STUTTGART - DaimlerChrysler has taken a $485.7 million charge to free it from supplier contract penalties for overestimating Smart car production volume.
The charge reflects lower estimated production figures for the tiny two-seater's life cycle, said DaimlerChrysler CFO Manfred Gentz. He said the investment write-off for the Smart plant in Hambach, France, has been adjusted.
But DaimlerChrysler insiders say the charge will be used to pay several Smart systems partners to terminate indemnity clauses in their contracts. The clauses entitled them to compensation if annual production targets were missed.
The clauses were given to some suppliers who invested heavily to develop parts modules and to set up production lines on the Hambach site.
High price to pay
Most contracts guaranteed that Smart would order parts for at least 200,000 cars per year. If orders fell below that number, Smart agreed to compensate suppliers.
'For each Smart not sold (up to 200,000 units) the company had to pay $1,086 in supplier compensation,' a company insider said. In 1999, about 80,000 Smarts were produced, resulting in supplier compensation of about $130 million. Last year, about 120,000 units were sold, requiring $87 million in compensation to suppliers.
Meanwhile, DaimlerChrysler has reduced its internal peak-sales forecasts to 130,000 to 135,000 Smarts. DaimlerChrysler also said Hambach's 200,000-unit capacity rating was too optimistic and set maximum annual output at 135,000 units.
The revised estimates are more realistic, but Smart still had long-term contracts with suppliers guaranteeing volumes it couldn't meet. Supplier contracts varied from seven to 10 years, the source said.
So DaimlerChrysler agreed with suppliers to end the indemnity clause by paying a one-time fee.
DaimlerChrysler spokesman Thomas Froelich said the one-time charge was due to compensating systems partners for their tooling development costs, and for depreciation.
Sources say there is also an understanding that suppliers agreeing to the deal have a better chance of involvement in the Smart four-door model. The car is being developed with help from Mitsubishi and will be produced at Mitsubishi's NedCar plant in Holland starting in 2004.
DaimlerChrysler originally contracted with eight systems partners. Not all were included in the buyout. Body-in-white and door supplier Magna Steyr renegotiated shortly after production began in 1998 when it became apparent that sales would fall short of projections.
Said John Lawson, auto analyst for Schroeder Salomon Smith Barney, 'We were expecting a charge associated with the shorter life period of the two-seater. It is a high number - much higher than I expected - so it looked as though it has to do with several contractual issues.'