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Daimler to repair Chrysler
February 26, 2001: 3:26 p.m. ET

Turnaround at U.S. unit will take $3.9B and three years; analysts skeptical
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NEW YORK (CNNfn) - Fourth-quarter losses at troubled automaker Chrysler Group more than doubled from its staggering third-quarter loss, and its parent DaimlerChrysler now says it will take three years and $3.9 billion to drag the unit back to acceptable returns.

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graphicCNNfn's Charles Hodson reports from Stuttgart, Germany, on DaimlerChrysler's restructuring.
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DaimlerChrysler itself will plunge into the red this year as the company attempts to reduce costs at its ailing U.S. unit as well as at Mitsubishi Motors, in which it owns a controlling 34 percent stake. The Japanese automaker will slash 9,600 jobs as a part of those cost-cutting plans, which comes on top of cuts of 26,000 jobs, or about 20 percent of the staff at the Chrysler Group.

The company did not announce any additional job cuts at Chrysler as it outlined a slow, steady plan to restore profitability at the unit, which was the most profitable North American automaker at the time of its purchase by Daimler Benz in 1998. But after some forecasts less than a month ago that a profit could be achieved by the end of the year, the company now is calling only for a slight profit next year and a healthy profit by 2003.

But investors and some analysts questioned even those more modest recovery plans. Saul Rubin, auto analyst for UBS Warburg, told CNNfn's Before Hours that his group sees U.S. auto sales continuing to fall through next year, and he's not sure that Chrysler will be able to achieve its planned turnaround.

"We are very much skeptics when it comes to DaimlerChrysler. There are some nice parts to the restructuring and the head-count reduction is clearly necessary," he said. "But other parts of the restructuring are no different from the types of changes you have to make-other companies will have to make as you go into a down swing in the economy."

Rubin said that Chrysler's problem are not only management missteps since the 1998 merger but also the product they have on the market today, which was set in place even before the merger, as well as increased competition in its key light-truck segment such as minivans and sport/utility vehicles. (375KB WAV) (375KB AIFF)

While the stock has had some rebound since Daimler started shaking up the Chrysler unit last November, he believes those investors are being too optimistic.

graphic"We've seen past cases in the auto industry where you've seen rallies that have coincided with big restructuring announcements," he said. "And those rallies have only been followed by periods of weakness in those stocks, because after the restructuring day has passed then it gets down to the difficult part, which is execution. And people sort of forget in the early days that it can take a good two to three years to really turn an auto company around and a lot of investors don't have that kind of patience."

Shares of DaimlerChrysler (FDCX) lost 0.3 graphicto close at graphic52.30 in Frankfurt trading Monday, while U.S. shares of DaimlerChrysler (DCX: Research, Estimates) dropped 74 cents to $48.06 in late-afternoon trading in New York.

Losses mount at Chrysler

The Chrysler unit reported an operating loss of graphic1.4 billion, or $1.3 billion, in the fourth quarter last year. That brought the unit's overall income down to about $500 million for the year, off 90 percent from the $5.3 billion it earned in 1999. The North American unit lost $512 million in the third quarter.

The company said it believes it can turn Chrysler around through better cost control and sharing resources with the Mercedes and Mitsubishi units, as well as cutting payments to suppliers by about 15 percent over the period. The company will make a strong effort to cut the number of platforms its different models are built upon as a way of saving engineering resources and parts and lowering costs.

It will also commit a significant portion of its engineering resources to figure out ways with suppliers to cut the cost of the parts and components it buys. But the company will also take a hard line with the suppliers who are not willing or able to meet 15 percent cost-reduction targets, and will shift work to suppliers willing to come in at lower cost.

It said it sees this return to profitability even with flat industry-wide U.S. auto sales of 16 million, a flat market share and increased price pressure over the coming three years.

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"We have an advantage by announcing this turnaround plan that we are already in the midst of implementing," said Dieter Zetsche, the Daimler veteran put in charge of Chrysler last November. "Every bit of it has been discussed and agreed upon by the unions. I have a very high degree of confidence we will be able to deliver on all parts of the turnaround plan."

graphicThe company said it will take a charge of about graphic3 billion, or $2.8 billion in the current quarter, to cover the restructuring costs at Chrysler, and that it will need charges of an additional graphic1 billion, or $1.1 billion in the future periods.

The company said the moves together should generate savings and gains in revenue at Chrysler of $8.1 billion annually by 2003.

But that improvement will be off the operating loss it now sees at the Chrysler unit this year of between graphic2.2 billion and graphic2.6 billion, or between $2.0 billion and $2.5 billion.

The problems at Chrysler left the overall company with earnings excluding special items of graphic3.5 billion, or $3.3 billion, which came out to earnings per share of graphic3.47 or $3.26, which was below First Call's EPS forecast of $3.33. Revenue at the company increased 8 percent to a record graphic162.4 billion euros, or $152.4 billion.

One step the company took to try to maintain its stock price was it left its annual dividend unchanged at $2.35, or $2.21. Some had speculated with rising debt and lowered cash reserves and profits, the company might have to cut its dividend. In fact the company said that even without special charges it probably would not be able to earn its dividend in the current year.

It projected operating loss at the parent company, excluding charges and special items, of between graphic800 million and graphic1.0 billion in the first quarter. But the company expects to post an overall profit for the year of graphic1.2 billion to graphic1.7 billion, or between $1.1 billion to $1.6 billion, given the company's assumption about exchange rates. That would miss First Call's current forecast of $2.01 a share, or about $2 billion this year, and be well below the graphic3.5 billion, or $3.3 billion it earned last year excluding special items.

graphicThe company also said it is now looking at earnings excluding special items of between graphic5.5 billion and graphic6.5 billion next year, which could beat First Call's forecast of $3.27 a share, given its billion shares outstanding. DaimlerChrysler also predicted an overall profit of between graphic8.5 billion euros and graphic9.5 billion euros in 2003.

But this could be DaimlerChrysler Chairman Juergen Schrempp's last chance to turn the world's third largest automaker in terms of sales, according to analysts.

Schrempp "needs to show real achievements by the end of this year if he wants to keep his job," Karl Ludvigsen, chairman of auto consultants Ludvigsen Associates, told CNN.

DaimlerChrysler also is attempting to plug a hole in Mitsubishi.

Mitsubishi said Monday it is cutting 14 percent of its 65,000 work force and will close one plant. The restructuring, which also aims to cut costs 15 percent by 2003, will cost $860 million to $1.30 billion and should allow the company to break even by the 2001/2002 financial year. graphic