DCX Foggy Forcast

By Christine Tierney in Frankfurt, Germany, and Joann Muller in Detroit

Is Chrysler's turnaround in trouble? It sure looks that way. On Feb. 6, the company's German parent, DaimlerChrysler , warned that its 2002 operating profit would fall at least $1.4 billion, or 28%, below the $5 billion target it laid out a year ago.

Analysts were quick to assume that the struggling Chrysler unit was to blame. Instead of breaking even, as projected, they predict Chrysler will probably lose $700 million to $800 million in 2002. Yet on Feb. 11, Chrysler CEO Dieter Zetsche insisted he's still ``absolutely committed'' to achieving Chrysler's break-even goal. ``That target hasn't changed, even in this down economy,'' he said.

Wait a minute. If Chrysler isn't the drag on earnings, where is the soft spot? Turns out Chrysler isn't the only troublesome member of the DaimlerChrysler family. The commercial-vehicles division is also struggling in weak truck markets in Europe and the U.S. The unit showed a small operating profit in 2001, excluding exceptional items, despite a 34% drop last year in sales by its Portland [Ore.]-based Freightliner truck subsidiary, according to Eckhard Cordes, chief of the commercial-vehicles division.

DEFINING MOMENT. The unit faces a tough 2002, too, Cordes says, with the U.S. and European truck markets expected to contract by 10% to 15%. And even DaimlerChrysler's successful Mercedes-Benz luxury-car division may report lower profits in 2002's first half due to the cost launching its all-important E-class sedan.

Up to this point, pulling Chrysler out of the ditch has been the company's toughest challenge. Could it be that DaimlerChrysler's definition of ``achieving break-even'' for Chrysler this year is a little loose? Indeed, some analysts believe the U.S. division will declare it's breaking even at the point when it stops bleeding red ink, presumably late in the year, even though the full-year result may be a loss.

A Chrysler spokesman insists that when Zetsche promises to achieve break-even in 2002, he means for the entire year. If that's the case, DaimlerChrysler executives will have some explaining to do on Feb. 20, when they release details of the 2001 results and their revised outlook for 2002. MM Warburg analyst Robert Pottman says the company's Feb. 6 profit warning jolted his confidence, coming just three weeks after the Detroit auto show, where management reaffirmed the earlier targets. Asks Pottman: ``Does the management see further risks, and if so, what are they?''

STUCK ON INCENTIVES. That's the big question. The Chrysler division has been losing money since the third quarter of 2000, prompting DaimlerChrysler CEO Jurgen Schrempp to dispatch Zetsche and a deputy from Stuttgart to turn the business around. Despite the new German management's pledge to break Chrysler out of a fierce incentive war, the U.S. subsidiary spent more on these promotions last year than its rivals: $2,411 per vehicle, compared with an industry average of $1,877, according to Merrill Lynch.

Chrysler's incentives remained above average in January. It's even offering discounts on its once popular retro-styled PT Cruiser. Even so, Chrysler's sales fell 8.8% in January from a year earlier, more than the market as a whole. By contrast, Mercedes-Benz sales jumped 19% last month in the U.S., bolstered by demand for the sporty C-class models.

Chrysler's troubles resulted in a $589 million net loss for the DaimlerChrysler group in 2001, its first annual loss since the 1998 merger. DaimlerChrysler reported a 2001 operating profit of $1.2 billion, excluding exceptional items -- within the target range set in the recovery plan -- but said it would fall short of its 2002 target because of the deteriorating business environment.

Most analysts had slashed their 2002 operating forecasts for DaimlerChrysler to around $4 billion even before its profit warning, the assumption being that Chrysler would not break even this year.

WHERE'S THE WEAKNESS? In a curiously worded statement, DaimlerChrysler said this year's operating profit would be significantly more than double last year's. Analysts read that to mean less than triple, and penciled in a new range of $2.4 billion to $3.6 billion. That's $1.4 billion below the low end of the previous $5 billion to $5.7 billion target range for 2002.

So if Chrysler is on track, what isn't? ``If Zetsche is right with his target for Chrysler, and DaimlerChrysler [operating profit] comes to about $2.9 billion, in the middle of the range, this would imply other activities of the company would show far stronger decreases in profitability. Trucks? Mercedes?'' write Deutsche Bank analysts in a stock report. Anguished investors will want an explanation at the auto giant's Feb. 20 conference.