Daimler Officials Are Committed to Dream Despite Losses

It all looked so good. Daimler-Benz, manufacturer of the world-famous Mercedes car, embarked on an expansion into areas such as aerospace and defense with the dream of becoming the world’s leading integrated technology group.

That was during the fat years of the mid-1980s. But less than a decade later, Daimler has crashed to the first loss in its postwar history--1.84 billion marks ($1.07 billion), according to U.S. accounting rules.

This was in spite of doubling in size to become Germany’s largest industrial concern, making everything from planes to trains to cars and with annual sales of almost 100 billion marks ($58.23 billion).

What went wrong?

First, the end of the Cold War caused cash-strapped Western governments to slash defense budgets. Second, a slump in air travel caused new aircraft orders to nose-dive. Third, a severe global recession caused car demand to crash.

While recovering car sales, cost cuts and huge layoffs are expected to push Daimler back into profit this year, the businesses it bought during the 1980s acquisition binge will not contribute positive earnings until 1995 at the earliest.

In the past decade, it took over electronics group AEG AG, engine and turbine maker MTU, aircraft maker Dornier, defense group MBB and Dutch plane builder Fokker.

In 1989, Daimler reorganized itself into a holding company with four subsidiaries--Mercedes-Benz, AEG, Deutsche Aerospace (DASA) and finance and information technology unit Debis (Daimler-Benz InterServices).

Group Chairman Edzard Reuter and finance chief Gerhard Liener remain firmly committed to the dream of an integrated technology group in spite of a wave of criticism that Daimler should have stuck to its core business of making cars.

“In many countries, car markets are almost saturated. It makes sense to expand into new areas with growth promise for the next century,” Liener said this week.

While presenting a futuristic fuel cell-driven vehicle project earlier this week, Reuter said the group could survive only through investment in new technologies.

“The critics of our strategy have been silenced because our concept is showing successes despite the crisis,” he added.

“Daimler’s earnings have collapsed but its aim of being an integrated technology group has not,” a London-based analyst said.

A drive toward the globalization has been accompanied by a search for new sources of capital to fund the expansion. In October, Daimler became the first German company to be listed on the New York Stock Exchange and plans to be listed in Singapore from next month.

The most encouraging changes, analysts say, are happening at Mercedes-Benz, which accounts for two-thirds of group sales. Once known for its limited lineup of prestigious but conservatively styled sedans, Mercedes has confronted a deep sales slump on the key European car market by focusing more on customers’ wants and producing more “niche” vehicles.

Hence the new compact A-Class city car, which will roll off the production line in 1997, and a decision to cooperate with Switzerland’s Nicholas Hayek to produce a radical, environmentally friendly mini car known as the Swatchmobile.

The company also plans to build four-wheel-drive sports-utility vehicles in the United States, beginning in 1997.

But most important for now is the new lower-priced C-Class model (the replacement for the old 190 series), which the company introduced last year in a bid to recapture sales lost to the stunningly successful 3-series from arch rival BMW.

The C-Class is selling extremely well and will make a vital contribution to the whole group’s recovery, analysts say.

DASA, the second-largest division, lost nearly a billion marks ($582.3 million) in 1993 due to falling orders for both civil and military aircraft. It plans to shed 16,000 jobs, close six plants and reorganize many businesses.

AEG, which also lost nearly a billion marks last year, is selling its household goods unit to Sweden’s AB Electrolux, and will hive off non-core interests and concentrate on railways and microelectronics.

This will be a welcome break for Daimler, which acquired loss-making AEG in 1986 from bank creditors who had rescued it from the brink of bankruptcy only four years earlier and has since pumped hundreds of millions of marks into it.

Analysts say Daimler began restructuring long before many other German firms and will be in good shape to reap the benefits of a pickup in demand when the recession ends.

Restructuring costs, which amounted to 3.5 billion marks ($2.04 billion) in 1993 will fall sharply this year. This plus cost cuts and rising C-Class sales should propel Daimler back to profit of up to a billion marks this year, analysts say.