DaimlerChrysler Woes Fuel Merger Second-Guessing

DaimlerChrysler executives on Monday disclosed $269 million in fourth-quarter losses, the first red ink to stain the global company since the auto giants merged in 1998 and fresh cause for second-guessing the wisdom of marrying the vaunted Mercedes with free-falling Chrysler.

The company also said it will book a $2.8-billion restructuring charge this quarter to finance a Chrysler turnaround and may take nearly $1 billion more later this year.

Performance figures for last year and even worse forecasts for this year provided a clear picture of a solid, century-old European company dragged down by crisis-ridden acquisitions, as the Mercedes-Benz division enjoyed record earnings.

The company’s German strategists, however, said their long-term goal of becoming a major player in world markets remains unshaken. They detailed an ambitious turnaround plan to restore Chrysler to profitability within a year and shore up another overseas partner, Mitsubishi Motors of Japan.

Facing a second straight year of losses and declining consumer confidence after decades of covering up safety defects, Mitsubishi will eliminate 9,500 jobs--14% of its work force--and reduce output by 20%, executives announced here and in Tokyo.

The moves did little to improve DaimlerChrysler’s tumbling stock value, as shares traded about 1% lower on the Frankfurt DAX exchange even after the company’s top managers spent two hours detailing an intricate program for putting the U.S. car maker back in the black. Its U.S. shares fell 68 cents to $48.12 on the New York Stock Exchange.

“The situation in the United States has deteriorated dramatically,” said DaimlerChrysler Chairman Juergen Schrempp, who faces lawsuits from Chrysler shareholders who accuse him of misleading them with promises of a “marriage of equals” when what Schrempp intended was a Daimler takeover.

Uncharacteristically dour amid reminders that his job is on the line, Schrempp reaffirmed his commitment to the merger despite industry analysts’ observations that the Germans would be better off without the U.S. firm. “Chrysler is an important pillar in our strategy,” he said.

The Chrysler rescue strategy envisions nearly $1 billion in cost savings this year to be achieved by forcing suppliers to cut prices, broader sharing of components among all brands and common platforms--the costly undercarriages--for small and mid-size cars produced by Chrysler and Mitsubishi. The company wants to reduce the number of Chrysler and Mitsubishi platforms from the current 29 to no more than 16.

The German managers made clear, however, that there would be no cross-breeding of Chrysler or Mitsubishi components with Mercedes-Benz products--a potential cost efficiency they have long and steadfastly rejected for fear it would degrade Mercedes’ elite image.

“When a customer buys a Mercedes, he can assume he’s getting a Mercedes,” division chief Juergen Hubbert retorted when asked if the company was reconsidering its opposition to platform-sharing or using Chrysler engines in the German luxury models.

Material-cost savings are projected to rise to more than $3.5 billion in 2003. Combined with labor-cost reductions expected as Chrysler sheds 26,000 of its 121,000 work force over the next few years, the savings should rise to $6.6 billion by 2003, the executives said.

Chrysler’s $1.3-billion loss over the last three months of 2000 exceeded even the most bleak industry warnings, prompting analysts to question whether the restructuring plan might be too ambitious in anticipating profitable operations at the U.S. unit within a year.

Schrempp acknowledged that his managers erred in failing to recognize strategic mistakes committed by Chrysler, which produced too many older-model minivans that now need expensive sales incentives to move them out of inventory and too few of the popular PT Cruisers. Management here and at Chrysler’s Auburn Hills, Mich., headquarters also failed to foresee the current downturn in the U.S. sales market, which is expected to drop about 9% from last year’s 17.4 million to 16 million and remain at that level through 2003.

In outlining the turnaround plan and timetable, Chrysler Group’s Chief Executive Dieter Zetsche said there was no hope of raising prices in the current market conditions, adding to the already daunting challenge of restoring profitability.

Schrempp and Zetsche said the plan includes cutting costs by eliminating 35,500 jobs worldwide, closing plants, introducing new products, revamping sales incentives and stepping up product development.

The outlook for this year is grim, the executives said. Chrysler will lose between $2 billion and $2.5 billion in addition to the restructuring charges, dragging down companywide profit from $4.78 billion last year--a 49% drop from 1999--to about $1.56 billion in its most optimistic scenario.

Zetsche said Chrysler should be able to maintain its 14% U.S. market share despite tough competition.

“The question that arises is whether this industry is going to remain as strong as it is,” said David Bradley, auto analyst with J.P. Morgan Securities. “Most people have been predicting a significant slowdown in industry demand and we haven’t really seen that.”

Others worry that the plan is too focused on savings at the expense of product improvements.

“You can’t cost-cut your way back to prosperity,” said David Healy, an auto industry analyst for Burnham Securities. “You’ve got to have something going on on the top line in getting your sales and revenues up through the introduction of popular new models. And that’s a lot easier said than done,” added Healy, who nevertheless sees merit in the plan’s realistic market projections.

Moody’s Investor Service and Standard & Poor’s also gave the turnaround plan a lukewarm reception, cutting their long- and short-term ratings for the company, which has about $70 billion of debt outstanding.

Mitsubishi’s biggest job may well be revamping corporate culture. The firm has suffered losses of consumer confidence after revealing that it hid customer complaints and avoided recalls over a three-decade period.

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Times staff writers Mark Magnier in Tokyo and Terril Yue Jones in Detroit contributed to this report.