Daimler Profit Probably Fell as Chrysler Lost Share (Update2)

By Jeremy van Loon and Jeff Bennett

Feb. 13 (Bloomberg) -- DaimlerChrysler AG, the world's fifth- largest automaker, will probably say fourth-quarter profit fell and announce job cuts and factory closings after its Chrysler unit lost market share to Toyota Motor Corp. and Honda Motor Co.

Net income likely dropped 25 percent to 726 million euros ($940 million) from 966 million euros a year earlier, according to the median of 14 analysts' estimates compiled by Bloomberg News. The Chrysler unit in the U.S. likely broke even, compared with an operating profit of 428 million euros a year ago.

Chrysler Chief Executive Officer Tom LaSorda will announce the elimination of 10,000 hourly jobs, or 12.5 percent of the U.S. division's workforce, when Stuttgart, Germany-based DaimlerChrysler reports results tomorrow, according to a person familiar with the plan. The company may also slash 1,000 management positions, close factories and increase shared development of cars between Chrysler and Mercedes.

``Chrysler is in big trouble and requires fixing fast,'' said Michael Raab, an analyst at Sal. Oppenheim in Frankfurt who has a ``neutral'' rating on the stock.

Shares of DaimlerChrysler, which are little changed over the past 12 months, rose as much as 22 cents, or 0.5 percent, to 49.40 euros. The stock has fallen 31 percent since Daimler-Benz AB took over Chrysler Corp. in 1998.

Of the 39 analysts who cover the company, 22 rate the shares ``buy,'' nine recommend holding the stock and eight say investors should sell.

Consumer Demand

Chief Executive Officer Dieter Zetsche, who took charge in 2006, failed to anticipate a shift in U.S. consumer demand to smaller vehicles as fuel costs rose, said Arndt Ellinghorst, head of automotive research at Dresdner Kleinwort in Frankfurt.

``Chrysler is still selling too many pickups and light trucks and that's hurting them,'' said Ellinghorst, who has an ``add'' rating on DaimlerChrysler shares. ``Management is losing patience.''

The automaker will also announce the closing of its Newark, Delaware, plant, cutting 2,100 jobs, the person familiar said. The plant assembles the Dodge Durango and Chrysler Aspen sport-utility vehicles. Production of those vehicles may be moved to other U.S. factories.

Chrysler is also considering shutting down an engine production line at its Mack Avenue plant in Detroit, though no final decisions have been made, the person said.

Greater Cooperation

The final piece of the restructuring will center on moving Chrysler and Mercedes closer together. Engineering in both units will collaborate to design and build small cars and large sport- utility vehicles, the person said.

All of the changes will be phased in over a number of years, the person said, without disclosing the length of time.

Chrysler spokesman Mike Aberlich declined to comment.

Most of the profit in the fourth quarter came from a recovery at the Mercedes Car Group and the heavy truck division, the world's largest truckmaker, as well as the services business, which lends money to vehicle buyers.

DaimlerChrysler spokesman Thomas Froehlich declined to comment on earnings or on the reorganization of Chrysler.

Zetsche slashed 40,000 jobs, closed six factories and added pick-up trucks and sport-utility vehicles when he was head of Chrysler from 2000 to 2005. Last year, as gasoline reached record levels of $3 a gallon in the U.S., demand for light trucks and SUVs sank. The company responded with incentives of as much as $4,000 a vehicle.

Light Trucks

About half of the vehicles Chrysler makes are SUVs and pickup trucks. The company last year attempted to reduce that dependence with new vehicles such as the Dodge Caliber compact car and plans for a Chinese-built small car.

The Caliber, which went on sale last year, is the only compact car that Chrysler Group sells. Nine of 14 Dodge-brand vehicles are trucks or SUVs. The best fuel economy of all Chrysler Group vehicles is the Caliber's 32 miles per gallon (7.8 liters per 100 kilometers) on the highway.

Zetsche, 53, is counting on new models like the Caliber to return the company to profit. Chrysler's 1.53 billion euros in operating profit in 2005 is a ``benchmark,'' he said on Feb. 3. Chrysler employed about 83,000 people at the end of that year, about a third less than the company employed at the time of the merger in 1998.

Market Share

Chrysler's U.S. market share dropped to 12.9 percent last year from 13.6 percent in 2005. Toyota's share rose to 13.4 percent from 11.5 percent, helped by vehicles like the Corolla and the Prius. Honda's share increased to 7.9 percent from 7.4 percent with cars like the Civic compact car and the CR-V SUV.

Toyota may surpass General Motors Corp. this year as the world's largest carmaker. The Japanese company has a market value of $239 billion, more than 10 times GM's value.

Since December, Chrysler has cut production, reduced the number of unassigned vehicles to under 10,000 from more than 100,000 and plans to cut dealer inventory to 500,000 vehicles by the end of March from 538,000 in January.

Credit-default swaps based on 10 million euros of Daimler debt have fallen to 46,500 euros from 53,393 euros at the end of last year. Credit-default swaps are based on corporate bonds and are used to speculate on a company's ability to repay debt. A decrease indicates an improvement in credit quality.

Mercedes Profit

Chrysler's declining fortunes contrast with those of Mercedes. Operating profit at Mercedes Car Group, which includes the unprofitable Smart small car and the Maybach super luxury sedans, was helped in the quarter by a new lineup of vehicles including the S-Class sedan and CL coupe.

``Given likely good numbers from Mercedes and trucks offset by continued weakness at Chrysler, investors are likely to focus on the content and communication of the Chrysler turnaround plan,'' said Stephen Cheetham, a London-based analyst at Sanford C Bernstein with a ``market perform'' rating on the stock. ``We believe that this is unlikely to be a quick fix.''

Mercedes Car Group sold a record 1.26 million vehicles last year. The company expects Mercedes-Benz sales this year to remain unchanged.

A new Mercedes-Benz C-Class, the brand's entry-level sedan, is scheduled to be in showrooms in Europe by the end of March and the company is counting on the car to help win new customers. Mercedes last year introduced an updated version of the E-Class, its next best-selling model.

Sales at the heavy truck division reached a record in 2006. The business last year benefited as customers bought old versions of trucks ahead of new pollution regulations that require the purchase of more expensive and cleaner motors.

``There is no escaping the fact that however well the other divisions do, the market will focus on the U.S. and Chrysler,'' said Thomas Besson, an analyst at Merrill Lynch in London, who rates the shares a ``buy.''

Zetsche's salary last year was 1.5 million euros, with a bonus of as much as 2.25 million euros as long as targets are reached, the company said at the annual meeting in April.