Berlin: Daimler AG is preparing a “comprehensive” cost-cutting program to secure profitability as the German automaker fights through a US-China trade spat, slowing demand in Europe and North America and surging expenses to develop electric vehicles.
The Mercedes-Benz manufacturer is stepping up efforts to shore up margins and counter pressures that are unlikely to blow over anytime soon. After a 29 per cent drop in 2018 net profit, Daimler cut its dividend for the first time in nine years and forecast only a “slight” increase in earnings before interest and tax this year.
“The environment will remain extremely challenging in 2019,” said Chief Executive Officer Dieter Zetsche. “That’s why we must continue working intensively on our efficiency,” as profitability is a “prerequisite” for investing in new technologies.
Zetsche, who was presenting Daimler’s earnings for the last time, declined to specify the extent of the cost-cutting targeted, saying the measures are just being initiated and haven’t yet been defined. The shares fell as much as 3.6 per cent on the cautious 2019 outlook, which includes a small increase in revenue.
The car industry has come through a difficult few months marred by trade tensions and declining sales in the US and China, the world’s two biggest car markets. Demand headwinds add to the strains caused by spending to develop self-driving, electric vehicles — investment that will take years to pay off. Daimler’s research and development spending rose to 9.1 billion euros (Dh38.17 billion) in 2018, and the company said capital expenditures would remain high this year.
The pressures prompted two profit warnings by Daimler last year, partly due to China’s trade spat with the US, which led to added tariffs on its Alabama-made SUVs. The company, which is also the world’s largest maker of heavy trucks, warned of geopolitical risks and a slowing global economy this year. It expects worldwide demand for cars to be flat in 2019.
Daimler shares fell 2.9 per cent to 51.38 euros as of 10:47am in Frankfurt, the most in a month. The stock has tumbled 26 per cent over the past 12 months, valuing the company at 55 billion euros.
Earnings declined in all divisions except heavy trucks in 2018. Profitability in the key Mercedes-Benz Cars unit narrowed to 7.8 per cent from 9.4 per cent a year ago, revealing the strains of investing in major technological shifts while also battling trade wars and volatile political and economic developments.
For this year, Daimler forecast a profit margin of 6 per cent to 8 per cent for Mercedes — below target levels as lucrative SUVs get overhauled and spending on electric vehicles, like the new EQC sport utility vehicle, dilute earnings.
“We cannot and will not be satisfied with this,” Zetsche said. “That’s why we have started to develop comprehensive countermeasures” with the goal of returning to target levels of 8 per cent to 10 per cent by 2021. The company said it also expects currency headwinds of 1 billion euros this year.
Stuttgart-based Daimler is the first European automaker to report fourth-quarter earnings and map out what could be another difficult year. Earlier Wednesday, Toyota Motor Corp. raised its global vehicle sales forecast for the year ending in March to 10.55 million vehicles, an increase of 50,000 vehicles, helped by higher sales in Japan and Europe.
Daimler proposed a dividend of 3.25 euros per share, an 11 per cent drop and its first reduction since 2010, when the payout was omitted in the aftermath of the global financial crisis.
Wednesday’s earnings are a disappointing farewell for Zetsche, who’s been at the helm since 2006. Credited with a pivotal role during Daimler’s divorce from Chrysler and a successful product overhaul, ongoing investigations into diesel emissions practices have weighed on his tenure. He will hand over to development chief Ola Kaellenius later this year.
In May, shareholders will vote on a new corporate structure to give the cars, trucks and mobility services units more independence to accelerate decision-making as newcomers like Tesla Inc. and Alphabet Inc.’s Waymo pressure the traditional auto industry. Investors have criticised the move as not going far enough and argue for a partial share sale of the trucks division. The company said it will invest “a mid-three-digit million” euro amount in 2019 on creating the new group structure with three legally independent units.