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Daimler’s Forecast Shows Strain of Epic Auto Shift

Feb. 1, 2018
New regulations and competition from tech companies have spurred big bets on cars that consumers haven’t fully embraced, and the industry is grappling with decisions on how quickly to introduce new models, how to forecast demand, and how to organize their huge global factories and supply chains.

Daimler AG expects profit growth to come to a sudden halt this year, highlighting how the car industry has shifted into an intense investment mode to rebuild around a future of electric and autonomous driving.

The German automaker issued a muted 2018 forecast with quarterly results on Thursday, showing the strains of the spending demands at its Mercedes luxury-car unit. While new technologies are inflating research and development budgets, materials costs are also mounting.

“The outlook is a disappointment,” Juergen Pieper, a Frankfurt-based analyst at Bankhaus Metzler, said by phone. “The drop in earnings at the cars division shows the profit dynamic is lacking.”

Daimler and its peers are feeling their way through a generational shift that’s exposing the industry to unprecedented demands while offering an uncertain payoff. New regulations and competition from tech companies have spurred big bets on cars that consumers haven’t fully embraced. The industry is grappling with decisions on how quickly to introduce new models, how to forecast demand, and how to organize their huge global factories and supply chains.

Record Run

Daimler’s subdued outlook overshadows a record run, fueled by demand for its overhauled E-Class and a number of new SUVs. The company sold more cars last year than ever before, and posted record revenue and profit as well. For its vehicles division with the Mercedes-Benz and Smart city car brands, Daimler expects earnings during 2018 at the year-ago level, compared with last year’s 13% jump in profit.

“Our outlook is dampened by currency exchange rates, as well as another expected rise of spending demands,” CEO Dieter Zetschesaid at the company’s annual press conference in Stuttgart. The two developments will combine for a 2 billion euros ($2.49 billion) headwind, he said.

Daimler shares fell as much as 2.6% in Frankfurt. The stock was down 1.3% to 72.76 euros ($90.64) at 10:33 a.m., giving the company a market value of 78 billion euros ($97.17 billion).

Fourth-quarter earnings before interest and tax were 3.47 billion euros ($4.33 billion), Daimler said, weighed down in part by a diesel recall that cost the company 425 million euros ($529.46 million) during 2017. Analysts had forecast 3.73 billion euros ($4.65 billion) on average. Revenue advanced to 43.6 billion euros ($54.32 billion).

Flat Year

Earnings this year will be in the “magnitude of the previous year,” the company said. In addition to industry pressures, the drop in the dollar is emerging as a challenge this year, especially for European companies that, like Daimler, sell a lot to the U.S. Currency headwinds will cost about 1 billion euros ($1.25 billion) this year, the company said, compared with a 300-billion benefit in 2017.

“Even though some of the headwinds should have been expected by the market, it’s always painful to see it in writing,” Arndt Ellinghorst, an analyst with Evercore, said in a note. “Daimler, similar to the rest of the industry, is facing material headwinds which offset the benefits from a solid demand for passenger cars and strong truck sales.”

Volkswagen’s diesel cheating has created another obstacle, putting diesel vehicles, with their main market in Europe, under intense scrutiny. A prolonged slump in diesel demand would undermine carmakers’ strategy on meeting tightening emissions levels on carbon dioxide in the European Union. 

Trucks Unit

Daimler plans to invest 10 billion euros ($12.46 billion) to release 10 new electric vehicles by 2022, even as demand for battery models remains low.

To meet the challenges, and fend off new competitors like ride-hailing company Uber Technologies Inc. and Tesla Inc., Daimler has started preparations for its biggest corporate overhaul in a decade. The company has said it will increase development spending, already at a record, for another two to three years.

The manufacturer is also contemplating structural change. It plans a holding company with three legally separate units: Mercedes-Benz Cars & Vans, Daimler Trucks & Buses and financial services. Shareholders, who favor a spinoff of the trucks unit into a separately-listed company, have criticized Daimler’s opaque language about the process that has left vague the benefits of the costly exercise.

By Elisabeth Behrmann

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