Daimler acts to cut Smart losses

DaimlerChrysler is to cut half the model range and axe one-third of jobs at its heavily lossmaking Smart small car brand in a restructuring that will cost up to €1.2bn (£830m).

Jürgen Schrempp, Daimler chief executive, said yesterday that Smart should break even by 2007 - three years later than planned - after running up combined losses that analysts estimate at nearly €3bn.

Eckhard Cordes, head of Mercedes, said Daimler had considered closing the brand down - as many investors and analysts had hoped. But the company had concluded it would be too expensive and decided instead to focus on just two products.

Smart is the latest in a string of problems for Daimler and has long been a drag on the carmaker's earnings, contributing to a 97 per cent slide in fourth-quarter profits at Mercedes Car Group, of which it is part.

Details of the restructuring came only a day after Mercedes recalled 1.3m cars to solve persistent quality problems that have muddied its image.

The cost of the recall could tip Mercedes into making a loss in the first and second quarters, analysts said.

Daimler blames Smart's problems on high costs and distribution difficulties. These arise from the fact that it is not sold from Mercedes dealerships.

Daimler aims to cut 30 per cent from fixed costs in the next two years and will shed 700 of the unit's 2,200 workers. It will scrap its Roadster sports model by the end of year and stop development of the ForMore small offroader.

Production will concentrate on the original ForTwo, which has become a design icon, and the troubled ForFour, which has failed to meet its sales targets.

The restructuring charge of up to €1.2bn will reduce profits at the German-US carmaker this year, but Daimler said that excluding the charge, operating earnings would rise slightly, in spite of a weaker first half.

Many of Smart's operations - such as sales, purchasing and service - would be integrated into Mercedes, giving rise to synergies, Daimler said.

Some analysts said the scale of the charge at Smart and the effort of training Mercedes dealers how to sell the small cars in their showrooms put in jeopardy a turnround at Daimler's flagship brand.

Adam Jonas, an analyst at Morgan Stanley, said: "The restructuring is risky. Addressing Smart cars could come at the possible expense of Mercedes."

Mr Schrempp said that Daimler was open to the possibility of future partnerships for Smart, when its financial situation improved.

The engine for the second version of the ForTwo, due to be produced from 2007 and which will be the first Smart product able to be sold in the US, will be used by Mitsubishi Motors and Nissan.

In Frankfurt, DaimlerChrysler shares fell 17 cents, or 0.5 per cent, to close at €34.36. They have fallen 2.6 per cent this year, making them the fifth-worst performer on Germany's Dax-30 blue-chip index.