Are all options, even the most drastic, now on the table as DaimlerChrysler AG tries to cut losses racked up by the Chrysler Group?
The German automaker seemed to send mixed messages Wednesday about the possibility it might jettison its American partner.
“We don't exclude anything here,” Chief Financial Officer Bodo Uebber said during a conference call on DaimlerChrysler's third-quarter results, which were marred by a $1.48 billion loss at Chrysler.
Pressed about the possibility of spinning off Chrysler or pairing it with another automaker, Uebber told reporters and analysts that the company was studying the situation and would draw its conclusions afterward.
“We need to safeguard sustainable profitability for the Chrysler Group and for DaimlerChrysler,” Uebber said.
But in response to media speculation ignited by Uebber's comments, DaimlerChrysler chief spokesman Hartmut Schick issued a statement late in the day saying “there are no plans to sell Chrysler.”
Uebber's comments triggered a rally in DaimlerChrysler shares.
“It's no longer a clear denial” that Chrysler might be dumped, said Juergen Pieper, an auto analyst and co-head of research at Metzler Bank in Frankfurt, Germany.
DaimlerChrysler's U.S. shares traded in New York closed up 4.5 percent at $54.68, even though a company spokesman, before Schick's statement, said Uebber's remarks had been misconstrued.
Investors see change
Investors thought they detected a shift in the management's thinking, as Uebber refused to rule out anything during repeated questioning about Chrysler. In the past, the company has flatly denied any possibility of dropping Chrysler, even though it shed its stakes in Asian automakers.
“DaimlerChrysler's management know they're under pressure,” Pieper said. The stock is one of the weakest performers among European automakers.
With Deutsche Bank no longer serving as a bulwark against predators, DaimlerChrysler might be vulnerable to bidders attracted by a resurgent Mercedes. “A takeover wouldn't be impossible,” Pieper said. “There's no family, no big investor.”
He doesn't believe, however, that DaimlerChrysler will get rid of its Auburn Hills division. DaimlerChrysler Chairman and CEO Dieter Zetsche, who also heads the Mercedes Car Group, was previously CEO of Chrysler and earned the top job partly on the basis of the recovery he achieved at Chrysler.
Chrysler recently said that a team of managers, including top Mercedes executives, was examining every aspect of the business to find ways to cut costs by $1,000 per vehicle and improve efficiency.
In a note to Chrysler employees Wednesday, Zetsche said the company was considering restructuring moves and will unveil a “comprehensive package of measures” in several weeks.
Meanwhile, Mercedes has re-established itself as the company's main breadwinner after a couple of difficult years. “The Mercedes star is beginning to shine brightly again,” Zetsche said in the note.
Mercedes more than doubled its third-quarter profit to $1.26 billion, but that did not fully offset Chrysler's losses. DaimlerChrysler's net profit fell 37 percent to $686 million.
The widely flagged deterioration of Chrysler's results reflected a 14 percent drop in sales and softening demand for its larger, traditionally more lucrative, vehicles.
“We are in no way satisfied with our third-quarter results,” said Chrysler CEO Tom LaSorda.
“We have taken dramatic steps to reduce production and shipments to address the inventory situation in the United States, and we continue to work to find new ways to eliminate waste, lower our costs and improve quality.”
LaSorda and his top lieutenants — Chrysler Chief Operating Officer Eric Ridenour and sales chief Joe Eberhardt — are under intense pressure to correct the mistakes that led to an imbalance between sales and output — and subsequently costly production halts.
Production planning cited
But Chrysler veterans say poor production planning is one of its longtime weaknesses. “Chrysler is the industry's worst culprit (when it comes to) building beyond demand and then halting production to compensate,” said Thomas Stallkamp, former Chrysler president and now a partner at private equity firm Ripplewood Holdings.
Until recently, DaimlerChrysler executives were counting on a flurry of new model launches — eight in the second half of this year, with more coming in 2007, including a new minivan — to revive Chrysler.
Like GM and Ford, Chrysler is struggling against efficient Asian automakers that have newer and lower-cost manufacturing operations in North America.
“Right now, everyone in North America is challenged,” said Van Conway, president of Conway, MacKenzie & Dunleavy, a Birmingham firm specializing in turnaround consultancy.
“All three have to deal with the same question — can the domestic carmakers compete with the Asian car companies?
“You could argue that you can turn Chrysler around quicker” than its Detroit rivals, he said. “Chrysler needs less volume to get into the black than the other two.”
But DaimlerChrysler investors are wary of the boom-and-bust cycle of the U.S. automakers and the U.S. market's cutthroat dynamics.
Chrysler has lost $4 billion over the past five years, against a $32 billion accumulated profit for the DaimlerChrysler group, Deutsche Bank said in a report last month.
Mercedes, meanwhile, is showing strong results reflecting reduced costs and smooth launches of models such as the flagship S-Class sedan.
“It's a huge success for Mercedes,” said Tom Libby, senior director of industry analysis at J.D. Power and Associates' Power Information Network. The S-Class was selling for $94,000 in late summer, he said, compared with an average price of $68,000 for its rivals.
“The continuation of the very positive earnings trend at the Mercedes Car Group, the distinct increase in operating profit at the truck group as well as the financial services' operating profit, which is above the high level of earnings in the prior-year quarter, only partially compensated for the loss contributed by the Chrysler Group,” DCX said in its earnings statement.
DaimlerChrysler reiterated that it expects Chrysler to lose about $1.3 billion this year but maintained its forecast for group operating profit of about $6.3 billion.
