Daimler's Travails Reflect Broader Pain in Luxury Autos -- 2nd Update

Date : 07/24/2019 @ 2:51PM
Source : Dow Jones News
Stock : Bayerische Motoren Werke AG (BMW)
Quote : 44.75  -0.115 (-0.26%) @ 4:35PM
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Daimler's Travails Reflect Broader Pain in Luxury Autos -- 2nd Update

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By William Boston 

BERLIN -- Daimler AG, the maker of Mercedes-Benz cars, said Wednesday that it would step up cost-cutting efforts in the second half of the year after reporting the company's first quarterly loss in a decade.

Like other leading German auto makers, Daimler is caught between a slowdown in sales and an increase in investment to develop electric and self-driving cars. A tailspin in the luxury segment after years of robust growth has hit its Mercedes brand, while rivals BMW AG and Audi, a unit of Volkswagen AG, have hit rough patches and recently switched out their top management.

Highlighting the troubles for luxury brands, shares of Aston Martin Lagonda Global Holdings PLC, the brand made famous by James Bond, plunged nearly 25% Wednesday after the company cut its outlook on weak sales to dealers.

Slumping earnings of Europe's luxury-car brands, once the industry's biggest earners, are now even trailing big-volume manufacturers, which traditionally earn much lower margins. The trend was highlighted by Peugeot on Wednesday, which reported a profit margin in its core automotive business of 8.7%, surprising analysts.

Despite the luxury-car industry's travails, Daimler's descent into ill health is sudden and unexpected. The company produced record earnings for years and has been flush with cash to spend on new models, technology and factories.

At the end of 2018, the company had around EUR16.3 billion ($18.2 billion) in the bank, but by the end of June just EUR6.7 billion remained, according to its second-quarter report, its lowest amount since the financial crisis.

Earlier this month, Daimler issued its fourth profit warning in a year, lowering its overall outlook for 2019 after a bruising second quarter. Earnings in the three months to the end of June were dragged down by the Mercedes-Benz cars and Mercedes-Benz Vans divisions, which reported losses before interest and taxes of EUR672 million and EUR2 billion, respectively.

Daimler's problems include an array of one-off issues including recalls of vehicles related to faulty Takata air bags, and criminal investigations into the company's business and emissions systems that prompted EUR4.2 billion ($4.7 billion) in extraordinary expenses in the second quarter.

The Stuttgart-based car manufacturer said earlier this month that these charges would result in a EUR1.6 billion loss before interest and taxes, the company's first quarterly loss since the fourth quarter of 2009.

Ola Källenius, a Swede who became chief executive of the premium car maker in May, replacing longtime CEO Dieter Zetsche, said his first task in the coming months would be to shore up the company's operations and stem the outflow of cash.

"We are intensifying the group-wide performance programs and reviewing our product portfolio in order to safeguard future success," Mr. Källenius said in a statement as the company reported details of its second-quarter earnings.

Mercedes-Benz, the leader among Germany's big three luxury brands, has seen sales of its flagship passenger cars fall in nearly every major market except China in the first half of the year. Overall, Mercedes-Benz's car sales fell 4.7% to 1.13 million vehicles world-wide in the first six months of the year. Mercedes-Benz's U.S. sales fell 7.2%, the steepest regional decline.

"Getting to the top of a corporation is a life-long ambition for many hard-charging executives," said Max Warburton, an automotive analyst at Bernstein Research. "But right now, it probably doesn't feel like much fun."

Daimler swung to a net loss of EUR1.33 billion in the second quarter from a profit of EUR1.73 billion a year earlier. Revenue rose 5% to EUR42.7 billion.

Achieving a lasting turnaround may not be easy. In its interim report, the company listed numerous investigations into its business by regulators and public prosecutors in the U.S., Brussels and Germany.

This week, Daimler's longtime Chinese partner, Beijing Automotive Group Ltd., said it was acquiring 5% of the company, bringing a second Chinese investor on board after billionaire Li Shufu's Geely group took a nearly 10% stake in the company last year. Having two rival Chinese auto companies as core shareholders with nearly 15% of the company between them could make it harder for the new management to focus on repairing the business, analysts said.

Write to William Boston at william.boston@wsj.com

 

(END) Dow Jones Newswires

July 24, 2019 09:36 ET (13:36 GMT)

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