The DaimlerChrysler share price did not know what to do yesterday. The stock exchange announcement of the 2005 results came out; the share price dived. DaimlerChrysler held its press conference; the shares recovered. The analysts’ conference broke up; the shares headed back down again.
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It was a very volatile day and unusually so in that the share price direction has been all one way since July. From trough to peak, there has been a share-dealing profit for the brave of 50% in just seven months.
Now nobody has much clue what is going on – and that is unusual for this company. For all his many failings, Jurgen Schrempp – who resigned as chairman six months ago – did at least know how to keep a grip on his results presentation and get his (usually very wordy) message across.
Dieter Zetsche who replaced Schrempp after a period of considerable success sorting out the Chrysler acquisition, was very welcome when he took charge. He was actually asked during yesterday’s press conference whether he thought that his arrival and the 50% share price gain could possibly be connected. That got a dead bat. “Share price euphoria is not our perspective.” Lighten up Dieter.
A large part of the problem is that DaimlerChrysler has adopted the strategy of showing only one half of the picture. For example, the Mercedes division which has been unprofitable, is going to be making a 7% return on sales by the end of next year. Wow. But how chaps; how many cars are you going to be selling and where? No answer.
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By GlobalDataThe analysts saw a light flicker and go out. So now that’s Ford, GM and DaimlerChrysler who have declined to provide guidance that allows the analysts to get at least within a sniff of what profit the company thinks it might make for the year. The analysts were close to begging for help with questions introduced by polite phrases like: “It really would be very helpful if…”
The advances with productivity and efficiency that are necessary to offset what Zetsche sees as “very difficult market conditions” involve – among other things – cutting the number of jobs at Mercedes by 14,500 over the next two years. That is going to cost €3 billion.
The losses at headquarters are being achieved partly through a new management structure. Another part of the forecasting problem therefore, in making disaggregated forecasts of divisional performance, is that the divisions may well be about to change. To an extent then, Zetsche is between a rock and a hard place. He is not yet sure how the reporting structures are going to be set up. And many of the people responsible for monitoring the financials are presumably going to be parting company with the group pretty soon.
So while being short on detail wins Zetsche no friends in the short term, he may be better off waiting till he knows how he will want the information displayed in the future.
The smart car operation for example is one of the casualties of the news blackout. Although the restructuring cost was given as €450m, the operating losses were not.
There is some concern about the ability to get Mercedes to a 7% operating margin. Was there not some contradiction, demanded one interrogator, between cutting costs and getting quality and building brand strength?
Absolutely not, maintains, Zetsche. The opposite is true. If you have the perfect process you save money and get better results.
There was however continuing doubt about that Mercedes proposal which is at the heart of what DaimlerChrysler has to do to regain credibility. Why would it be so easy to grow profitability when Mercedes was losing market share to Audi and BMW in its own home market?
In Germany, came the retort, they did not lose market share, they reduced it willingly by doing less staff and fleet volume. Oh that old chestnut. In Western Europe yes, there had been market share loss – but the year had finished very strongly for them. “Ask yourself,” said Zetsche, “was our market share in Germany consistent with that of a premium brand.”
Other worriers alighted on the Mercedes price premium against other premium brands. It was said to be around €3,000 a car – a position that just was not going to be sustainable in tighter markets.
Zetsche just wasn’t having it. In the end he lost patience and swept the whole thing aside with a promise: “We will do whatever it takes to do 7% margins in Mercedes in 2007.”
So there we have it. There are now rather a lot of people in Europe who are promising both better margins and growing volumes in an increasingly hostile market. Renault and PSA are on exactly the same tack. There is never going to be room for all of them on stage when the consumers’ votes are counted at the end of 2007.
Rob Golding
