Hallelujah! Daimler is bought by a PE Firm

This morning, I'd like to welcome Aptium Global's Lisa Reisman back to Spend Matters. A couple of years back, Lisa traded in her Fortune 500 consulting and trading past to focus entirely on working with small and middle market manufacturers on direct materials sourcing (including smaller tier one and tier two automotive suppliers). In full disclosure, I have an economic interest in her firm, considering that she's my wife. Oh yeah ... and if you ever have an issue with something controversial on this blog, blame her, as she put me up to it.

I know that there's a lot of bashing of private equity firms these days but personally, I think it is fantastic that Cerberus Capital Management decided to purchase Chrysler from Daimler. This is not to say that they're picking up a cream puff of an automaker. After all, Daimler has its own set of problems to work through, as they just came in 25th in a recent quality survey. And so it goes, the Big 3 are all in the midst of their "turnarounds" albeit each with a slightly different strategy.

It's no surprise that the first step is stabilization of the patient. And clearly Chrysler needs to be stabilized (as did their brethren Ford and GM). Cerberus, being who they are, will not only be pulling out their cutting shear ... they will be bringing out the chainsaw. Cost reduction will be paramount. Expect plant closures and layoffs.

Once the patient is stabilized, there will be a lot of talk about re-habilitation of the patient. How will Cerberus go about fixing Chrysler's reputation in the marketplace and more important, fix its design and innovation organization (after all, these are the guys who brought us the K Car)?

IMHO, the real problem for the Big 3 is that nobody wants their trucks and SUV's anymore and GM probably killed it's best innovation of the past 15 years, the EV1. As an aside, Who Killed the Electric Car -- linked above -- was a very interesting movie and shows how "big corporate interests" can stifle innovation.

Which brings up another thought ... maybe Cerberus should cut Chrysler's "Strategy or Scenario Planning Team" ... they sure got the oil price equation wrong. At the same time, they could hire a lobbyist in DC who will press for tax breaks/incentives for individuals purchasing any kind of fuel efficient car (rather than the goofy hydrogen-only incentives that Bush is advocating via his oil buddies). Do you ever get the impression that the hydrogen option is an oil company alternative in disguise? I mean, who controls the hydrogen fill-up stations? Hmmm ...

But back to the point, if I were Cerberus, I'd pony up some dollars and try to steal away some amazing consumer products designers. My first call would be to Apple. New and improved won't cut it anymore -- breakthrough will be critical. To do that, the sourcing and design teams will need to work hand in hand to identify other cool, economical materials and components. Companies like Material Connexion are where innovators are hanging out (we won't comment on the organizational changes that will need to occur to support this capability).

Speaking of components, I once walked through an injection molded facility. The facility was producing hand grips for the back seats for both GM and Toyota. That tour highlighted some subtle differences and challenges for Cerberus. GM's hand rail was designed as three components to be assembled at a Tier 1 facility and then installed into an interior system. Toyota's was designed as a single piece assembly -- shipped to its Tier 1 ready for installation. This story is typical of the Big 3 and highlights some of the subtle yet difficult spend management issues Cerberus is going to need to address.

Whether Cerberus succeeds in transforming Chrysler back into a formidable player in the market will depend largely on their ability to undo the damage that Daimler has done. Perhaps this will involve reinvigorating Thomas Stalkamp's supplier partnering philosophy (which looked more Japanese and less North American in design). But my guess is that they will need to do much more than introducing equal parts carrot and stick into the sourcing and supplier management process. After all, Chrysler's suppliers will have nothing left to supply -- either with a smile or a snarl -- if the company can't solve the demand piece!

Lisa Reisman is Middle Markets Editor of Spend Matters. She can be reached via email @ lreisman [at] aptiumglobal [dot] com.

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