Daimler's Zetsche steps down pledging cost cuts to boost profit

Frankfurt

DEPARTING Daimler AG chief executive officer Dieter Zetsche promised cost cuts and an efficiency drive to restore profit margins as the man who steered the Mercedes-Benz carmaker for more than a decade leaves his successor to tackle unprecedented industry upheaval.

"We cannot and will not be satisfied with the current level of profitability," Mr Zetsche said on Wednesday at the German manufacturer's shareholder meeting in Berlin, which marks the end of his 13-year tenure. "Everything is under scrutiny: fixed and variable costs, material and personnel costs, investment projects, vertical integration and the product range." Daimler's target remains to return Mercedes-Benz Cars and Mercedes-Benz Vans to a "profitability corridor" of 8 per cent to 10 per cent by 2021, the Stuttgart-based manufacturer said. At the heavy trucks and bus divisions, the goal is to achieve a sustainable return of 8 per cent and to "unlock further potential".

The walrus-moustached Mr Zetsche, 66, and chief financial officer Bodo Uebber, 59, who is also leaving, turned Daimler from an industrial conglomerate that included holdings in aviation into a company focused on upscale passenger cars and commercial vehicles. Among their key decisions was selling Chrysler to Cerberus Capital Management in 2007 before the financial crisis pushed the US mass-market manufacturer into bankruptcy.

Following the ill-fated merger with Chrysler, the duo shepherded the painful restructuring of Mercedes-Benz after quality woes dented sales. This included axing thousands of jobs, shaking up design and expanding the brand's compact-car offerings, culminating in winning back the global luxury-car crown from BMW AG in 2016.

Both manufacturers now face the difficult task of how to allocate shrinking profits and find savings to finance the shift towards electric cars and digital services with a payoff that might be years away.

Mr Zetsche will hand the wheel to Ola Kallenius, 49. The smooth-talking Swedish-born executive gave a first glimpse on his strategy last week, pledging to make Daimler greener.

Mr Zetsche told reporters this month that the onus is on carmakers to show they can generate adequate profit margins from electric cars to lift stock valuations, which have been squeezed as investors deem traditional manufacturers ill-prepared to adopt new technology.

Adding to headwinds are swirling trade woes that threaten vehicle exports and stricter emission limits in key markets. Tighter rules on carbon emissions that take effect in Europe next year mark the biggest hurdle, with many carmakers potentially exposed to significant fines. "I have never seen such a material event risk in my career," Evercore ISI analyst Arndt Ellinghorst said in a note last week.

Daimler is also wrestling with pending probes into its diesel-car emissions and a recall imposed by German authorities. Its US litigation risk related on diesel cars may exceed US$4 billion, according to Bloomberg Intelligence estimates.

Daimler generates the vast majority of profits with hulking sport utility vehicles and sedans. It expects more than half of global deliveries to be fully-electric or plug-in hybrid cars in 2030 and plans to make its entire model lineup carbon-neutral by 2039.

Mr Kallenius will also need to turn around sagging profits led by a downturn in the core Mercedes-Benz cars unit, where earnings slumped 37 per cent during the first quarter. Shareholders will vote on the biggest corporate overhaul since the merger with Chrysler that will split the group into three legally separate units comprising cars, trucks and financial services.

The new structure - which comes with significant costs - is meant to speed up decision-making and allow the individual units to forge collaborations more easily. Investors have criticised the project as not going far enough and argue for a separate listing of the trucks business, similar to Volkswagen AG's plan for Traton SE.

Daimler is spending 10 billion euros (S$15 billion) to develop more than 10 fully-electric vehicles, including the Smart small-car brand, by 2022 and started selling the Mercedes-Benz EQC this month to challenge Tesla Inc's Model X.

To bring down costs and free up funds for new technology, Mr Zetsche announced "comprehensive" countermeasures three months ago, but hasn't yet provided details.

In a sign of industry shifts, Daimler recently forged tie-ups with arch rival BMW on mobility services including car sharing and ride hailing, as well as autonomous car technology. Mr Kallenius last week foreshadowed deepening ties with peers, suppliers and technology firms.

His new CFO Harald Wilhelm, who joined from Airbus SE last month and will officially resume his position after the annual general meeting, has previously been in charge of mergers and acquisitions at the company that was then called DaimlerChrysler Aerospace AG. BLOOMBERG