Fitch Revises DaimlerChrysler Outlook To Stable

CHICAGO--July 19, 2005--Fitch Ratings has today revised the Outlook on DaimlerChrysler AG's (DCX) 'BBB+' senior unsecured rating to Stable from Positive. The short-term rating is affirmed at 'F2'.

The Outlook revision reflects Fitch's view that, given the recent performance of the Mercedes Car Group and competitive pressures at the Chrysler Group, an upgrade of the ratings for DaimlerChrysler is unlikely in the short term. While the Mercedes Car Group had been the stabilizer of the group's credit profile since its formation in fiscal 1998, this division has recently faced a number of quality issues, a restructuring and increasing operating losses at its Smart division, and higher expenses related to new product introductions.

Despite significant improvement in profitability at the Chrysler Group resulting from attractive product introductions and improved market share, new product competition and pricing pressures are likely to impact profitability over the intermediate term. Despite a number of scheduled new product offerings, Chrysler will be challenged to retain the share gains and profitability garnered from recent product successes. Pricing pressures and transplant capacity expansion will continue to limit margin expansion and could neutralize at least parts of the operational improvements achieved at Chrysler Group so far.

The Commercial Vehicles segment remains in the midst of a strong cyclical upswing in the U.S., which is likely to continue through 2006. New emission standards to be enacted in 2007 in the U.S. could result in a 2007 cyclical downturn, although the current strength of the market and emission-compliant products could extend the current build cycle. Over the long-term, the Commercial Vehicles segment remains well positioned to capitalize on its market position, scale, and technical capabilities and to leverage its cost position and recent strategic acquisitions.

Consolidated margins also remain affected by the sharp increase in commodity prices. Fitch expects that relief in this area may not be felt until 2007. A restructuring program at the center of a new business model for the Smart business unit targets to increase earnings at Smart by some EUR600 million in fiscal 2007, which would result in achieving break-even in the same year, while streamlining the company's model range. Management expects to incur restructuring expenses of up to EUR1.2 billion in fiscal 2005, the majority of which will be cash-effective. Separately, losses at the tolling joint venture Toll Collect (incorporated in the Financial Services division) have hurt 2004 consolidated operating results. These losses were incurred following a revaluation of the system's total cost and additional operating expenses required to ensure the timely start of operations in January 2005.

In their entirety, these developments have affected the positive momentum assessed during fiscal 2004 and are expected to affect short- to medium-term profitability and cash generation. As a result, Fitch does not see the potential for a ratings upgrade within the original time frame envisioned. A key focus over the near term will be the performance of the Mercedes Car Group in addressing quality issues and the performance of important new product introductions.

A recall of several models under the Mercedes-Benz brand had been made to address actual and potential quality issues with respect to electronic components. Fitch also notes the sizable exchange rate risk MCG still faces as a result of the weakness of the U.S. dollar, which affects the margins achievable on the export of vehicles out of Europe.

Fitch also remains concerned about the financial health of the U.S. supplier base, which has been adversely affected by pricing pressures, high structural and legacy costs, and high commodity prices. For the Chrysler Group, it could become increasingly difficult to extract the incremental price concessions that have been the norm historically. Instead, increasing levels of financial support are being provided by OEMs to suppliers to ensure supply chain integrity and investment required by new product launches.

Fitch notes that the financial profile of the group remains strong. Cash surpluses were used to repay industrial debt while exchange rate movements have lowered the book value of the U.S. dollar-denominated debt. At the same time, the increase in total group debt reflected the strong expansion in Financial Services businesses. Industrial leverage improved further and reflects DCX's industrial net cash position, while EBITDA-based gross interest coverage rose to 10.2 times (x) (fiscal 2003: 7.9x). Nevertheless the agency expects that the quality offensive at Mercedes-Benz and the Smart restructuring as well as potential pricing pressures in North America are likely to affect the group's cash generation in the short to medium term.

Fitch's rating definitions are available on the agency's public web site, www.fitchratings.com. Published ratings, criteria and methodologies, and relevant policies and procedures are also available from this site, at all times. This document will remain on the public site for seven days.