DaimlerChrysler stubbed its toe - hard - in North America in the third quarter.
Not counting one-time gains and losses, worldwide earnings fell 78 percent to $289 million. Including one-time events - notably a $2.9 billion gain from spinning off the company's European aerospace unit - net income rose 54 percent to $2.7 billion.
The former Chrysler Corp. brands, which not long ago set the standard for profitability among the Big 3, had an operating loss of $512 million compared with a year-ago operating profit of $1 billion.
Wall Street analysts had been expecting the drop in continuing earnings, but Jim Holden, CEO for North America, said that people inside and outside of DaimlerChrysler wanted to know: 'What happened? And how did this thing happen so quickly?'
Holden blamed a 'confluence of events' that hurt the auto industry in general and Chrysler in particular:
Incentives - 'Industry incentives are at record levels,' Holden said.
The parent company spent about $900 million on incentives in the quarter, plus a one-time hit of $400 million on lower residual values for its portfolio of 620,000 leased vehicles in the third quarter, said CFO Manfred Gentz.
Most of those charges were for the former Chrysler brands, he said. He estimated the company spent about $600 million in incentives on leftover 2000 models.
Lower volume - Lower volume and a less favorable model mix dragged down earnings another $700 million to $800 million, Gentz said. Sales fell 14 percent in the quarter to 623,031 for the former Chrysler brands, the company said.
Minivan changeover - To avoid repeating a past mistake, where Chrysler Corp. shut off production of an outgoing model too soon, DaimlerChrysler built up inventories of the expiring minivan and ended up with too many, which needed incentives to move them.
Holden said the minivan changeover hurt in several ways. The new model was not generating revenue, but DaimlerChrysler was forced to keep spending money on incentives to move the previous model.
When General Motors recently unveiled incentives that included no-interest loans, it hit DaimlerChrysler at a vulnerable time, he said.
'If you've got a market where somebody comes out with zero percent APR (annual percentage rate) for 60 months on 2000 models in closeout, if you happen to be the manufacturer at the time with some plants down from changeover, you're going to get rained on harder than some others,' Holden said.
In a separate conference call for analysts, Chairman Juergen Schrempp said he expects the former Chrysler brands to be profitable again in the fourth quarter and then improve next year, as new models are added.
'When you have a product at the beginning of its life cycle, incentives can be lower, if at all. In 2000-2001, we had the end of several products. At the beginning, there is some positive effect,' he said.
'But there will not be any easing of the incentive game.'