daimler and Renault-NissanAfter a disastrous merger with Chrysler in the late 1990s, which unwound in less than a decade, you'd think Daimler (DAI) would be gun-shy about teaming with another auto maker. But in linking up with an already allied Renault-Nissan, Daimler and its French-Japanese partner are seeking to compete in an increasingly competitive global auto industry, in which innovative products and cutting costs mark the path to profitability.

The partnership, announced Wednesday in Brussels, gives Renault-Nissan a symbolic 3.1% stake in Daimler, and the German carmaker gets a same-size stakes in Renault and Nissan (NSANY). The companies will collaborate on developing small cars, a segment in which Daimler has struggled to be profitable in recent years. Daimler, the maker of Mercedes-Benz vehicles, is best known for its luxury automobiles.

Daimler's Spotty Record in Alliances

In announcing the plan, Daimler Chairman Dieter Zetsche says the companies' expertise complement each other well. "Right away, we are strengthening our competitiveness in the small and compact car segment and are reducing our [carbon dioxide] footprint -- both on a long-term basis," Zetsche says.

The companies will share platforms, but the individual brand identities will remain distinct. Such an alliance isn't unique to Daimler -- it has several failed tie-ups in its past with Chrysler, Mitsubishi and Hyundai. Renault and Nissan's partnership, in which the companies share expertise in areas such as engine design, dates back to 1999. Renault holds a 44.3% stake in Nissan, while the Japanese company owns 15% of Renault.

Among other projects, the trio will jointly develop the platform for Daimler's Smart and Renault's Twingo models, including electric versions. Renault-Nissan will supply Daimler with three- and four-cylinder gas and diesel engines -- this not only fills a void in Daimler's engine offerings, but also allows Renault-Nissan to improve engine-plant efficiency.

Winning Abilities?

Speaking in Brussels, Carlos Ghosn, chief executive of both Renault and Nissan, says he isn't seeking a merger with Daimler but potentially deepened ties between the companies. "Daimler is the best partner possible. We're not competing against Daimler," Ghosn notes.

For his part, Zetsche says Daimler's partnership with Renault-Nissan isn't comparable to its 1998 merger with Chrysler, which cost Daimler billions of dollars and nearly destroyed Chrysler.

Whether the alliance can succeed is debatable. But what's clear is that Daimler needs to be able to compete in the small-car segment -- and Renault's proven ability to build and market small cars may finally give the German auto company a winning entry for frugal car buyers.

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