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April 1, 2005

SMART REACTION: DaimlerChrysler’s Smart action feeble, say bankers

DaimlerChrysler’s decision to axe the Smart Roadster and Smart ForMore SUV will disappoint investors, who had hoped to see more drastic action including plant closures and the demise of the ForFour four-seater as well, writes Neil Winton.

DaimlerChrysler’s decision to axe the Smart Roadster and Smart ForMore SUV will disappoint investors, who had hoped to see more drastic action including plant closures and the demise of the ForFour four-seater as well, writes Neil Winton.

One investment bank – Lehman Brothers – says Mercedes should grit its teeth and shut the whole thing down.

Mercedes Smart division has been a chronic loss maker since its birth in 1998 and promises of break-even have never been fulfilled. Mercedes’ new CEO Eckhard Cordes dubbed the Smart project a “disaster” after the 2004 financial results in February revealed that Smart had lost 500 million euros in the year.

DaimlerChrysler’s announcement today said it would cost 1.2 billion euros this year to put Smart right, while the maker of city cars would lose 600 million euros this year. Breakeven is promised for 2007.

According to investment banker Morgan Stanley, this confirmed its own earlier estimates that every time a Smart car drove away from the showroom, Mercedes lost a staggering 4,000 euros, a negative margin of 35 per cent.

Morgan Stanley was not impressed with today’s action. “Investors may be somewhat disappointed with at least part of this decision. Expectations were rising that the ForFour, which has been the source of many of the brands problems, would be discontinued. The decision on the ForMore was all but officially announced already. The Roadster is a smaller volume product, albeit one that has been responsible for rising warranty costs at the brand,” Morgan Stanley said.

Lehman Brothers was also under-whelmed by the action. “The overall announcement is not as far reaching as the market had expected – while it was clear they weren’t going to shut it down, they could have been more drastic,” said Lehman Brothers.

“It is disappointing that there are no plant shutdowns, only significant workforce cuts. It was thought they make take Smart down to a single model but they will be keeping ForFour, which, 6 months in to launch, is already underperforming by 50 per cent. Also, after spending 1.2 billion euros on restructuring, the target is only to breakeven in 2007, hence the payback appears low despite a higher than expected cost,” Lehman Brothers said.

Deutsche Bank was a little more positive, although the Mercedes division has other big problems on its hands, as its profit margins almost sunk into the red in 2004, while analysts expect it to have lost up to 500 million euros in 2005’s first quarter.

“Bottom line – it is a significant amount (the 1.2 billion) but it does not really change the picture. Smart is only one problem the Mercedes Car Group currently has to deal with,” said Deutsche Bank.
For Lehman Brothers the action was too little, and maybe too late. “Far from solving the Smart problem, we believe today’s announcement raises even more reasons for a closure,” according to Lehman.
   
Neil Winton   
  

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