2018 results As Daimler's profits slide 30%, shareholders are not pleased

While sales at Mercedes-Benz' parent company edged up last year, the bottom line is dreadful, reinforcing investors’ calls for the vehicle maker to slash costs.
Quelle: Reuters
What's in store for Mercedes-Benz?


(Source: Reuters)

Soaring costs, the diesel scandal and sluggish progress on electric cars have made a German automaking icon vulnerable.

Daimler reported on Wednesday that its 2018 earnings before interest and taxes (EBIT) were €14.3 billion ($16.3 billion), down 22 percent from the previous year. Profits collapsed by almost 30 percent, to €7.6 billion.

As a result of the lower earnings, the Mercedes-Benz manufacturer plans to reduce its dividend to €3.25 per share – last year it was a record €3.65 per share. The 130,000 Daimler employees covered by the collective agreement will also see a smaller profit-sharing bonus: €4,965 for 2018 compared to last year's €5,700.

Daimler's revenue increased marginally last year to €167.4 billion, thanks to a 2.4 percent increase in unit sales; it handed off 3.4 million passenger cars and trucks in 2018. Daimler Trucks is the bright spot among the group's five major divisions, with its sales increasing by 7 percent last year to €38.3 billion.

Shareholders were already worried ahead of the new numbers released in Stuttgart. Outgoing CEO Dieter Zetsche, who rescued Daimler after its failed merger with Chrysler and made it the world’s top-selling premium car brand again, lately has been letting things slide. Bert Flossbach, founder of asset manager Flossbach von Storch, which owns 1.8 percent of Daimler, likened the company to an ageing motorway bridge: It looks solid, but the foundations are gradually disintegrating from the inside.

“It now needs someone to work proactively before the damage comes out into the open,” Flossbach told Handelsblatt. He urged Zetsche and his designated successor, Ola Källenius, who takes the wheel in May, to speed up the company’s restructuring. “This is now about whether Daimler will still be around in 10 years,” Flossbach said.

Other investors share his doubts. “Daimler must step up its efforts to become more efficient,” said Michael Muders, an auto specialist at Union Investment. Stefan Bauknecht of fund manager DWS said: “Cost control must now take priority. Daimler has put on more fat than others.”

Stopping the rot

In light of the weak results, Daimler said it will introduce "measures to increase efficiency" but did not provide any details. The company’s stock-market value has reflected shareholders’ concerns, tumbling more than 35 percent last year. While its stock has recovered a little in recent months, Daimler's listed value has still shrunk by more than €19 billion ($21.7 billion) since the end of 2017.

But Daimler aims to slightly increase unit sales, operating profit and revenue in 2019. "We cannot and will not be satisfied with this," Zetsche said. "That is why we have started to develop comprehensive countermeasures."

Daimler’s management and worker representatives find the shareholder criticism exaggerated and disturbing. The automaker will likely keeping on shunning cost cuts unless its two biggest shareholders – the Kuwait Investment Authority and Chinese automaker Geely – demand them.

That being said, cost-cutting is already going on behind the scenes. Company sources said managers are considering cutting the number of engine variations to reduce complexity. They’re also exploring cooperating with BMW and competitors to share the huge development costs for autonomous vehicle and e-mobility research.

Avoiding job cuts

Even the head of Daimler’s works council, Michael Brecht, said the company must act. “If earnings are getting worse while unit sales rise, we have to increase efficiency, no question,” he told Handelsblatt. He said Daimler’s existing range of 40 models was excessive and could potentially be trimmed. “We will support any optimizing that can be done as long as it doesn’t go against the workforce,” he said.

In other words: Do everything except cut jobs. Mercedes employs almost 25,000 workers more than BMW even though the two firms ship a similar number of cars. As a result, its share of labor costs to revenue at 13.5 percent is markedly higher than BMW’s at 12.3 percent, according to figures from Evercore ISI. 

Brecht says those figures are misleading and don’t take the entire production chain into consideration. “BMW for example doesn’t build its own gearboxes; we do,” he said.

For many shareholders, management’s plan to reorganize the company into three legally separate entities – cars, trucks, mobility services – under the roof of Daimler AG doesn’t go far enough. They want the truck division to be split off. “Daimler has huge potential if only its individual divisions could operate more freely,” shareholder Flossbach said. DWS and Union Investment are pushing for a partial flotation.

What the future CEO wants remains a mystery. Källenius, a towering Swede, won’t divulge his strategy until he takes the reins from Zetsche. Normally in times of transition, the chief financial officer would be in charge of calming nervous investors. But Bodo Uebber is also heading out the door at the end of 2019, and it’s unclear who his successor will be. In that sense, it’s all change at Daimler.

Martin Murphy covers the steel, car and defense industries for Handelsblatt. Franz Hubik is an automotive reporter for Handelsblatt. To contact the authors: [email protected] and [email protected]