Mercedes-Benz-Blog TRIVIA: 1924: Benz & Cie. and Daimler-Motoren-Gesellschaft found a community of interests


Stuttgart/Mannheim, Germany, Apr 01, 2009

* Merger in the interest of the motor vehicle

* Rationalization through the concentration of activities

In the sense of the word's Latin origin, ‘taking an interest’ means ‘becoming involved in something’. This is an apt description for the situation 85 years ago. On May 1, 1924, the boards of management of Benz & Cie., Mannheim, and Daimler-Motoren-Gesellschaft (DMG), Stuttgart, approved the foundation of a community of interests. In this way, the two oldest motor manufacturers became involved in each other’s fate and joined forces in economically difficult times – also in the interest of the motor vehicle. The latter had, after all, been invented almost 40 years earlier, by the founders of the two companies, Gottlieb Daimler and Carl Benz, completely independently of each other.

For economic reasons, the merger would have made sense several years earlier already, and it had indeed been the subject of discussions. Daimler board member Ernst Berge had tried as early as 1916 to convince the supervisory board that the two major motor manufacturers should merge. But Alfred von Kaulla, the chairman of DMG's supervisory board from Württembergische Vereinsbank, thwarted the early merger plans, wishing to ward off the influence of Rheinische Kreditbank, Benz & Cie.'s principal bank headed by Carl Jahr who, in turn, was a member of the supervisory board of Benz & Cie. Alfred von Kaulla didn't change his attitude after World War I, either. In 1919, Carl Jahr, representing Rheinische Kreditbank on the supervisory board of Benz, launched another – and equally unsuccessful – attempt to persuade those in power that Daimler and Benz should join forced in the difficult post-war period.

Alfred von Kaulla, the opponent to the merger, died in January 1924. Shortly afterwards, Car Jahr submitted a memorandum in which he outlined how the two motor manufacturers could safeguard their competitiveness and cut their costs by joining forces. Carl Jahr was convinced that the key to the survival of the two traditional companies in the economic and political turmoil of the 1920s was rationalization.

A difficult time of reconstruction

Five years after the war, life was still extremely difficult. "The changeover to peace-time business required a lot of time and many sacrifices," it said in the annual report of DMG, and biographer Paul Siebertz described the difficult time of reconstruction as follows: "In industrial terms, it was not just a question of changing over from war production to useful peace-time production; the companies had to start from zero in every respect."

After the war, the German motor manufacturers had not only lost the state as a major customer; they also had to stand by and watch how the army brought a large number of former military vehicles onto the market. What's more, mass motorization had not yet begun in Germany: the car was still a luxury commodity. The 15 percent luxury tax levied in 1906 was not lowered before 1925. And motor vehicle taxes had quadrupled since the end of the war.

Difficult conditions for motor manufacturers

The Daimler and Benz companies were particularly hard hit by the loss of their foreign customers – before the war, both of them had sold more than half of their motor vehicles abroad. And it was impossible to pick up from where they had stopped before the war: immediately after the capitulation, German manufacturers were not even permitted to participate in motor shows abroad.

Foreign competition used this time to improve the quality of their products significantly and to expand their mass-production activities. While foreign governments in the most important export countries set up high customs barriers for German products, the import duties in the occupied regions in Germany, especially in the Palatinate and the Ruhr area, were lowered, facilitating the import of foreign cars.

The change-over from war-time to peace-time production additionally raised the competition within Germany. A large number of factories tried their luck in civilian motor manufacture – in this way, they were at least able to keep their production facilities operating. Between 1920 and 1924 alone, as many as 121 companies started producing passenger cars – although Daimler and Benz alone would have been able to meet the demand for automobiles.

By 1927, after the first wave of mergers in the automotive industry, the number of producers in Germany had been reduced to just 19.

More than anything else, however, it was inflation that ruined the German industry. With the devaluation of the currency, people's purchasing power dwindled. The excessive scale of price increases is illustrated by the example of operating costs at Benz & Cie., rising from some 500 million marks in October 1922 to 22,600 billion marks less than a year later. And since German money had also lost its worth abroad, the acquisition of raw materials was jeopardized. Shortly before the currency reform in November 1923, for instance, Daimler-Motoren-Gesellschaft spent its own money to meet its obligations in payment transactions.

Alongside the economic turmoil, another, and very different, concomitant phenomenon of inflation made life difficult for Benz & Cie: when the economy is faring badly, speculators are having a field day. At Benz, danger emanated from Jakob Schapiro, a dealer and bodybuilder born in Odessa and living in Berlin; he bought large numbers of cars at a fixed price but paid for them much later when the money was almost worthless. With this trick, Schapiro earned so much money that he almost managed to secure the exclusive sales rights for Benz automobiles and could have bought more than 40 percent of the Benz stock. It was not before the merger in 1926, that the speculator could be forced to withdraw by means of a number of legal tricks.

The community of interests

In 1924, "figures spoke a sad language," it said in the memorandum of Carl Jahr, member of the Benz supervisory board. It was now high time for cooperation between the two south-west German manufacturers if they wished to become competitive again. In future, the two companies were "to devote the sacrifices in terms of funds and assets they had previously made to fight each other to a common cause," Jahr demanded in his memorandum. "All the more so as they belong to the same banking group today."

Meanwhile, the German banks had also consolidated their activities; after mergers with the principal banks of Daimler and Benz, Deutsche Bank was now represented in both companies' supervisory boards and was highly interested in bundling its shares in a large and strong company. Carl Jahr made out just one feasible solution: "Rendering top-quality work and rationalizing operations to such an extent that prices can be lowered significantly."

Daimler and Benz signed the community-of-interests contract on May 1, 1924, agreeing on the "retention of their legal independence" to the extent that "the pursuit of any special economic interests shall be excluded." This brought the community of interests – a customary cooperative-venture model in Germany at the time – close to being equivalent to a merger, as indicated in addition by the contract period until the year 2000 and the fact that it would have been virtually impossible to terminate the contract itself. In the mid-1920s, fiscal reasons spoke against a merger more than anything else. And a merger had been the aim right from the start. According to paragraph 15 of the community-of-interests contract, the merger was to be brought about "as soon as fiscal conditions permit this."

The stock capital was set at 600 Daimler shares to 346 Benz shares, and profits were to be distributed according to this ratio. Top management was assumed by a panel of ten people chaired by Emil Georg von Stauß, Director of Deutsche Bank. The members of the boards of management and supervisory boards were appointed deputy members of the respective boards of the other company – and so it happened that Carl Benz became a member of the supervisory board of Daimler-Motoren-Gesellschaft.

The contract established the two companies as an economic entity and empowered the new management to restructure operations extensively. The community of interests was committed to engaging in a joint range and model policy and to standardizing the dividend policy.

On May 8, one week after the signing of the contract, the two supervisory boards also approved the community of interests of Daimler and Benz. At the end of May,
Mercedes-Benz Automobil AG was established as a common sales organization. In November 1924, the boards of management also achieved agreement on joint materials procurement.

Initially, each partner continued to pursue its own strategic orientation. While the Daimler board endeavored to launch into American-style mass production as quickly as possible, the Benz big-wigs pursued a policy of careful modernization. The Stuttgarters had diversification into marine and aero-engines in mind and wanted to expand the group of companies by the addition of a steel works and a colliery to be able to start mass production quickly.

The Mannheimers, by contrast, wanted to become competitive in the automotive business first and expand large-scale production rather than engaging in expensive mass production. To cut costs, a larger number of components were to be outsourced and the number of models was to be reduced significantly. Banker Carl Jahr had favored this concept – which was to prevail eventually – as early as his memorandum: ideally a factory was to produce just one model "designed to perfection in the largest possible volumes."

At the beginning of the community of interests, those in power agreed at least on standardizing and simplifying their models. Each factory was to produce just one model in the future. Mannheim specialized on two-liter engines, Untertürkheim on four- and six-liter engines. Gaggenau and Marienfelde became the production sites for trucks below and above four tons, respectively. In addition, the design departments were to be merged and bodybuilding was to be concentrated in Sindelfingen. Carl Jahr expected this to bring forth "vehicles of high perfection built with combined experiences."

Immediately after the approval of the two supervisory boards, the community of interests' management panel met on the evening of May 8. At this meeting, the panel first of all agreed on an "obligation arising from gratitude" as biographer Paul Siebertz put it: Carl Benz and his wife were to receive an honorary salary until the end of their lives. Their aim was to ensure a carefree old age for Benz, after all one of the inventors of the automobile, exactly 25 years after Benz & Co. Rheinische Gasmotorenfabrik had been renamed Benz & Cie. Rheinische Gasmotorenfabrik AG. Like so many other Germans, Carl Benz, too, had become a victim of inflation and lost his possessions.

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