Stuttgart, Germany ? The 1998 merger of Daimler-Benz and Chrysler Corp. seemed to have so much potential.

It combined German luxury car technology with lean, agile U.S. management, and teamed legendary vehicle brand names from both sides of the Atlantic — Daimler’s sleek Mercedes sedans with Chrysler’s hot-selling, profitable Jeep SUVs and Dodge pickups.

There would be economics of scale to cut costs, making DaimlerChrysler AG an auto giant that could weather the brutal competition among Japanese, German and U.S. automakers.

Five years later, DaimlerChrysler is still struggling to unlock that potential.

Under chief executive officer Juergen Schrempp, leading architect of the deal, the merger is only now beginning to bear fruit in new models such as the advanced Mercedes drive trains in Chrysler’s new sedans, and the Chrysler Crossfire sports car that shares an engine and other parts with Mercedes’ SLK model.

Schrempp and the company argue that there’s more to come.

“If you want to see the complete advantages, you accordingly need the necessary period of time,” he was quoted as saying in Der Spiegel magazine. “But we had to first learn how to cooperate between the different brands.”

“When Daimler-Benz and Chrysler came together, there was no textbook on how to do this.”

Stock takes hit

The Mercedes Star on top of the DaimlerChrysler headquarters' main building in Stuttgart, Germany, reflects the evening sun. Five years after the merger of Daimler-Benz and Chrysler, the company is still struggling to make CEO Juergen Schrempp's ambitious vision of a global auto powerhouse a reality.

Sharing parts and design work should save money by spreading costs and increasing production volume. But while the company learns, its stock price and earnings, particularly at the troubled Chrysler division, have lagged.

Chrysler emerged with a scant $171 million in third quarter earnings after losing $1.1 billion in the second, losses caused by price wars with U.S. competitors General Motors Corp. and Ford Motor Co. It was a painful setback after Chrysler division chief Dieter Zetsche cut more than 30,000 jobs and closed six plants in a restructuring begun in 2001.

DaimlerChrysler has cut its forecast for 2003 Chrysler earnings to a bare operating profit and says it’s possible the division will show a loss.

Meanwhile, it has been Mercedes’ steady profits, and progress turning around the company’s commercial vehicle division, that have kept DaimlerChrysler profitable.

One measure of the merger’s mixed legacy so far is DaimlerChrysler’s stock price. After documents sealing the merger were signed on Nov. 12, 2000, the combined shares of DaimlerChrysler began trading Nov. 17 at $84.31 on the New York Stock Exchange, bid up by excitement and speculation over the merger. They’re now trading in the high $30 range, hurt by the company’s woes and the stock market’s losses during the past few years.

The merger has been criticized in the German news media, where Der Spiegel recently called it “the company with two faces,” leaving little doubt which face was more attractive.

Leadership changes

Five years ago, it appeared the deal would give each merger partner something essential that it lacked — for Chrysler, a presence outside the United States, for Daimler-Benz, mass-market know-how to go with Mercedes and a foothold in the key North American market.

Then-Chrysler CEO Robert Eaton, a 1963 Kansas University engineering graduate, felt that Chrysler, the perennial No. 3 in the North American market, needed a partner to ensure the company’s future in an era of worldwide consolidation. Schrempp sought to link Daimler with Chrysler’s entrepreneurial culture and flair for doing things quick, cheap and lean — a talent that seemed to evaporate, however, when top Chrysler managers retired, quit or in several cases were pushed out as a result of the merger.

The top managers of the merged company now are mostly German, and it is incorporated in Germany, although it has two headquarters: Auburn Hills, Mich., and Stuttgart. Zetsche, Chrysler’s current head, is a former Mercedes-Benz executive who quickly won over employees and public opinion in Michigan.

Investor Kirk Kerkorian, a major Chrysler shareholder, has since sued in federal court, claiming Daimler-Benz intended a takeover rather than a merger of equals.

Many analysts say it was the lack of duplication between Daimler-Benz and Chrysler operations and products that severely limits benefits from the merger today.

“When it occurred, and Bob Eaton and Schrempp talked about the synergies, that was one of the things that struck me as a stretch,” said David Cole, director of the Center for Automotive Research in Ann Arbor, Mich.

“There was very little overlap. And because there was very little overlap there wasn’t the ability to, say, go to a common platform or go to major common parts. On one level, they sort of complemented one another because they didn’t have products on top of one another in various markets.”

“But it was going to make it much more difficult to get economies from the merger.”

Analysts weigh in

The company can only go so far in putting common parts in Chrysler and Mercedes products, lest they contaminate the luxury brand’s premium image.

Some analysts say many of Chrysler’s troubles come from issues unrelated to the merger, such as the price wars in the United States, where Ford and GM have pumped up sales with costly incentives such as zero percent loans, and an aging model lineup.

“The separate issue is, are they even getting any synergies at all,” said Himanshu Patel, an analyst at J.P. Morgan in London. “If you look at the earnings, they would argue no. … But that doesn’t necessarily mean they aren’t getting synergies, there are just other problems that are overwhelming the synergies right now.”

Analysts say Schrempp’s vision may still come true — not from the company’s Chrysler and Daimler-Benz pillars, but from Chrysler’s work with mass-market producers Mitsubishi, in which DaimlerChrysler owns 37 percent, and Hyundai Motors, where it owns 9 percent. The three are teaming up to make four-cylinder engines together in volumes as high as 1.4 million a year.

And Mitsubish and Chrysler are hard at work developing common architecture for a new generation of small cars.

“The story is not over yet,” said Cole. “How it comes out depends on two things, what happens in the world economy, and what DaimlerChrysler does, in its related products, its manufacturing capabilities. The race is still on.”