Sep 16, 2006 4 min read

By David Rising Associated Press Writer

BERLIN (AP) – DaimlerChrysler AG cut its 2006 operating profit forecast Friday, saying it now expects a euro1.2 billion ($1.52 billion) third-quarter loss at Chrysler – more than twice the amount anticipated. Shares in the company fell more than 5 percent.

The German-American automaker lowered its operating profit forecast for 2006 to approximately euro5 billion ($6.34 billion), based on an expected full-year loss for the U.S.-based Chrysler Group of euro1 billion ($1.27 billion).

The news came the same day Ford Motor Co. said it was cutting more than 10,000 salaried jobs, offering buyouts to all its 75,000 U.S. hourly workers and shutting down two more plants in a plan to stem its losses and become smaller and more competitive.

Chrysler had previously said it anticipated a third-quarter operating loss of up to euro500 million ($633.75 million). DaimlerChrysler also said Friday that Chrysler will make production cuts to reduce dealer inventories.

“The Chrysler Group is facing a difficult market environment in the United States with excess inventory, noncompetitive legacy costs for employees and retirees, continuing high fuel prices and a stronger shift in demand toward smaller vehicles,” the company said in a statement.

DaimlerChrysler shares tumbled 5.6 percent to close at euro39.18 ($49.66) in Frankfurt.

Given the troubles facing Ford and General Motors Corp., DaimlerChrysler’s announcement didn’t come as a surprise, said Stephen B. Cheetham, an analyst at Sanford C. Bernstein in London.

“Chrysler’s sales (down 10 percent from a year ago) and market share (down by 1 percentage point year-to-date) have both been trending down as the products responsible for the company’s earnings recovery in 2004 have started to age,” he said.

Chrysler, Ford and GM are all struggling with the need to reduce their so-called legacy costs of big pay and benefits packages for workers and retirees to compete more effectively with foreign automakers. Chrysler has failed to renegotiate health care costs with the United Auto Workers union, Cheetham said in a research note.

“A large announced loss at Chrysler should make it easier to reach agreement with the UAW,” he said.

DaimlerChrysler said additional production cuts in the third and fourth quarters would reduce dealer inventories and make way for its “current product offensive.”

“In order to improve the earnings situation of the Chrysler Group as quickly, comprehensively and sustainably as possible, measures to increase sales and cut costs in the short term are being examined at all stages of the value chain, in addition to structural changes being reviewed as well,” the Stuttgart-based company said.

DaimlerChrysler said the Chrysler Group “strives” to make an operating profit in the fourth quarter.

It said while customers in the third quarter shifted toward smaller vehicles and the company was unable to follow the demand, it is introducing eight new vehicles in the second half of the year. Those include several in the smaller vehicle class, the company said.

Cheetham said the company’s product cycle was set to improve over the next 18 months, with the new minivan set to be available in volume in 2007.

As U.S. automakers have struggled, analysts have cited the very competitive U.S. sales environment, which is reliant on rebates and discounts, as well the shift toward more fuel-efficient cars.

Ford, which acknowledged a need for drastic changes in its product lineup, said the speed of that shift caught it by surprise. Like other U.S. automakers, its bottom line is heavily dependent on high-margin trucks and large SUVs.

“The simple fact is that the business model that served us in North America for decades no longer works,” Mark Fields, Ford’s president of the Americas, said during a morning teleconference.

Standard & Poor’s said the difficult North American market has led to Chrysler’s being far off its 2006 targets, with heightened risk regarding its prospects for next year.

“Although we have been skeptical about Chrysler’s long-range prospects for a long time, we expected Chrysler to reach break-even profitability in 2006,” said S&P analyst Maria Bissinger, “followed by a slight improvement in 2007, supported by new product launches.”

DaimlerChrysler said earnings for the Mercedes Car Group and its other segments are fully in line with planning.

But it cautioned that the updated forecast does not include potential effects from the company’s 22.5 percent stake in European Aeronautic Defence and Space Co. EADS has indicated that its review of the Airbus program could lead to a reduction of earnings in its half-year report.

AP-ES-09-15-06 1339EDT