Hyundai And DaimlerChrysler: Driving In Different Directions?

The Korean carmaker seems set on ending the partnership -- which could work to DaimlerChrysler's advantage

In his drive to build the world's No. 1 car and truck company, DaimlerChrysler (DCX ) Chief Executive Jürgen Schrempp nabbed a 10.5% stake in Korean auto maker Hyundai Motor Co. in June, 2000, and pledged to build small cars and 100,000 trucks a year in a 50-50 joint venture. But in the years since Hyundai Chairman Chung Mong Koo and top German executives hoisted glasses to toast the alliance, the partnership has been dogged by acrimonious disputes. The plan to develop small cars went nowhere, and now the pillar of the alliance, the $700 million truck venture, appears poised to collapse. "The game is over. Strategically the alliance with Hyundai has fully failed," says a DaimlerChrysler manager.

The partnership's breakdown -- expected to become public in weeks -- will add to DaimlerChrysler's woes in Asia. It owns a 37% stake in Japan's Mitsubishi Motors Corp., which expects to lose $685 million for the fiscal year ended Mar. 31, on a 10% drop in sales to $23.5 billion. A major restructuring will be announced on Apr. 30 that may cost Daimler over $4 billion.

The Hyundai deal started unraveling in September when Schrempp returned from China trumpeting an alliance with Beijing Automotive Industry Co. to produce Mercedes-Benz sedans in the fast-growing Chinese market. Hyundai cried foul, saying the venture violated an exclusive pact it had cut with Beijing Automotive a year earlier to make sedans in China. Without a solution, an infuriated Hyundai put the engine and truck collaboration on ice. Insiders say the China incident was the last straw in a relationship strained by cultural clashes and power struggles, with an increasingly self-confident Hyundai determined to be treated as an equal partner.

DaimlerChrysler officials say talks with Hyundai are continuing but note that Hyundai is no longer as vital an investment because DaimlerChysler has since nabbed a 65% stake in Mitsubishi's spun-off truck unit, Mitsubishi Fuso Truck & Bus Corp. Hyundai execs say they're "reviewing all options," but insiders say talks are off and an announcement is pending. "We have a plan to become the global No. 9 truck maker by 2010 -- with or without DaimlerChrysler," says a Hyundai spokesman. Hyundai now is No. 14 in trucks.

POSSIBLE WINDFALL. A breakup could have a silver lining for DaimlerChrysler. The partners have invested $260 million in a factory to build diesel engines for commercial vehicles. If they agree to part ways, Hyundai might opt to buy out Daimler's stake and pay royalties for the engine technology. DaimlerChrysler also paid $381 million for its 10.5% stake in Hyundai and stands to make a handsome profit if it sells the shares back to the company, since Hyundai's share price is now more than double the price Daimler paid.

A windfall from the sale of Hyundai shares would be a boost to DaimlerChrysler's results, especially given the need to bail out Mitsubishi. In addition, Mitsubishi's truck business just had a nasty surprise for its new owner. On Apr. 16, Mitsubishi Fuso said its chairman will resign to take responsibility for a coverup of defective truck components responsible for more than 50 accidents since 1992.

Schrempp is counting on DaimlerChrysler's commercial vehicle division, which has $34.2 billion in sales, to pull in big profits. The unit earned an operating profit of $1.26 billion in 2003 after two years of losses. Analysts see strong growth this year, thanks partly to the restructuring of U.S. truck division Freightliner by Eckhard Cordes, head of the commercial vehicles unit. But with the Hyundai venture about to end and Mitsubishi Fuso coping with scandal, Cordes has plenty of heavy lifting ahead.

By Gail Edmondson in Frankfurt, with Moon Ihlwan in Seoul

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