive models. Daimler and BMW also seem already prepared to rethink their collaboration plans in the event of the car industry continuing to worsen. If, by the end of this year, there is still no sign of improvement, they privately admit they may have to consider substituting consolidation for collaboration. That would imply merging Mercedes-Benz and BMW, which would be pretty historic, whatever it may mean for competition in the luxury car market.


Source: Financial Times

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