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From the Detroit Free Press:

Chrysler incentives put drag on profits

Report raises concerns of slowdown

April 28, 2006



Chrysler Group showed for the first time on Thursday signs it could be slowing down.

A drop in profits raises questions about the automaker's ability to continue its success without the use of costly props, such as cash-back rebates and rock-bottom financing, as it launches 10 new models this year.

As parent company DaimlerChrysler announced its financial performance Thursday for the first three months of 2006, the Chrysler Group reported that operating profits fell 50% from the year before.

Chrysler's financial picture still is much better than that of General Motors Corp. and Ford Motor Co. Chrysler made $144 million in the first quarter and parent company DaimlerChrysler made $363 million, a far cry from the $323-million and $1.2-billion first-quarter losses by GM and Ford, respectively.

Chrysler Group Chief Executive Tom LaSorda highlighted the positive: "Despite an intensely competitive market, Chrysler Group was able to deliver our 11th consecutive quarterly profit in the first quarter," he said in a statement.

But outside estimates show that Chrysler Group incentives, particularly on trucks and SUVs, have increased. Incentives are cause for concern because they can drive sales at the expense of profits.

Chrysler Group executives appear willing to make the trade-off as they usher out old models, such as the Neon.

Ideally, as Chrysler prepares to launch 10 new models, including the just-released Dodge Caliber, it needs to sell these vehicles with no or minimal incentives.

In a competitive U.S. market, where Toyota Motor Co. shows no signs of slowing down, the Chrysler Group is working hard to hold onto its recent gains.

It increased U.S. sales 5% last year, turned a healthy profit for two straight years and has continued to gain market share early this year in the face of stiff Japanese competition.

The Chrysler Group and its predecessor, the Chrysler Corp., have been prone to wild swings. Chrysler Group executives have said they want to avoid future roller-coaster rides and maintain financial strength this time.

"I think there was a conscious effort that said, 'We can't afford to lose ground anymore,' " said George Magliano, director of automotive research for the Americas for Lexington, Mass.-based Global Insight Inc.

In a conference call, analysts peppered DaimlerChrysler executives Thursday with questions about the incentives. How long would they continue? Has the Chrysler Group reached a low point for profits?

Just a few years ago, as the incentive war was heating up, Chrysler Group officials criticized GM for using incentives to drive sales.

But even as GM and Ford pull back on incentives in 2006, the Chrysler Group has stayed with special promotions. The Chrysler Group's incentives per vehicle in the first quarter were $3,864, higher than both GM and Ford, according to estimates from Autodata Corp. Incentives on Chrysler Group trucks were $4,479.

The incentives can provide a short-term fix for moving the older cars and trucks off dealer lots and keeping plants busy. But ultimately, to stay financially sound, the Chrysler Group needs the new cars and trucks to sell without the use of incentives, or profits could turn to losses and busy plants could be idled.

DaimlerChrysler Chief Financial Officer Bodo Uebber declined to forecast Chrysler Group profits or incentives. Uebber was optimistic the new models would do well without major incentives.

"Our product pipeline gives us confidence," Uebber said.

Launched in February, the Dodge Caliber, a small-car replacement for the Neon, is off to a good start.

But the bulk of the replacements, including a redesigned Sebring, aren't expected until the second half of this year. Several of the new models have been received with skepticism.

The Chrysler Aspen adds another large SUV to the lineup in the face of rising gas prices. The Jeep Compass, a car-based SUV, could have difficulty as it attempts to stretch the Jeep brand. Unlike most Jeeps, it won't have extreme off-road capabilities.

The Chrysler Group will be challenged to keep up the sales growth in 2006, most analysts say. The new models likely won't affect sales until next year.

"It's not going to be easy for Chrysler this year," Global Insight's Magliano said.

The Chrysler Group, though, is positioned well compared to GM and Ford. Last year's success has provided breathing room to hold onto market share.

The Chrysler Group is doing what it has to do this year, said David Healy, an analyst with New York-based Burnham Securities Inc. It's keeping the assembly lines running with the old models until the new ones arrive and still finding a way to turn a profit.

"You have to admire them," Healy said. "Even with $4,000 in incentives, they're still making money...You compare that with how GM and Ford are doing in North America, and you have to give them a medal."

DaimlerChrysler shows slight improvement

DaimlerChrysler AG reported its first-quarter financial results Thursday. Some of the highlights:

* DaimlerChrysler as a whole had a net income of $363 million, a 4% increase from the first quarter last year.

* The Chrysler Group made $144 million, about half the operating profits of a year ago. Sales increased, but so did incentives.

* The Mercedes Car Group lost $823 million, but that was better than the $1.2 billion it lost in the first quarter last year. The most recent loss was because of major expenses for discontinuing a model in the Smart unit and employee buyouts at Mercedes plants.

* Executives said the company is in talks with the UAW in hopes of getting a health-care deal similar to the agreements reached with Ford and GM. A health-care deal could save the Chrysler Group hundreds of millions of dollars a year, according to analyst estimates.

* Sales for the Chrysler Group cars and trucks are expected to be stable this year. Sales for Mercedes are expected to be at least the same as last year
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