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Mercedes, Despite Flaky Record, Seeks Renault Liaison

Germans Need Help Making Small Cars Profitably
Renault-Nissan Needs Hybrids, Better Factory Use

Don’t Forget That Renault Thought GM Link Made Sense 

After Elizabeth Taylor and Zsa Zsa Gabor had been married about three times each, you could probably have predicted that any further attempts at official liaisons were projects destined to fail.

Investors are probably saying the same thing about Daimler, as rumours spread that the German luxury car and truck manufacturer is thinking about taking the plunge again, this time with the Renault-Nissan alliance. As boards of both companies prepared to meet in April to talk about a linkup, a wide-ranging strategic partnership was said to be on the cards, perhaps with a small, symbolic swapping of equity stakes of perhaps three per cent. News is expected in time for Daimler’s general shareholders meeting on April 15.

Some investors are probably still reeling from the effects of Daimler’s recent divorce from Chrysler. Mitsubishi of Japan was embraced for a while by Daimler, only to be unceremoniously dumped. Before that Hyundai of Korea felt Daimler’s ardour. Renault doesn’t have an unblemished record either. Certainly it has won plaudits for its 10 year partnership with Nissan, but for a while was actively seeking to join up with General Motors, even while the then world’s largest auto company was in its death throes before bankruptcy.

Why does Daimler and its Mercedes subsidiary still think marriage with another company might work, in the face of massive evidence to the contrary?

Eye-watering Smart losses
Mercedes desperately needs to make small cars profitably, to meet upcoming regulations in Europe and new U.S. rules curbing gas guzzlers. Mercedes already produces the little Smart two-seat city car, and the small A and B class, but has not been able to make any money. For a while losses on Smart cars reached an eye-watering $5,000 per car, until Mercedes slashed the model range.

Renault-Nissan has expertise in making small cars on a big scale, like the little Renault Clio and Nissan Micra. Talk is that the Renault Twingo might be developed with Mercedes to also produce a four-seater Smart. Renault-Nissan would like access to bigger engines, particularly diesels, to add sparkle and economy to its upmarket Infiniti brand.

Mercedes reportedly talked to BMW, VW, Fiat 
Max Warburton, analyst at Bernstein Research, said Mercedes needs Renault more than the other way around and has suffered large losses on its Smart and A-Class programmes.

“If Mercedes is going to thrive in an era of declining vehicle mix, it needs to find a way to expand in small cars and small engines as economically as possible. We believe the company has talked to BMW, VW and Fiat in recent years but failed to find agreement. However talks with Renault have proven much more fruitful and Daimler sees the French company and its Japanese affiliate as the best possible partner,” Warburton said.

“The (Renault) electric vehicle programme may also be of interest. The list of things that Mercedes could bring to Renault is shorter but includes electronics, quality expertise, large diesels for Nissan, and hybrid technology which Renault Nissan lacks. But the main attraction of a deal with Daimler is probably financial and strategic security,” Warburton said.

According to Deutsche Bank, both the Mercedes and Renault Nissan have dowries which the other would covet.

What Mercedes could bring to Renault, according to Deutsche Bank –

·      Renault has failed in its attempts to sell cars as big as the Mercedes C class, and could use German knowhow.

·      Renault has plenty of battery-car knowledge but needs Mercedes’ hybrid technology.

·      Many Renault small car factories are underused.

·      Renault has a weak balance sheet and needs to sell assets like its Volvo Trucks stake.

What Renault could bring to Mercedes –

·      Mercedes lacks scale in small cars. Amalgamating Clio-Micra, with Smart, Mercedes A and B class would cut costs.

·      High R&D fuel efficiency costs could be spread much wider

·      Mercedes Trucks could benefit from amalgamating with Volvo Trucks

The Financial Times Lex column sees the benefits of cooperation, but thinks a more formal liaison would be a mistake.

“Cooperation makes sense, a cross-shareholding less so. Daimler has a specific need to share development of its next-generation smaller Smart and A class models to improve profitability. Renault has the expertise and can benefit from sharing costs across higher volumes. But both companies have questionable history with tie-ups. Even Renault’s synergies from its cross-shareholding with Nissan have disappointed,” Lex said.

“A better solution would be a joint venture or licensing agreement,” said Lex.

This would mean project-by-project agreements, avoiding high profile arguments on turf wars and the inevitable clash of strong egos on overall corporate strategy.

But given that Mercedes, and probably BMW to, is under long-term pressure from Audi, this Renault-Nissan move would seem an inadequate response. VW’s Audi subsidiary is making huge profits because it can use components in its luxury cars from Volkswagen’s huge mass production runs.

Chronic inability
The Wall Street Journal’s Heard on the Street column also sees benefits for both sides, but warns that investors should be wary of Daimler’s poor record, showing a chronic inability to maintain relationships.

“Daimler’s experience with Chrysler, Mitsubishi, Hyundai and Tata – costly partnerships it has only just exited from – shows it isn’t good at cooperating with other auto makers. Keeping things simple with Renault may be the best way to ensure their tie-up doesn’t become another dangerous liaison,” the column said.

Whatever happens, a pre-nuptial agreement would seem to be a necessity.

Neil Winton – March 30, 2010

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