The "halo effect" is a well-known marketing concept where the perception of the quality of one product can rub off onto other products in the brand.
For example, Apple's (Nasdaq: AAPL ) iPod has had a blindingly bright halo effect on the rest of the company's products. Of the million Mac notebooks sold in its last quarter, half were to people who had not owned an Apple computer previously. Now whether that's because of the 80% market share the iPod enjoys is hard to quantify -- after all, Macs still only account for 5% of the total PC market -- but certainly people think more of the company and its products now.
In a similar way, DaimlerChrysler (NYSE: DCX ) is hoping to burnish its "down market" Chrysler brand via associations with its premium Mercedes brand. Cooperation between the two brands could achieve cost savings and cut product development time -- though that attitude is not held companywide, and it's certainly not held in Mercedes' Germany offices, where it is seen as diluting the premium label the German car has carried.
DaimlerChrysler is suffering from a host of problems that is impeding a turnaround at the world's fifth-largest car maker. For the third quarter, the Chrysler Group suffered a $1.5 billion operating loss brought on by higher fuel prices, among other things. Consumer preferences have switched from the SUV and pickup segment that currently comprises 70% of the group's sales, toward more fuel-efficient cars that have made Toyota (NYSE: TM ) the world's No. 2 car seller. Toyota reported a 7.3% profit gain today for its latest quarter, on sales of 2.16 million cars. It is on track to unseat General Motors (NYSE: GM ) as the largest car maker; GM saw global sales fall to 9.09 million cars last year, while Toyota sold 8.8 million.
DaimlerChrysler optimistically hopes that by more closely aligning Chrysler with Mercedes, the prestige and aura will magically turn its loss into the 7% operating profit margin that Mercedes is on track to achieve this year. Yet being a premium brand is no guarantee of premium profits. The prestige associated with the premium brands gives them little leverage, since other manufacturers can easily churn out their own premium lines to compete.
Mercedes remains locked in a pitched battle with BMW, in which the two automakers produce similar numbers of cars and earn similar profits. Rubbing elbows with Chrysler will do nothing to help it exceed BMW in sales and might serve to set Mercedes back, bringing back memories of quality control problems and tough losses.
Even DaimlerChrysler's executives admit that the plan could backfire, and they would rather keep the cooperation and buying synergies confined to invisible components that consumers wouldn't see. When the 2005 Chrysler 300C was introduced, it was built with roughly 50% Mercedes E-Class engineering (transmissions, front and rear suspensions, stability control, and such), and the new 2007 Jeep Grand Cherokee CRD engine will be built at a Mercedes plant. So you could probably expect more under-the-hood, behind-the-scenes collaboration rather than the flashy stylings associated with Mercedes. In one sense, that's too bad for Chrysler, because many of its models need some style makeovers -- though some have suggested that Mercedes' Ocean Drive concept car looks more like a 1990s car than a production model for 2008. And that's what Mercedes engineers fear most: upgrading the Chrysler brand at the expense of Mercedes.
It's never been a happy marriage between the two, and perhaps Chrysler's fling with China's Chery Automobile will cause a permanent rift that would find Daimler divorcing Chrysler and Chrysler shacking up at Chery's house. At least that move would allow a Benz to remain a Benz, and any halo effect would simply be distributed amongst the different Mercedes models.
BMW is a recommendation of Motley Fool Stock Advisor, where you can test-drive the service, kick the tires, and look under the hood for 30 days risk-free.
Fool contributor Rich Duprey drives a Mercedes, but does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.