A company's choice of partners can reveal a lot about it, including how great the need for that partnership may be. Daimler, it seems, must have been desperate. After all, why would the German auto manufacturer agree to a partnership with France's Renault?
Renault is a French mass manufacturer of automobiles already locked into a cross-shareholding alliance with Nissan, the Japanese mass manufacturer. The French cars do not have a particularly good reputation -- neither for their technology nor their quality. And in the upmarket mid- and high-range of cars, where manufacturers can count on fatter profit margins, Renault is absent. The French company is also absent in China, the world's fastest growing market for automobiles.
The logical consequences of this bad positioning is that Renault posted a €3 billion loss last year. And, so far, Renault chief Carlos Ghosn isn't predicting any profit for 2010, either. A desirable business partner looks nothing like Renault.
There Are More Desirable Partners Out There
A more desirable partner might look a little like Volkswagen, for example -- a company that has remained profitable despite the global economic crisis and whose vehicles are seen as technologically sophisticated. Or maybe like the Japanese competitor Toyota, a world leader in efficient production methods and hybrid technology, despite the current problems it is having with quality control.
Daimler Chairman Dieter Zetsche has already negotiated with both of these companies. He even discussed a cross-shareholding deal with VW five years ago. VW, however, wanted nothing to do with its Stuttgart-based competitor. "Why should we help Mercedes?" asked VW boss Martin Winterkorn.
Talks with Toyota began two years ago. Things moved forward at a millimeter pace, then there would be a time-out and then things would move a little bit further forward. But now Toyota wants to -- and in fact, must -- solve its own problems.
BMW would also be a good partner for Daimler. Both companies place great emphasis on quality and technology. But the two years worth of talks between the companies didn't produce much. The firms have merely agreed to combine their shared purchasing power to buy windshield wipers, door locks and other small parts. Had the pair worked together on the development and production of motors and gear drives, though, they could have saved billions of euros. The drive units could have been manufactured so that a Mercedes still drove like a Mercedes and a BMW like a BMW. But Zetsche and BMW chief Norbert Reithofer were unable to reach a deal anywhere near that ambitious.
The French President Holds Renault's Reins
So now Daimler is turning to Renault. On Wednesday, Daimler, Renault and Nissan announced a strategic partnership for the development of small cars, motors and light commercial vehicles as well as each company taking an equity stake in the other. But the deal is frought with uncertainties. Renault, for example, is partly owned by the French state -- and even though the government only holds a 15-percent stake, it is clear that French President Nicolas Sarkozy has his hands on the reins. When Renault sought to move a good deal of production on its Clio subcompact car to Turkey, an indignant Sarkozy balked, saying it was unacceptable for a French company making French cars for the French market to build them elsewhere. "I demand this proportion be reversed," he said at the time, "two-thirds of Renault's sub-contractors shall be French."
How, then, is a German car-maker supposed to work successfuly together with a partner that, when in doubt, would put politics before financially sound decisions? Daimler boss Zetsche is well-aware of these misgivings. But he also has some good reasons for establishing the Franco-German partnership.
First and foremost is that he has some serious problems to tackle. Daimler has difficulty making money with its smaller cars, like the Smart, Mercedes A- and B-Class product lines, and Zetsche needs business partners in order for the company to compete effectively in the lower-end sector. When it rolls off the assembly line, the next-generation line of Smarts will be built using shared technology with the Renault models. And the next A- and B-Class Mercedes will incorporate Renault motors that Mercedes Benz plans to refine. Daimler developers have put the French technology through its paces and are convinced of the quality.
Daimler Could Benefit from Renault's Electric Car Plans
Mercedes Benz and Renault will also be able to work together on larger vehicles, like vans and mini-buses. Finally, Daimler could also benefit from the fact that Renault is currently working on one of the most ambitious electric-car projects in the entire automotive industry. By 2011, Renault chief Ghosn wants to have the capacity to produce up to 550,000 electric cars in Europe, the United States and Japan per year.
The French government is supporting the construction of a battery factory as well as offering an incentive on the sale of electric cars of up to €5,000 per vehicle. And Sarkozy will doubtlessly apply his pressure on other French businesses to ensure that they fill their company fleets wtih Renault's electric cars. Indeed, Renault could directly profit from the fact that the French state is its most powerful shareholder.
But all this could also constitute a major risk for Daimler. In addition to Daimler taking a 3.1 percent stake in Renault and a 3.1 percent stake in Nissan, the Renault-Nissan alliance will also together hold a 3.1 percent stake in the German company. By doing so, the companies are demonstrating that this is meant to be a long-term partnership, Zetsche explained to his supervisory board members, justifying the deal.
He had better hope that his French partners view things the same way. Some analysts already have their doubts, though, saying that the French might see these shares in Daimler as a beachhead from which to mount a possible takeover of Mercedes-Benz at some point in the future.