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Daimler's future tied to green technology

Analysis: The power of the Mercedes brand will drive the car maker through the global economic storm.

The power of the Mercedes brand will drive Daimler through the global economic storm, but the company will emerge weakened unless it hastens the development of smaller, more environmentally friendly vehicles in response to changing demand, analysts say. And this makes the cash injection by Aabar Investments, based in Abu Dhabi, all the more important to Daimler's prospects. Daimler has all but written off this year and told investors at last week's annual shareholders' meeting that it would report a "significant loss" for the first quarter. It also expects a "significant" drop in revenue this year due to sliding global sales of its cars and trucks.

Dieter Zetsche, the chief executive of Daimler, is fighting back by slashing costs but added that he could not rule out forced redundancies if the crisis, Germany's worst economic slump since the Second World War, dragged on much longer. Daimler plans to cut labour costs by ?2 billion (Dh9.65bn) this year through an array of measures that include cuts in staff working hours and reductions in bonuses. The company has already cut business travel costs and consultancy fee payments, and executives have taken salary cuts of about 30 per cent.

Daimler's sales last month of 110,400 vehicles delivered a feeble ray of hope because the rate of decline for the Mercedes, Smart, AMG and Maybach brands slowed to 16 per cent from March last year, compared with an alarming 25 per cent drop in February. But the company told shareholders that a turnaround in car markets was unlikely before the end of this year at the earliest. Jürgen Pieper, an industry analyst at Bankhaus Metzler, a German private bank, says Daimler may post a loss as high as ?1bn for the first quarter, and that it may not return to profitability this year.

"The question one has to ask is whether we will ever return to the old days when the market for premium brands like Mercedes and BMW was always more stable than the mass market," Mr Pieper says. "Many buyers in western Europe are moving away from big cars and this may turn into a fundamental trend. The premium sector is set to come under increasing pressure from curbs on emissions." With a long-term shift towards electric-powered vehicles, premium makers such as Mercedes and BMW risked losing a major selling point, the quality of their engines, he says.

"Once the basic technology has been developed in the next 10 to 20 years ? it will be more difficult for manufacturers to emphasise what is special about cars made in Germany, which in many cases has a lot to do with engine technology." Daimler has recognised the danger and emphasises that its cost cuts will not affect its research into green technology, an element of its co-operation deal with Aabar Investments announced last month.

"Although the crisis is forcing us to cut costs wherever we can, we will not jeopardise our future by reducing essential investment," Mr Zetsche told shareholders. He says that by 2012, Daimler intends to reduce the average carbon dioxide emissions of its cars in Europe to less than 140 grams per kilometre. Daimler's average for its fleet in 2007, the year for which most recent data is available, was 174 grams.

Arndt Ellinghorst, an industry analyst at Credit Suisse in London, says Daimler's joint-venture deal sealed last December with the German firm Evonik to develop high-performance batteries for electric-powered vehicles shows its commitment to adapting to the market. "Daimler will definitely adapt by offering more fuel-efficient and smaller cars. The company's big asset is the Mercedes brand, you can do everything with that brand," Mr Ellinghorst says.

"Daimler, like much of the industry, was pretty late in realising the trend, but they are forging ahead strongly now." In the current crisis, however, the premium status of Mercedes is proving a disadvantage because its sales are not benefiting from the German government's ?2,500 cash bonus being paid to buyers exchanging old cars for more environmentally friendly models. The bonus, launched to help stimulate the economy where one in five jobs depends on the car sector, has led to sharp increases in domestic sales of smaller cars this year, with new registrations of Volkswagens up 16 per cent in the first quarter, and Fiat, Hyundai and Suzuki more than doubling sales for the same period last year.

Mercedes and BMW are not profiting because the bonus represents a far smaller percentage discount for high-priced cars. "2009 has to be written off. There is no upturn in sight anywhere and all hopes are focused on 2010. If nothing happens, there will definitely have to be redundancies, not just at Daimler but at other manufacturers as well," says Professor Willi Diez, the director of the Institute for Automotive Economy at the Nürtingen-Geislingen Business College.

Mr Zetsche admitted Daimler had been slow to trim production at the start of the crisis, which had left the company with large numbers of unsold cars. However, media commentators say Daimler has survived far greater management errors in the past, such as its ill-fated acquisition in 1998 of Chrysler, the ailing US car maker it managed to sell in 2007, before the economic crisis struck. For now, Daimler is pinning its hopes on the E-class Mercedes, the new version of which was unveiled last month. It said it had received 50,000 orders for the new model by the end of the first quarter.

The Aabar stake purchase is also proving a boost. Analysts say Aabar is an ideal investor because it has a long-term focus and is unlikely to interfere much in management. "Aabar's investment makes Daimler less vulnerable to a takeover and speculation that the car maker may face a hostile bid has now abated," says Mr Pieper. Germany hailed the stake purchase last month as a much-needed sign of confidence in the nation's manufacturing, although some Daimler shareholders accused the management of selling the stake at an excessively low price.

Mr Pieper says that while Daimler's liquidity had been battered by the crisis, he did not see the company's existence as under threat. "They are fundamentally too strong in the business for that. They always have a number of options to rescue their finances." In the long-term though, analysts believe that Daimler will have to swallow its pride and co-operate with another car maker, possibly BMW, to achieve the necessary cost savings through economies of scale. "Volkswagen is profiting from its critical mass," says Mr Ellinghorst. "I keep repeating that Mercedes and BMW will need to move together."


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