Daimler Trucks Widens Global Parts Sharing to Bolster Profit

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Bloomberg  /  June 8, 2016

Daimler AG’s trucks division, seeking to recover from a profit warning last month, aims to boost future earnings with a plan to cut costs by sharing more engines, axles and other components across units in North America, Europe and Asia.

Once truck markets return to “a more normal level,” the unit will reach its target of an average 8 percent return on sales, Wolfgang Bernhard, head of Daimler’s commercial-vehicle business, said at a press conference Wednesday in Stuttgart, Germany. A key to boosting profit will be using more vehicle parts worldwide and improve efficiency, he said.

“We’ve initiated the right measures to balance short-term swings and reach our long-term goals,” Bernhard said. “We’re not talking about 10 or 15 years; we want to get these things done by the end of this decade, and this will put us in a unique position.”

The world’s largest maker of commercial vehicles is seeking to stabilize earnings in the face of fierce price pressure in Europe and intensifying competition, including from Chinese rivals in emerging markets. Declining demand in the U.S. and contracting markets in Brazil, Russia and Indonesia prompted Daimler last month to forecast “significantly lower” 2016 profit at the unit. To better offset such swings, the German manufacturer, which also makes Mercedes-Benz luxury cars, has embarked on an unprecedented push to share truck parts across more vehicles and markets.

Delivery Target

The division’s Mercedes-Benz trucks brand plans 2,000 job cuts in Brazil, and its North American operations, which include the Freightliner and Western Star nameplates, are laying off a similar number of workers. Daimler is sticking to a target of selling 700,000 trucks a year by 2020 even as global markets are set to remain difficult this year and weigh on profitability, Bernhard said.

“With truck earnings down and the product story at Mercedes arguably past peak, we remain on the sidelines,” Arndt Ellinghorst, a London-based analyst at Evercore ISI, said in a report to clients. He estimates full-year profit at Daimler Trucks to drop about 18 percent to 2.26 billion euros ($2.57 billion).

Unlike passenger cars, heavy-duty vehicles vary significantly from region to region. The geographical differences and lower volumes in the truck market have limited manufacturers’ investments in common engines, transmissions and other components. Daimler is seeking to buck that trend. Bernhard on Wednesday outlined plans for a single electronics system in Daimler’s trucks worldwide and a single dashboard that can be installed with different exterior designs for each brand.

The goal is to rein in costs and win over customers by accelerating the introduction of new technology, including logistics-data services and operating-efficiency gains. Fuel consumption ranks as one of the top criteria when truck buyers choose a model, along with vehicle reliability and maintenance terms.

Daimler Trucks “hasn’t proved yet that it can match the level” of profitability of Paccar Inc. or Volkswagen AG’s Scania, Oliver Maslowski, a Zurich-based fund manager at GAM, said in an interview this week. “The profit warning raises the question if they misread the truck cycle in North America and were too late to scale down production.” The Daimler unit’s operating-profit margin was 7.3 percent of revenue from ongoing business in 2015.

Bernhard said that, while Scania’s ahead of Daimler Trucks in profitability, “we’re making progress.” The Swedish competitor “is only present in the heavy-duty segment, which is more lucrative in terms of margins than the mid-duty segment.”

The Mercedes-Benz trucks unit is revamping its production network to become leaner and improve margins, said Stefan Buchner, the head of the brand. The business will scale back vehicle variants 35 percent by 2018 and cut production hours 25 percent, while it will “tackle material costs aggressively, performing better than target.”

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Daimler Trucks to cut more jobs in Brazil

Reuters  /  June 8, 2016

Daimler's truck division is to cut a further 2,000 jobs in Brazil on top of the 1,240 cuts in the United States and Mexico which it announced on Tuesday, as it seeks to cope with weak markets in the region.

Daimler Trucks CEO Wolfgang Bernhard told an investors conference near Stuttgart the 2,000 jobs will be axed in Brazil at a cost of about 100 million euros ($114 million) in severance payments, raising the number of jobs it has cut in Latin America's biggest economy to almost 5,000 since last year.

He also said he would not rule out further layoffs in the United States should the truck market there shrink by more than the expected 15 percent this year.

Daimler Trucks currently employs 13,700 workers in the United States and about 11,500 in Brazil, a spokeswoman said.

Daimler last month warned that sales and profits at the trucks division would fall significantly in 2016 due to weaker demand in the United States and Brazil.

However, Bernhard denied that his company needed to take more drastic action.

"We don't need an additional programme, we can react swiftly and flexibly to changing market conditions," Bernhard said, citing steps to shorten truck assembly times and to reduce its portfolio of heavy-duty vehicles.

"If we want to remain competitive, we must build more vehicles with fewer people," said Stefan Buchner, the truck division's regional chief for Europe and Latin America.

Daimler Trucks accounted for about a fifth of the group's earnings before interest and tax and about a quarter of total sales last year.

The North American heavy-duty trucks market has cooled after a plunge in oil prices and metals-related businesses put a dampener on industrial activity and haulage volumes, prompting rivals like Volvo to warn investors about a downturn.

The division's operating profit margin will slip below last year's 7.3 percent, Bernhard said, which was already below the division's 8 percent target.

By comparison, Volkswagen's main trucks division MAN last year reported a profit margin of just 0.7 percent although its currently separate Swedish subsidiary Scania's profitability approached 10 percent.

"We are a long way from a corporate crisis, this will be a great year in an environment that is not favourable," Bernhard said.