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Chrysler in shakeup
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November 17, 2000: 4:39 p.m. ET
Daimler warns on Chrysler earnings, new management put in driver's seat
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NEW YORK (CNNfn) - DaimlerChrysler AG warned Friday that earnings at Chrysler would be lower than expected this year, and said it would immediately parachute in a new management team, as the German automaker seeks to take control of its stalling U.S. business.
In a statement, the firm said conditions in the U.S. auto market had continued to worsen in the fourth quarter, forcing Chrysler to increase price discounts on some models and reduce production output.
 "As a consequence, results at the Chrysler Group will fall below the last forecast and thus also affect the earnings of DaimlerChrysler," the company said.
The company did not specify a new earnings range for the fourth quarter ending Dec. 31, nor did they specify if 2001 earnings would be lower than expected. However, analysts have been lowering estimates for both periods.
DaimlerChrysler shares slipped 1.50 euros to 50 euros, after earlier hitting a 52-week low of  48.85. Shares of DaimlerChrysler's (DCX: Research, Estimates) American depository receipts lost 96 cents to $42.60.
The company is dispatching a team of executives from Germany, headed by Dieter Zetsche from the commercial vehicles unit, to lead efforts to put Chrysler back on track. That move was widely reported Tuesday.
Zetsche will be president and chief executive of the Chrysler Group. Also being sent to Chrysler is Wolfgang Bernhard, who takes up the new post of chief operating officer of the unit. Bernhard was responsible for the launch of Daimler's new S-Class model and was recently appointed managing director of sports brand Mercedes-AMG.
"Zetsche is undertaking a very challenging assignment heading the Chrysler Group," said a statement from Juergen E. Schrempp, DaimlerChrysler's chairman. "Given his capabilities and his proven career track record we have no doubt that he will lead this business back to sustained profitability."
 Zetsche will immediately succeed ousted James Holden, the Canadian-born president and chief executive of DaimlerChrysler. Holden -- who was responsible for overseeing the Chrysler unit -- was one of only four North Americans on the company's management board. One of the four, Thomas Gale, the company's executive vice president in charge of product development and design, is already set to leave the company at the end of the year.
There are concerns among some observers about how the move will affect morale at the Chrysler unit, which has seen the departure within the last year of two other top U.S. executives besides Holden and Gale -- Thomas Stallkamp, the president of the company who was widely credited with helping to turn the company around before the merger, and Robert Eaton, who was the co-chairman of DaimlerChrysler who helped negotiate the merger.
Company faces downgrades
Debt rating service Standard & Poor's put the company on CreditWatch Thursday, meaning that a downgrade of the debt was possible in the near future. The rating agency cited the problem with morale, as well as the soft pricing on the company's new minivan. The company has been forced to announce incentives on the recently redesigned minivan much sooner than analysts had been expecting.
"The CreditWatch placements reflect Standard & Poor's concern that the exodus of management talent from DaimlerChrysler's key Chrysler Division, and the resulting dwindling morale, heighten the risk that performance prospects for Chrysler will continue to fall well short of historically superior levels," said the ratings agency.
The incentives on the newly designed 2001 minivans is of particular concern to many analysts.
"This is Schrempp's last chance to get this right," said Philip Rosengarten, a German auto analyst at research consultants DRI. "The U.S. management took its eye off the ball and new models are not an improvement on old."
The two Germans will lead a significant shakeup at the third-largest U.S. automaker, and will "fundamentally reposition and restructure the business," according to the German company. Details of the new measures will be unveiled in the first quarter of 2001.
Analysts say competition, not management is problem
But even before Friday's announcement analysts were questioning whether the change of management would be enough to make a difference for Chrysler.
 "I think the issues at Chrysler go very deep," said Stephen Reitman, the London-based Merrill Lynch analyst who was the first to lower earnings estimates for the company this week ahead of Friday's warning. "The real problem is a failure to anticipate a change in the environment in the United States in the light-truck market."
Reitman and others said the greater competition for key DaimlerChrysler products such as minivans, sport/utility vehicles and pickup trucks are not going to be easy to address through cost cutting or management changes.
"In the past, there was little in the way of true competition from Japanese manufacturers, who made a lot of missteps and missed opportunity in early 1990s," Reitman said. "They've put pressure on the core truck market and Chrysler, with the biggest exposure to light trucks, has been hardest hit."
David Cole, the director of the office for the study of automotive transportation at the University of Michigan, said improvements that have slowed market share losses at General Motors Corp. (GM: Research, Estimates), the world's leading automaker, have also increased competition for DaimlerChrysler, the third-largest automaker in the United States.
"A weak GM gave everybody an ability to do things without having to worry as much," Cole said. "As GM gets stronger, it's going to put more heat on people like DaimlerChrysler."
Daimler's largest shareholder, Deutsche Bank AG, said it was unhappy with the development of the firm's share price, but voiced confidence in Schrempp, chief architect of the 1998 takeover of Chrysler.
Deutsche's chief executive, Rolf Breuer, told Reuters earlier Friday. "I am deeply convinced that the merger was the right strategic concept," adding, "I am deeply confident that DaimlerChrysler will get the situation under control."
Schroder Salomon Smith Barney analyst Adam Collins said earlier Friday he halved his estimate of Chrysler's 2001 profit to 1 billion ($854 million).
On Thursday, Goldman Sachs cut its rating on DaimlerChrysler stock to "market performer" from "outperformer", saying the move reflected "the increasingly uncertain situation in the North American vehicle market and the continued deterioration of the performance of Chrysler." But it said talk that Chrysler would lose money in 2001 was "overly pessimistic."
In October, DaimlerChrysler had predicted its U.S. unit would return to profit in the fourth quarter after revealing a $512 million loss for the third quarter. Sales of Chrysler vehicles fell 14 percent in the third quarter to 623,031 from 722,384 in the previous year. 
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