No Joke Daimler to Eliminate Jobs, Models to Cut Smart Losses

April 1, 2005; Jeremy van Loon writing for Bloomberg reported that DaimlerChrysler AG, whose Smart two- seat cars have dragged down earnings for seven years, plans to cut 700 jobs, or about one-third of the division's workforce, and eliminate models to stem losses.

The overhaul, which will cost 1.2 billion euros ($1.6 billion) and lead to an earnings decline at the world's fifth- biggest carmaker this year, will help Smart reduce operating costs by 30 percent in two years, Stuttgart, Germany-based DaimlerChrysler said in a stock exchange filing.

Smart may have lost a combined 2.5 billion euros since the brand's first model, which is eight feet (2.5 meters) long, went on sale in 1998, according to estimates by analysts including Juergen Pieper at Bankhaus Metzler in Frankfurt. Earnings at the Mercedes Car Group, which includes Smart, collapsed in the fourth quarter as design faults in luxury cars added to the woes.

``It's going to take a long, long time for DaimlerChrysler to get back where it was,'' said Andy Brough, who helps oversee $6.5 billion at Schroder Investment Management in London and doesn't own any carmaker stocks.

DaimlerChrysler shares fell as much as 53 cents, or 1.5 percent, to 34 euros and were down 0.8 percent at 34.24 euros at 12:56 p.m. in Frankfurt. The stock's 2.9 percent drop this year is the fifth-worst performance on Germany's benchmark DAX index.

``This highlights further concern in the industry,'' said Rolf Elgeti, head of European equity strategy at ABN Amro in London. ``There's too much overcapacity.''

Job-Cut Breakdown

Smart's workforce of 2,200 employees includes 850 people at the brand's Hambach, France, headquarters and 1,350 workers at Boeblingen, Germany. About 600 jobs in Boeblingen and 100 positions at Hambach will be cut, the carmaker's works council said in a faxed statement.

``The planned job cuts will affect the workers at Boeblingen especially hard,'' said Erich Klemm, DaimlerChrysler's deputy supervisory board chairman and the works council chief, in the statement. Worker representatives are in discussions to ``find a solution for all the employees.''

DaimlerChrysler expects ``significant workforce reductions'' in Smart's reorganization, the carmaker said, without giving details. Toni Melfi, a spokesman, wasn't immediately available to comment on specifics.

Market Share Declines

Mercedes Car Group has lost market share to Bayerische Motoren Werke AG and Toyota Motor Co. as Chief Executive Officer Juergen Schrempp spent 4 billion euros reorganizing the Chrysler division after buying the U.S. carmaker in 1998. Mercedes-Benz, the world's biggest luxury carmaker, yesterday recalled 1.3 million vehicles to replace electrical and braking faults.

Mercedes-Benz in June ranked 29th out of 37 brands in a J.D. Power & Associates reliability study of three-year-old cars. Profit at Mercedes Car Group dropped 97 percent, as the division spent an unspecified amount to improve quality. DaimlerChrysler's fourth-quarter net income fell 63 percent to 526 million euros. The company doesn't break out Smart earnings figures.

``The substantial exceptional expenses in connection with the new Smart business model will impact DaimlerChrysler's earnings forecast for 2005,'' the carmaker said today. The company now expects a ``slightly higher operating profit'' this year excluding the Smart reorganization costs. Mercedes doesn't break out Smart earnings.

SUV Plan Dropped

Smart will combine sales operations with DaimlerChrysler's luxury Mercedes-Benz brand and drop plans to build a sport-utility vehicle under the reorganization, the carmaker said.

Schrempp, Chief Financial Officer Bodo Uebber and Eckhard Cordes, who heads Mercedes, will hold a conference call later today to discuss the revamp, which includes development of a successor to the two-seat model to meet requirements in the U.S., the world's biggest car market.

Smart would sell cars in the U.S. through existing Mercedes- Benz dealerships rather than start its own distribution network, Cordes said in January. That strategy helped contribute to the success of BMW's competing Mini car.

DaimlerChrysler plans to talk with the works council at Smart in coming weeks to reach an agreement over job cuts in a ``socially acceptable manner,'' the company said today.

The carmaker contends that Smart is the right brand to fill out its product line, which includes the $85,000 S-Class luxury sedan. Smart is a ``unique'' product though it's not ``realistic'' for the car to have a return on sales of 10 percent, Cordes said on March 1 at the Geneva car show.

The carmaker will stop developing the proposed Smart ForMore sport-utility vehicle, and production of the roadster version will be terminated at the end of the year, DaimlerChrysler said today. Cooperation with Mitsubishi Motors Corp. will continue on the four- door Smart model.

Missed Sales Targets

Smart in 1994 predicted that it would be able to sell 200,000 of its small, 2-seat city coupes, now called the ForTwo, every year. The brand in 2004 sold a total of about 153,000 vehicles, short of a target of 155,000 cars. The carmaker had targeted 2006 as the first year Smart would break even, a delay from an original 2004 goal because of missed sales targets.

The original Smart starts at 8,820 euros, according to the German Automobile Club, more than Daihatsu Motor Co.'s Cuore, which costs 7,795 euros. The four-door Smart ForFour, which costs 12,990 euros, competes with PSA Peugeot's Citroen C3 and Nissan Motor Co.'s Micra, both of which cost less.

Bonds Fall