German carmaker Daimler (DAI) stunned investors with a profit warning on July 24, sending company shares into a nosedive and illustrating the dramatic changes forced on the auto industry by high fuel prices and a cooling world economy.
Shares of the maker of Mercedes-Benz cars and trucks plunged more than 10% in Frankfurt after the company revised its profit outlook. Operating profit for the year will be more than $11 billion instead of the $12 billion-plus forecast earlier, the company said. "The going has gotten tougher," Daimler Chief Executive Dieter Zetsche told analysts and reporters on a conference call. "We can no longer completely compensate." Daimler also reported a 2% decline in operating profit for the second quarter, to $3.2 billion. Sales rose 6%, to $40 billion.
The drastic decline in Daimler shares seemed at odds with gains by Volkswagen (VOWG.DE) shares a day earlier. In a report on first-half earnings, VW also pointed to risks ahead as global growth slows. But investors seemed to be punishing Mercedes for its emphasis on bigger luxury cars as well as trucks, and they may also have been spooked by Zetsche's blunt assessment of the situation. "The way that the stock has been beaten up is a complete overreaction," says Christoph Stürmer, auto analyst at market researcher Global Insight in Frankfurt. "If you look at VW, which shot up yesterday, they are by no means better."
Or maybe the stock markets are just confused. Shares of French automaker Renault (RENA.PA) also fell July 24, a day after investors cheered earnings reports by PSA Peugeot Citroën (PEUP.PA) and Fiat (FIA.MI). Renault also issued a grim prognosis even as it reported a 37% increase in net profit.
Daimler's second-quarter earnings reflected many of the problems afflicting the world economy, including the credit crunch and high fuel prices. Though Mercedes' second-quarter unit sales jumped 36% in the U.S. and held steady in Europe, recent weeks have seen alarming double-digit declines in sales in Spain, Italy, and Britain. Zetsche said sales of Freightliner and other Mercedes trucks in the U.S. continue to suffer from a weak economy, as well as from tighter emissions standards.
There are also signs that buyer preferences are changing in the face of $4-a-gallon gas in the U.S.—and more than $9 a gallon in Europe. Units sales of Daimler's two-seat, ultracompact Smart car, which has long struggled, surged 24% worldwide as even U.S. buyers discovered a new appreciation for the car's fuel economy and lower CO2 emissions. But sales of Daimler SUVs fell 5% as that vehicle class began to fall out of favor.
Buyer fondness for big Mercedes vehicles hasn't collapsed, especially in oil-producing countries such as Russia. Still, it's clear carmakers have realized they need to devote more resources to improving fuel efficiency. Daimler plans to increase research and development on fuel-saving technologies, Zetsche said. The company may also consider exporting future generations of its compact A- and B-Class passenger cars to the U.S.
The rise in oil prices, as well as government regulation in response to global warming, "has changed the auto industry fundamentally," says analyst Stürmer. "It has changed the strategic priorities. Even if consumer pressure goes away, the regulatory pressure is not going to go away."