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DaimlerChrysler to Restructure Smart
Friday April 1, 10:02 am ET
By Matt Moore, AP Business Writer
DaimlerChrysler to Restructure Smart; Scrap Some Models, Cut 700 Jobs Through 2006
FRANKFURT, Germany (AP) -- DaimlerChrysler AG announced plans Friday to restructure its money-losing Smart car maker, spending up to 1.2 billion euros ($1.56 billion) this year, cutting 700 jobs and scrapping some models.
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Smart is part of the German-U.S. automaker's troubled Mercedes division, with its ultra-compact brands including the zippy two-seat forTwo, the four-seat forFour and a two-seat roadster. The roadster will stop being produced this year and plans for an SUV model are being dropped.
"The new business model aims to put the small-car brand onto a financially sound basis, with the goal of breaking even in 2007," said Mercedes-Benz chief Eckhard Cordes.
Smart has been losing money, but the company has not said how much.
Cordes said the restructuring program would result in costs of up to 1.2 billion euros ($1.56 billion) this year.
"Excluding the exceptional charge from Smart, DaimlerChrysler, after a weaker first and second quarter, still expects a slightly higher operating profit for full year 2005 compared to 2004," the company said.
Some 700 workers will lose their jobs, including 600 at the company's headquarters operations in Boeblingen near Stuttgart in southern Germany. Some 100 jobs will be eliminated at Smart's manufacturing plant in Hambach, France.
DaimlerChrysler shares fell 1 percent to 34.16 euros ($44.29) in afternoon trading on the Frankfurt exchange.
"It is obvious with Smart that we have built a very strong brand and created tremendous empathy with many customers and admirers," DaimlerChrysler chairman Juergen Schrempp said in a conference call. "We have said repeatedly that we would continue with the brand."
But Cordes conceded that DaimlerChrysler had considered shutting down the Smart operation completely.
"We have considered different options, which theoretically would be available, among them also the complete closure of Smart," he said. "The option we have decided upon is by far ... the best from a shareholder point of view."
The company said a new product concept for Smart "calls for the intensified development of the successor" to the original two-seat car, "including fulfilling the requirements for the U.S. market."
Cordes said initial feedback on Smart sales in Canada were good and bode well for an eventual U.S. rollout.
"If we can achieve good margins, then we can bring it to the U.S.," he said.
Another aspect of the model includes shifting Smart sales, procurement and service into Mercedes-Benz operations, in part to take advantage of the automaker's established network.
smart.com
daimlerchrysler.com
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UPDATE 4-Smart revamp to cost Daimler up to 1.2 bln euros
Fri Apr 1, 2005 12:21 PM ET
(Adds management, analyst comments from conference call)
By Christiaan Hetzner
FRANKFURT, April 1 (Reuters) - DaimlerChrysler (DCXGn.DE: Quote, Profile, Research) will spend up to 1.2 billion euros ($1.56 billion) in 2005 to revamp its ailing Smart brand, adding to its woes just a day after announcing its biggest-ever recall for its Mercedes brand.
"The substantial expenses in connection with the new Smart business model will impact DaimlerChrysler's earnings forecast for 2005," the company said in a statement on Friday.
Daimler reiterated it expects a slightly higher operating profit this year compared to the last, but only when excluding the one-off restructuring charge for the loss-making marque, and said it was targeting break-even for Smart in 2007.
Smart, known for its quirky, snub-nosed ForTwo microcar, has not made a profit since it was set up jointly with Swatch founder Nicolas Hayek in 1994. Daimler bought Hayek out four years later.
The announcement comes on the heels of Thursday's recall of 1.3 million Mercedes-Benz vehicles worldwide, including the E-Class full-size saloon and the brand new CLS four-door coupe, signalling just how dire the situation is at Daimler's flagship division.
In the fourth quarter of last year, operating profit at the Mercedes Car Group, Daimler's former jewel, comprising the Mercedes, Smart and Maybach brands, plunged 97 percent to just 20 million euros largely due to Smart's 600 million euro loss.
CORDES'S PLAN
Mercedes Car Group chief Eckhard Cordes admitted for the first time during a conference call that the company had considered closing down Smart -- a move many analysts are calling for.
Cordes aims to lower fixed costs at Smart by around 30 percent within the next two years, in part by cutting a third of its 2,100 workforce by 2006.
Cordes said the plan to break even was not based on the assumption that Daimler would find a partner for Smart. Daimler has not ruled this out. It also does not take into account sales from a possible launch of the brand in the United States in the mid-term.
Cordes said the plan was "by far the best from a shareholder value point of view."
Shares in Daimler closed down 0.5 percent at 34.36, underperforming a 0.7 percent gain in the DJ Stoxx European autos index .
Munich-based bank Merck Finck downgraded shares in Daimler to "sell" from "hold" on Friday following news of the restructuring charges and the recall, while Citigroup said the plan fell short of hopes for a more radical approach.
"Investors hoping for some new thinking will be disappointed that the company appears determined to 'grow its way' out of trouble at the Smart unit," Citigroup told clients.
Dresdner Kleinwort Wasserstein analyst Arndt Ellinghorst told management during the call that the potential profits of 50 to 80 million euros annually were "tiny compared to the risks".
ONLY TWO MODELS LEFT
As part of the rescue plan, Smart will discontinue production of its roadster model at the end of 2005 and will drop plans to build the Smart ForMore compact off-roader.
This leaves just the ForTwo and the new ForFour subcompact in the brand's model range.
"The new product concept calls for the intensified development of the successor to the Smart ForTwo, including fulfilling the requirements for the U.S. market," it said, adding that it will sell its next generation, three-cylinder petrol engine to Mitsubishi Motors (7211.T: Quote, Profile, Research) and Nissan (7201.T: Quote, Profile, Research) to achieve greater economies of scale.
The cooperation with Mitsubishi on the production of its Smart ForFour at the Japanese carmaker's plant in the Netherlands would continue, but measures would be taken to ensure the model will break even in the future, it said.
The brand will largely lose its independence as key areas of development, sales, purchasing, after-sales and service will be integrated into Mercedes-Benz to generate greater cost savings. A quarter more Smart outlets will also be opened within the showrooms of existing Mercedes-Benz dealerships.
Daimler has limped from one bailout plan to the next in recent years, first trying to restructure U.S.-arm Chrysler, then fix alliance partner Mitsubishi, only to find that its steady workhorse Mercedes finally began to crumble from neglect.
"We're sitting now for three years in a row together, talking about massive problems," DrKW's Ellinghorst said.
"It was Chrysler in 2003, Mitsubishi last year, now its Smart and Mercedes. Should I put a reminder in my diary for next year?"
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