The Germans are in the driving seat

National icons Chrysler and Rolls Royce have been snapped up by Mercedes and VW. David Usborne reports

BRILLIANT, hand-in-glove, made-in-heaven. So said the chief executives of Chrysler and Daimler-Benz about their merger announced yesterday, and so said most car industry analysts. And yet only 48 hours ago, the very idea would have seemed batty. Why? Because, if you set aside all the suddenly sensible business considerations for a second, it remains a jaw-dropper.

It is not that trans-national combinations are anything new. Even in the car sector, we have seen BMW snaffle Rover and now Volkswagen has triumphed over BMW in acquiring Rolls Royce. But this is something different. For starters, it is the largest industrial merger ever. Above all, however, this is Chrysler we are talking about, the company that conceived the "Buy America" campaigns of the Eighties and the very quintessence of the industrial midwest. The "Big Three" shorthand of Detroit - Motown - is finished. Now it will be the "Big Two - General Motors and Ford - and the Germans".

Imagine the editorial cartoons. How about the image of the Mercedes star revolving atop the spire of the Chrysler Building in New York? Never mind that the skyscraper, briefly the world's tallest structure when completed in 1930, is no longer tied to the carmaker. (The first tool-kit owned by Walter Chrysler, the company's founder, still sits buried at the spire's base). Or the Mercedes symbol on the bonnet of a mud-churning pick-up truck?

From almost any viewpoint the respective stars of Mercedes, with its three prongs, and of Chrysler, with five, have heritages that are entirely contrasting, even back to the Second World War. Chrysler's Sherman tanks helped the allies flatten the Third Reich while Jeeps ferried American troops. Mercedes provided the Nazis with staff cars and engines for the Luftwaffe. Since the war, Mercedes has stood for conservatism and luxury for the elite. Chrysler, with its minivans and pick-ups, has remained resolutely middle-class.

Today, Chrysler is doing better than ever before. Though it is smaller than General Motors and Ford, with just 16 per cent of the US market and almost no presence in Europe, it is more profitable, on a per-car basis, than its Detroit rivals. Its current models, especially its Dodge pick- ups and Jeeps, are among the hottest in American showrooms.

If Chrysler's image is one of hardscrabble survival, it is because its fortunes were not always so fine. Created after Walter Chrysler took over the Maxwell Motor Car Company in 1920 and named it after himself five years later, it has stumbled repeatedly. Never was it more imperilled than at the end of the Seventies, when bankruptcy was avoided only when Lee Iacocca, who took control of Chrysler in 1978, went begging to Washington and persuaded President Carter to change the law to produce a $1.5 bn survival cushion.

It was an iconic moment in American industrial history. Pulling itself up by its bootstraps, Chrysler managed to pay back that federal loan in 1983, seven years ahead of schedule. Its designers went on to develop the minivan concept, which transformed the the company's fortunes and set a new way for the entire industry. Such was the mega-star status of Mr Iacocca, he briefly considered running for president. One of the ironies of yesterday's deal is that another factor behind Chrysler's recovery was the entirely nationalistic "Buy America" drive that was also dreamed up by Iacocca.

Chrysler looked shaky again in the wake of the last American recession in the early Nineties. Iacocca was pushed out in 1992 and replaced by Robert Eaton, who yesterday did the deal with Daimler. Three years ago, however, Iacocca teamed up with billionaire investor Kirk Kerkorian to try to buy out Chrysler from under the nose of its own board. The assault failed, but Mr Kerkorian remained Chrysler's biggest shareholder with 13.8 per cent of the company and today stands to reap a profit from his investment of $5bn.

For its current good health, Chrysler also has it line of Jeeps to thank. It took hold of the Jeep brand only in 1987, when it bought the American Motor Corporation, then America's fourth car manufacturer, from Renault of France. And therein lies a possibly instructive and cautionary tale. Renault took control of AMC in 1981 in a bid to find a permanent base in the American market. Clashes of culture between Paris and Detroit destroyed the marriage, however. Today you could not buy a Renault in America even if you wanted to.

Will Daimler and Chrysler fare any better? Wall Street, where Chrysler shares soared on first news of the merger talks, seems to think so.

One of the happiest characteristics of the deal is the virtual absence of overlap in the two manufacturers' product lines. Only with its launch last year of its chunky M-Class sports utility that it is building in Alabama has Mercedes got anywhere near to encroaching on Chrysler territory. (Launching the Alabama facility as well as listing its shares as ADRs on the New York stock market both now seem like acts of remarkable forsight by Mercedes.) Because of the easy synergies, the savage job cuts that often come with mergers of this scale are not expected to materialise here.

There are also tremendous opportunities for each side in gaining ground in each other's home markets, America and Europe. While Mercedes watched as sales of its luxury sedans soared 60 per cent here last year, it still has only a measly one per cent of the American market. Chrysler was forced essentially to abandon Europe as a condition of the Carter loan deal. (Remember the Chrysler Alpine of the 1970s, the Hillman Imp and those clunky Simcas?) By contrast, Ford manufactures across Europe and General Motors has Opel in Germany and Vauxhall in Britain.

It is a measure of the proposed merger's credibility with investors and analysts that it has already sparked speculation of further mega-mergers to come in the automotive industry. Shares in the main European manufacturers consequently have been soaring also. Only in Japan have they been falling. But that is because investors there anticipate further combinations and fear for the positions of the likes of Toyota and Nissan, currently the third and sixth largest car makers, in unit sales, in the world. The company considered most in the mood to snack on rivals worldwide is Germany's Volkswagen - as witnessed by its deal with Vickers to buy Roll Royce yesterday.

Still, there are obvious pitfalls. How easy will it be to weld laid-back Detroit with stiff-collared Stuttgart? And will the German and American car unions cooperate? (Giving in to demands for the unionisation if its M-Class plant in Alabama may be a first order of business for Daimler.)

It is a perhaps a sign of a our global times, that the general reaction throughout America to the deal has been one of fascination and surprise but not of one nationalist outrage. When it was first uncovered by the Wall Street Journal on Wednesday, the merger ranked second or third on most evening news bulletins.

And so far even the United Automobile Workers union, which represents most of Chrysler's American workforce, is witholding judgement.

One thing is for sure though: if Mr Iacocca had stayed at Chrysler this is a deal that would not be happening.

"Buy German" could never be in his vocabulary.

Business, page 22