Chrysler nightmare no longer haunts Daimler CEO

FRANKFURT (Reuters) - In the hunt for vital cost savings in the small car segment, luxury producer Daimler (DAIGn.DE) is willing to blur a line in the sand it has drawn since its 2007 Chrysler divorce and acquire equity in a volume carmaker - again.

Days after selling its 5 percent stake in India's Tata Motors (TAMO.BO), Chief Executive Dieter Zetsche is reversing course and plans to get shares in Renault (RENA.PA), whose recent appeal has been driven by small runabouts like its top-selling Clio and cheap Romanian-built Logan sedan.

Sources familiar with the talks say Daimler plans to acquire a tiny stake of around 3 percent in Renault next month, using treasury shares as currency to avoid spending cash only weeks after angering investors by omitting a dividend for 2009.

Daimler aims to manufacture a new four-seat Smart car that could share underpinnings with the pint-sized Renault Twingo and potentially roll off the same assembly line in the French carmaker's Slovenian production site in Novo Mesto.

"They don't make any real profit with Smart, much like BMW's (BMWG.DE) Mini. The development costs are too high to justify its own architecture so they need to find a partner to increase overall production volume," said Henner Lehne from industry forecaster CSM.

Daimler would also procure components or larger modules such as small four-cylinder engines from its French partner, whose biggest shareholder is the French state.

These could then be perfected by Mercedes engineers for A- and B-Class compacts.

Daimler would profit from a partnership with Renault in the same way that premium rival Audi (VOWG_p.DE) gains by building A3 hatchbacks or A1 subcompacts on Volkswagen platforms to save development costs and achieve economies of scale.

CSM's Lehne believes the new four-seat Smart would benefit if built on Renault's massive B-Platform it shares with alliance partner Nissan (7201.T). It underpins a combined volume of 3.4 million vehicles across their group brands annually.

"That would offer Smart tremendous scale effects," he said.

Daimler at one stage mulled ditching Smart after years of heavy losses, but salvaged the brand with severe pruning that included scrapping its old four seat model, a reengineered more expensive version of the Mitsubishi Colt that flopped.

MESSAGE TO ENGINEERS

Premium brands can no longer afford to ignore the imperative of greater scale. They need small cars to cut their marque's carbon footprint ahead of a highly ambitious emissions target of 95 grams per kilometer set for the European industry by 2020.

Daimler and to a lesser degree BMW lack the volume to build the Mercedes A-Class or BMW 1 Series cost-effectively, so Zetsche tried to persuade BMW to forge a strategic partnership where only a handful of areas would remain taboo.

Analysts applauded closer ties between the two since their luxury brands would not be diluted, but BMW felt the rivalry was a key to driving innovation. One banker close to the talks acknowledged Daimler's efforts "were going nowhere."

As other carmakers like Volkswagen allied themselves with Porsche (PSHG_p.DE) and Suzuki (7269.T) during last year's industry crisis, options began to dwindle fast for Daimler.

A former head of Chrysler, Zetsche has flatly conceded the 1998 merger failed to generate any meaningful savings between the U.S. mass carmaker and German luxury sibling Mercedes. Ever since, he has sworn off acquiring car brands in favor of M&A deals only with technology providers like Tesla.

Economic reality in the small car segment means, however, Zetsche is ready to form a mini-alliance using equity as a mortar, more as a political signal to tell standoffish Mercedes engineers that Renault colleagues are friends, not enemies.

"There is no absolute need for a cross-shareholding to achieve the cost savings within a partnership but it could be an internal signal to staff at both carmakers that they have to work together to make this succeed," Fitch Ratings analyst Emmanuel Bulle said.

One auto analyst cautioned against over-interpreting the cost savings potential since common projects would only start to yield results years down the road and the depth of the partnership does not come anything near Renault's alliance with Nissan.

"A 3 percent stake? At that level no one is obligated to do anything really, so I would try and dampen expectations before the market starts to estimate billions in synergy potential," he said.

(Additional reporting by Hendrik Sackmann in Stuttgart, Edward Taylor in Frankfurt and Marcel Michelson in Paris; Editing by David Cowell)