Daimler-Benz Aerospace AG

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Daimler-Benz Aerospace AG

Postfach 80 11 09
81611 Munich
+ 89 6 07-3 42 35
Fax: +89 6 07-3 42 39

Public Company
Employees: 50,784
Sales: DM 15.03 billion
Stock Exchanges: Munich
SICs: 3721 Aircraft; 3724 Aircraft Engines & Engine Parts; 3728 Aircraft Parts & Equipment, No Elsewhere Classified; 3761 Guided Missiles & Space Vehicles; 3764 Space Propulsion Units & Parts; 3669 Communications Equipment, Not Elsewhere Classified

With less than a decade under its belt, Daimler-Benz Aerospace AG has transformed the German aircraft industry from a bit player on the global scene into a leading star of the European aerospace industry. Commonly known as DASA, this affiliate of Germanys Daimler-Benz designs and manufactures both military and civilian aircraft, including missiles, helicopters, space, and commercial vehicles. DASAs Deutsche Airbus subsidiary is a lead partner in the pan-European Airbus consortium via a 37.9 percent share. Led by Group President Hartmut Mehdorn in the mid-1990s, DASA struggled to become consistently profitable. DASA was created in May 1989 through the merger of Messer-schmitt-Bóelkow-Blohm (MBB), Dornier GmbH, Motorenund Turbinen Union (MTU), and Telefunken System Technik (1ST). The newly-formed conglomerate took a controlling (80 percent) interest in Deutsche Airbus that December.

Background and Development of German Aerospace Industry

Although DASA wasnt formed until the late 1980s, its creation is intimately linked to several trends that characterized the German aerospace industry in the post-World War II era. Before the First World War, Germany had been an influential player in the aircraft industry. And afterwards, despite prohibitions against military development, German companies continued to create civilian and military aircraft. In fact, the countrys build-up prior to World War II was distinguished by innovative technical and production capabilities.

After the Second World War, however, German aircraft companies were truly hamstrung. In his book Airbus Industrie, David Weldon Thornton noted that after the defeat of the Third Reich Germany found itself prohibited from having an indigenous aviation capability. Although the advent of the Cold War helped revive the industry, at least in the Federal Republic of Germany (West Germany), the divided countrys many aerospace companies continued to lag behind their contemporaries in Great Britain and France throughout the mid-20th century.

Regional rivalries within the German aviation industry exacerbated each companys inability to compete on a continental, let alone global, scale. Specifically, the German aircraft industry didnt start to consolidate until the mid-1960s, much later than did France, Britain, or most significantly, the United States. The pace of mergers quickened after 1968, when the West German parliament formally declared that it would use direct and indirect subsidies to induce the enterprises to combine into larger, and thus competitive units.

But by that time, such American aerospace giants as Boeing Company, McDonnell Douglas Corporation, and Lockheed Corporation dominated the global market for commercial passenger aircraft. In order to compete more effectively, the federal governments and aerospace companies of France, Great Britain, and Germany began to investigate ways to pool their resources.

Four years of negotiations resulted in the December 1970 formation of G.I.E. Airbus Industrie, a consortium headquartered and incorporated in France. Founding members were Frances Aerospatiale and Deutsche Airbus GmbH, a German joint venture created with contributions from five companies: Messerschmitt, Dornier, Blohm-Hamburger Flugzebau (HFB), Vereinigte Flugtechnische Werke (VFW), and Siebel. Each took a 20 percent share in the Airbus affiliate, which was created in 1967.

Future DAS A member MBB was formed through the union of Messerschmitt and Bóelkow, two southern German interests that had themselves merged in the fall of 1968 with Blohm-Ham-burger Flugzebau (HFB), a northern German manufacturer. By the late 1980s, only MBB and VFW still held stakes in Deutsche Airbus. Dornier, another major aircraft manufacturer and future DASA member located in southern Germany, was characterized as jealously independent in Thorntons 1995 study.

During the 1970s, German firms participated in several trans-European collaborations, but because of their small size German participants often had secondary roles and made most of the compromises.

Formation of DASA in the Late 1980s

In 1987, German automaker Daimler-Benz had several reasons for acquiring and consolidating the German aerospace industrys largest players. First, Daimler-Benz leader Edzard Reuter hoped that DASA would help diversify his company from its core in luxury cars and heavy-duty trucks. He also believed that the aerospace business would complement the automotive operations by providing insights into new technologies and engineering. Perhaps more importantly, it was expected that the amalgamation would return Germanys aerospace industry to the position of leadership it had enjoyed in the early 20th century.

Daimler-Benz acquired controlling interests in MBB, Dornier, and MTU and merged them with its own Telefunken System-Technik (TST) electronics unit in May 1989. That December, the carmaker bought a controlling (80 percent) interest in Deutsche Airbus. The parent company organized these companies under Daimler-Benz Luftund Raumfahrt Holding (Daimler-Benz Aerospace Holding), a holding company 85 percent owned by Daimler-Benz and the rest by state and local governments. The carmaker also tried to add shipbuilding interests to the mix, but was prevented from doing so by the federal antitrust department.

Jürgen E. Schrempp, formerly a top executive with Mercedes truck^building unit, was selected to lead the new company. Schrempp vowed to wean Airbus from government subsidies and make DASA a bottom-line company, according to a May 1993 Business Week article. In 1990, he told Aviation Week & Space Technologys Michael Mecham that he wanted to transform DASAand by extension the German aerospace industryfrom a junior partner to an equal partner in the European sphere.

But the amalgamation did not proceed as smoothly as Daimler-Benz might have planned. The hurdles were both political and cultural. Rivalries between the former competitors endured, despite their new alliance. Moreover, the Federal Cartel Office opposed Daimler-Benzs effort to bring Messerschitt-Beilkow-Blohm into the fold. The automaker had to bypass the ministry, applying directly to the Kohl administration to approve the merger. Critics in the German antitrust department, as well as remaining domestic aircraft manufacturers, worried about the concentration of power and government subsidies and contracts. Other more objective observers feared that Daimler-Benz had overextended itself.

1990 was DASAs first year to operate as a fully consolidated corporation but it took until 1993 for the company to integrate all the member companies. Although Airbus Industrie made its first profit ever that year, Deutsche Airbuss loss heavily influenced DASAs DM135 million shortfall on DM12.5 million in revenues. Deutsche Airbus 1991 profit helped carry its parent to a net income of DM50 million (US$31.25 million).

Profitability was fleeting, however, as a number of factors converged on the German aerospace industry. European economic unification influenced the consolidation of the continental market. The end of the Cold War and German reunification reduced military budgets and direct government subsidies in favor of economic restructuring and rebuilding the East German infrastructure. Military purchasing in Germany slashed 60 percent in the early 1990s, and civil markets also declined, as commercial airlines struggled to profit as well. The decline of these two major market segments demanded consolidation and intensified competition.

Company leader Schrempp employed several key strategies in the face of this difficult environment. First, he planned to forge joint ventures that would spread the costs, risks, and government subsidies among the partners, particularly in the development of new aircraft. The European Fighter Aircraft (EFA) project, for example, united the efforts of British, Italian, Spanish, and German manufacturers for what Aviation Week & Space Technology called the continents most ambitious program. The German government held a 33 percent stake in the project, but threatened several times to pull out and reduced its aircraft order from 250 to 200 in 1992. That same year, German defense minister Rune announced that the country would abandon the EFA, but he was quickly forced to recant. Although CEO Schrempp wanted to reduce DASAs dependence on military contracts, he didnt want Germany to abandon the EFA. He was adamant that the country remain engaged, telling Interavia/ Aerospace Worlds Brian Davidson that abandoning the project could mean the loss of 10,000 jobs and a severe loss from the technological standpoint. DASA and Germany were still participating when the EFA made its first test flight in 1994.

Company Perspectives

Because we are a company active in the field of high technology, the way we see the future determines our entrepreseurial activity. Decisions that we take today will affect every aspect of our lives in the 21st century. At Daimler-Benz Aerospace we are committed to securing the wellbeing of mankind in the world of tomorrow.

Outside of the EFA project, Schrempp sought to reduce DASAs dependence on the rapidly dwindling defense market from 45 percent of sales to 25 percent by 1997. He set out to accomplish that goal in a roundabout way, decreasing DASAs military emphasis by increasing its presence in civilian aircraft through the US$393 million acquisition of a controlling interest in Hollands Fokker in 1992. The purchase came after more than a year of negotiations with labor unions and politicians, during which DASA agreed to allow its newest affiliate to remain independent through 1995, when the Dutch government would sell its remaining 22 percent stake to the German company.

Fokker gave its new parent greater access to the American market via its strengths in the development of small (80- to 100-seat) regional aircraft. Although Fokker gained a much-needed infusion of capital, it lost US$77 million in 1993. Chairman Jan Nederkoorn, who had been in that post since 1988, resigned in the wake of that decline. In 1994, Fokkers board of management decided to begin the companys third major reorganization in as many years, cutting production by one-third and slashing the work forcefrom 13,500 in 1990 to less than 9,000 by mid-decade.

It was a trend felt throughout the global aerospace industry. DASA reduced employment from 83,605 in 1991 to 81,872 in 1993 and expected to eliminate another 7,500 and close six plants by the end of 1994. While laudable, these efforts did not significantly improve DASAs position. The corporation lost a total of over DM1 billion (US$620 million) in 1992 and 1993,, in spite of sales increases from DM12.4 billion (US$7.75 billion) in 1991 to DM18.6 billion (US$10.8 billion) in 1993. The new gush of red ink prompted a flurry of speculation that Daimler-Benz would end its airborne experiment. Aviation Week & Space Technologys Anthony Velocci noted that Some aerospace analysts in the United States and Europe have been questioning Daimlers long-term commitment to DASA, and a few industry observers in Germany actually expect Daimler to sell its aerospace business within the next two years. But a sale wasnt forthcoming.

Schrempp and his mentor, Reuter, thought that an expansion of cooperative efforts would help turn DASA around, but Judy Bolinger, an analyst with Goldman Sachs London office, gave the corporation a threefold prescription for improved health in a 1993 Aviation Week & Space Technology article. She suggested that the company improve MTUs weak market position (it was then fifth among the worlds eight aircraft engine manufacturers); downsize to fit its shrunken markets; and reduce its diversification to a few core competencies.

Principal Subsidiaries

Daimler-Benz Aerospace Airbus GmbH; Dormer Luftfahrt GmbH (Germany); Eurocopter S.A. (France); Dornier Satellitensysteme GmbH (Germany); LFK-Lenkflugkorpersysteme GmbH; Dornier GmbH; Elekluft GmbH; E.S.T.-Entsorgungsund Sanierungstechnik GmbH; Bayern-Chemie, Gesellschaft fur flugchemische Antriebe mbH; TDA Armements S.A.S. (France); CMS Inc. (U.S.); The company also lists subsidiaries under the Daimler-Benz Aerospace name in Austria, France, Greece, Spain, Portugal, Italy, Mexico, China, South East Asia, Turkey, the United Arab Emerates, Belgium, Brazil, India, Japan, Korea, South Africa, and the United States.

Further Reading

Banks, Howard, Good-Bye to Cost-Pius, Forbes, November 23, 1992, p. 52.

Consortiamania, The Economist, May 23, 1992, pp. 72-73.

Covault, Craig, German Industry Confronts Crisis, Aviation Week & Space Technology, January 31, 1994, pp. 44-48.

Davidson, Brian, Positioning DASA for the Future, Interavia/Aerospace World, June 1993, pp. 26, 28, 32.

Hill, Leonard, Fokker/DASA: Finally A Deal, Air Transport World, June 1993, p. 26.

, Nederkoorns Downfall, Air Transpon World, April 1994, p. 58.

McIntyre, Ian, Dogfight: the Transatlantic Battle Over Airbus, London: Praeger, 1992.

Mecham, Michael, Deutsche Aerospace Wants to Grow Out of Its Junior Partner Role, Aviation Week & Space Technology, June 4, 1990, pp. 21-22.

, Deutsche Airbus Moves Into Black; DASA Makes $31 Million as Result, Aviation Week & Space Technology, June 8,1992, p. 70.

, Deutsche Airbus Renamed; DASA Retires MBB Identity, Aviation Week & Space Technology, October 12, 1992, p. 64.

, Germany Weighs Cost of Unification as Deutsche Aerospace Seeks Expansion, Aviation Week & Space Technology, September 3, 1990, pp. 69, 73.

, Market Forcing Regionals to Think Consolidation, Aviation Week & Space Technology, September 7, 1992, pp. 69-71.

Moorman, Robert W., A Finger in Every Pie, Air Transport World, April 1994, p. 54.

On the Runway, The Economist, April 8, 1989, pp. 72, 76.

Reed, Arthur, Boeing & DASA: Sound, Fury and What? Air Transport World, February 1993, p. 31.

, New Day Dawning in Deutschland, Air Transport World, March 1993, p. 82.

Sparaco, Pierre, Facing Tough Times, DASA Looks Long Term, Aviation Week & Space Technology, May 31, 1993, p. 95.

Sutton, Oliver, Restructuring DASAs Aircraft Group, Interavia Business & Technology, May 1994, p. 31.

Templeman, John, and Patrick Oster, The Runway is Clear for Deutsche Aerospace, Business Week, May 10, 1993, pp. 39-40.

Thornton, David Weldon, Airbus Industrie: The Politics of an International Industrial Collaboration, New York: St. Martins Press, 1995.

Velocci, Anthony L., Jr., Daimler Stands By DASA Despite Mounting Losses, Aviation Week & Space Technology, November 1, 1993, pp. 61-62.

Verchere, Ian, Can DASA Afford to Quit EFA? Interavia, June 1992, p. 17.

, Germany Tempers Its Ambitions, Interavia, June 1992, p. 13.

April Dougal Gasbarre