Daimler: Single and Loving It

CEO Dieter Zetsche predicts that the newly emancipated German automaker will see operating margins hit 10% within three years

by Gail Edmondson

After the May sale of its long-ailing Chrysler unit, Germany's DaimlerChrysler (DAI) is back on the road to the kind of lofty earnings befitting a luxury automaker—and could soon overtake rival BMW (BMWG). During a first-half conference call with analysts on Aug. 29, Chief Executive Dieter Zetsche said the group's operating margin for 2007 would be significantly better than his 7% target. He predicted it would hit 10% by 2010 at the latest—likely outpacing profit margins at BMW, which hover between 7% and 8%.

Zetsche, long hammered by investors and analysts to unload Chrysler, heralded the August closing of the sale to Cerberus Capital Management as "a new era" for Daimler. Shareholders will vote in October on renaming the company Daimler AG, and Zetsche insisted the new Daimler "starts on a very solid and healthy basis." In the second quarter, pretax earnings jumped 74%, to €1.2 billion ($1.6 billion) at Mercedes Car Group. The improvement was driven by a cost-improvement and efficiency drive.

Paying Chrysler's Last Bills

Huge losses at Chrysler repeatedly zapped Daimler's profits since it took over the U.S. automaker in 1998. The last cost item for the unhappy marriage will be a charge of about €2.5 billion ($3.4 billion) to be booked by DaimlerChrysler this year for the disposal, the company said. That figure was down from a €4 billion ($5.4 billion) full-year charge estimated at the time of the sale in May. Daimler group net profit was down 14%, to €1.85 billion ($2.5 billion) in the same quarter, however, hit by the final losses from Chrysler.

DaimlerChrysler also agreed last month to provide a €1.5 billion ($2 billion) loan for Chrysler's automotive business to help finance the sale of Chrysler to Cerberus, when credit market jitters sapped investors' appetite for debt needed to close the deal. The deal will close in the third quarter. Cerberus recently named former Home Depot (HD) CEO and former General Electric (GE) executive Robert Nardelli to the top job at Chrysler (see BusinessWeek.com, 8/6/07, "Nardelli: Back in the Game at Chrysler").

Smart Move

Vehicle sales at Mercedes Car Group declined 3% in the first half, reflecting Zetsche's decision to stop producing the unsuccessful Smart Forfour model. The Smart Fortwo mini will go on sale in the U.S. in 2008 (see BusinessWeek.com, 8/24/06, "Smart in the City"). The introduction this year of a new generation of C-Class sedans—Mercedes' best-seller—should boost sales in the second half. Mercedes now represents a hefty 52% of Daimler's revenues.

Zetsche, who led the turnaround effort at Chrysler between 2001 and 2006, insisted the company's key goal was profitable growth—not size—a distinct shift from predecessor Jüergen Schrempp, who inked the Chrysler deal and went on a failed acquisition binge to build the world's largest automaker.

Edmondson is a senior correspondent in BusinessWeek's Frankfurt bureau.