DaimlerChrysler cut its full-year profit forecast on Tuesday, blaming a fiercely competitive U.S. market for a 1 billion euro ($1.17 billion) operating loss at its Chrysler unit in the second quarter.
The world's fifth biggest carmaker, battling to return Chrysler to sustainable profits after it dragged the group into losses two and a half years ago, now aims for a 2003 group operating profit of about 5 billion euros ($5.86 billion).
Previously DaimlerChrysler had said it hoped to beat last year's 5.8 billion euro operating profit.
The shock announcement, made after the U.S. and German stock markets closed, led Standard & Poor's to cut its rating outlook on DaimlerChrysler's debt to "negative" and to describe the new Chrysler forecast as "staggering."
DaimlerChrysler shares had closed down 11 cents or 0.35 percent on the New York Stock Exchange on Tuesday.
"This is a nasty shock and I would expect it to have a major impact on the shares," said one German-based analyst.
The warning will be a chill reminder to investors of heavy losses at Chrysler over two years ago which resulted in a three-year overhaul at the division.
Then, investors criticized Chief Executive Juergen Schrempp and the 1998 merger between Daimler-Benz and Chrysler. The stock has lost nearly two-thirds of its value since the merger.
"BUMP IN THE ROAD"
However, Chrysler chief Dieter Zetsche told Reuters in a telephone interview that the second-quarter performance was merely "a bump in the road" in the ongoing restructuring.
"It's obviously a setback and obviously, for the first time in 2-1/2 years it makes us miss the milestone and the targets."
Chrysler has slashed costs, cut 20 percent of its work force and demanded lower prices from suppliers and as a result reversed losses faster than analysts had expected last year.
Zetsche told Reuters no further job cuts were planned at Chrysler and stressed the unit's problems were related to the market rather than to internal issues.
The carmaker blamed the North American price war and profit-eroding incentives which have ballooned this year as manufacturers have tried to offset weak demand.
"In addition to lower revenues from ongoing sales, this result is primarily attributable to a revaluation of dealer stocks and residual values," said the group in a statement.
It added that Chrysler had already taken action including additional cost cuts and still expected to report a slightly positive operating profit before restructuring expenses for 2003 compared with a previous target of a $2 billion operating profit.
Other divisions had performed in line with previous guidance despite a wobbly world economy, DaimlerChrysler said.
The statement follows the resignation on Friday of Chrysler sales and marketing chief, Jim Schroer, a critic of the U.S. auto industry's big cash rebates and cheap loans deals, who said they were destroying the profitability of Detroit automakers.
A day after rolling out a new sales program, Chrysler said its U.S. sales had fallen 3 percent while domestic rivals General Motors Corp. GM.N and Ford Motor Co. F.N said they would cut third-quarter North American production after incentives failed to give a boost to May sales.
S&P affirmed DaimlerChrysler's "BBB-plus" long-term credit rating, its third lowest investment grade, and said a downgrade was possible "within the next few quarters" unless management shores up Chrysler's competitive position.
"Chrysler is suffering from intense price competition in the North American automotive industry, to which it has recently proven to be especially vulnerable," S&P said.