Christine Tierney

Mercedes' next ally may be its old rival

It might seem premature to ask who Mercedes-Benz's next partner will be. Parent company DaimlerChrysler AG is still finalizing the separation from Chrysler LLC. On Thursday, its shareholders will gather in Berlin to vote on a new name for the German truck- and luxury carmaker: Daimler AG, removing the last outward trace of the nine-year merger.

So far, the split is doing wonders for soon-to-be-Daimler. The stock has rallied 50 percent since the firm's announcement in February that it would sell Chrysler. The Mercedes car division is out-earning Audi and BMW. On Monday, Moody's Investors Service raised DaimlerChrysler's debt to a coveted single-A grade.

Moody's Senior Vice President Falk Frey said the sale of 80.1 percent of Chrysler had strengthened Daimler's financial profile and reduced the risks it faced as the owner of the smallest of the mass-market U.S. automakers.

But some German investors already are looking ahead to the next partnership. If Mercedes-Benz looked too small nine years ago to be a viable global player, it looks even smaller now.

Ballooning costs

Mercedes' research and development costs are expected to rise steeply as the industry strives to meet ever more stringent environmental standards. Mercedes' enviable profits, amounting to 9.6 percent of sales in the second quarter, are due in part to reductions in R&D and capital expenditure to around 7.5 percent of sales, said Merrill Lynch analyst Harald Hendrikse. Historically, its R&D and capital spending ranged between 10 percent and 11 percent of sales.

This time around, investors expect Daimler to look closer to home, to its Bavarian rival BMW, not for a full-blown merger mate but for a partner to generate economies of scale and share some costs.

Logical partners

The two carmakers already are working together to develop hybrid powertrains in a project with General Motors Corp.

"They are logical partners -- they're close in size and technological ability," says analyst Jürgen Pieper at Metzler Bank in Frankfurt.

The two also are increasingly threatened by the powerful grouping formed by Porsche's creeping takeover of Volkswagen AG, and its portfolio of brands including Audi.

"There's huge momentum at Volkswagen, and they might use their size better now than they have in the past," he said.

BMW is under even more pressure than Mercedes after a three-year drop in its margins. Last week CEO Norbert Reithofer laid out plans to wring out $8 billion in savings by 2012, partly by cutting purchasing costs. For now, BMW isn't interested in acquiring any brands -- and Reithofer laid out strict criteria for any acquisitions. But he no longer ruled them out.

You can reach Christine Tierney at (313) 222-1463 or ctierney@detnews.com.