It took a very feisty lady from Business Week to cut through the traditional gentle probing at the DaimlerChrysler results press conference this morning.
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“Why,” she demanded to know “after seven years of DaimlerChrysler is it making less than a mass market brand like Renault?”
She has a point. It’s true that Renault results earlier this week came with the major support of Nissan turnaround profitability, as chairman Juergen Schrempp was quick to point out. And true also that Renault is trading right at the top of its operating margin range if you look at the company over the long term. But there is no doubt that despite the technical interest in various distracting details in the DaimlerChrysler results, for the shareholder the question is still: Big deal. Where’s the money?
It was a big deal. Seven years ago it was the biggest in the industry and there was every reason to suppose that some benefits could be extracted. But the fact remains that seven years ago a share cost 95 bucks and today you can sell the same share for 45 (miserably depreciated) bucks. Had you been in BMW you’d have made 30% over the same period.
The shares fell two percent meaning that no-one was terribly surprised. DaimlerChrysler runs good investor relations despite the fact that they still have not much good to say – yet. The basic message this morning was that with a following wind (positive volume, better dollar exchange, no nasty surprises) they might be able to turn in a slightly better result next year. But for significantly better results, there would be nothing till 2006 and 2007.
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By GlobalDataThe surprising cost in the fourth quarter that came up in the results was the decision to take a charge to improve quality and goodwill payments and to underpin the launch of new models. There was a substantial accrual for “warranty and goodwill”. It was a measure that the board describes as being necessary – that the company takes cars to the market which are “absolutely up to standard.”
“We are taking precautions. There are some cars in the field that do not meet our standards.”
It was quite clear that after years of Chrysler being the most challenging of the two brands to manage it is now revived or at least still reviving. Its results were up in the fourth quarter, up for seven quarters in a row and with the cash required for incentives to shift the stock falling.
Much has been done to deal with product quality the most significant being development of complex simulation tools that will run electronic infrastructures to make sure that they do not burst. According to the new chief executive officer Eckhard Cordes, the quality of cars now coming out of the factory is at the best level ever (measured by performance over the first three months in service). “That does not mean we have reached our target. We do need to be the best in that regard.”
With small losses to both BMW and Audi in market share there is no freedom to let a poor quality image develop.
What of smart and the joint venture with Mitsubishi Motor (MMC)? Schrempp was quite candid with one questioner. “You are right. If smart is still losing money then there must be something wrong with the business model.”
He thinks there is more scope on model development and more scope on sales territories and there is potential to get cost down further. The board meeting in April will make the decisions and there was nothing further to say now.
The partnership with Mitsubishi would continue on smart, and would continue over a broader framework also. “Not all programmes will be cut. Those that we will continue will be defined again and signed again.” Ownership of the Japanese company will fall from 17.9% to 13% after the capital injection in which DC has declined to participate.
The big initiative though – as one might expect from a company still on the back foot seven years after convincing shareholders of a fabulous new dawn – is a cost efficiency programme designed to get €3bn of cost out of the system. That, they say, will allow an operating margin of 7% in 2007.
Let’s hope they do. Renault is already hovering just under six per cent and the same tough cookie from Business Week could be back in two years time to ask the same question.
Rob Golding
