FRANKFURT -- An earnings stumble at DaimlerChrysler's Mercedes-Benz flagship tarnished higher profits at the world's fifth-biggest automaker on Thursday and stoked questions about the loss-making Smart compact's future.
Third-quarter operating profit at the German-American group rose 7 percent to 1.3 billion euros ($1.65 billion), just below analysts' expectations, thanks to a rebound at U.S. arm Chrysler and its hit new models like the 300 sedan and Dodge Magnum.
DaimlerChrysler reiterated it expected "significant improvement" in 2004 group operating profit excluding one-time items, even though its premium Mercedes Car Group division now expected "substantially lower" operating earnings.
It had said in July only that Mercedes would not match 2003 earnings, which had been its original plan.
"Mercedes is brutal. Everything else is clearly better than expected," said HVB analyst Georg Stuerzer, suggesting new Mercedes chief Eckhard Cordes was clearing the decks by packing as much bad news as possible into the third-quarter figures.
Operating profit at Mercedes -- traditionally the group's cash cow -- fell to 304 million euros from 793 million a year earlier amid disruptive model changeovers, high launch costs for new products, currency headwinds, and stepped-up spending to fix quality problems that have smudged its cars' elegant image.
During a conference call with analysts, Chief Financial Officer Manfred Gentz said "strong deterioration" of performance at the Smart compact range within Mercedes also played a big role at a time Smart was supposed to be narrowing its losses.
The tiny brand for image-conscious urban drivers has been well received by the market, but its financials have been "disappointing", he said.
"Therefore we have to make up our mind what to do with the Smart business, how we can make it a profitable business and here we have to consider all potential alternatives but it is by far too early to tell you what we are going to decide," he said.
A spokesman later ruled out shutting down Smart.
The quarter marked a serious role reversal for Mercedes and for Chrysler, which until this year had been a problem child.
Chrysler's operating profit advanced 48 percent to 217 million euros despite 104 million in restructuring charges. It forecast "considerable positive earnings" in 2004 amid model successes that let it limit margin-eroding sales incentives.
"This quarter will be remembered for the significant disappointment at the group's most valuable division, Mercedes Cars," Morgan Stanley analysts said in a note to clients.
"Chrysler's third-quarter margin of 2.8 percent (excluding the restructuring charge) surpassed Mercedes' margin of 2.5 percent," it noted. "When is the last time this happened?"
Gentz said exchange rates would remain a drag in 2005 and the negative impact of raw materials prices could also worsen significantly next year.
Spending to fix Mercedes quality problems will also weigh on results for some time to come, he added.
"The main burden out of that (quality issue) will be taken in 2004 and 2005. There will be some impact also in 2006 but these (costs) will probably be minor because the bulk of the problem will be resolved in 2004 and 2005," he said.
Overall third-quarter group revenue rose 2 percent to 34.9 billion euros, while net profit swelled to 951 million euros from a year-earlier loss amid a big impairment charge.
The carmaker generated 2003 third-quarter operating profits of 1.25 billion euros on sales of 34.11 billion. Full-year 2003 operating profit excluding one-offs was 5.1 billion euros.
The group's booming commercial vehicles business saw operating profit fall by a fifth to 159 million after absorbing 405 million in costs for the impact of recalls and quality problems at its Mitsubishi Fuso truck and bus unit in Japan.
Struggling Japanese partner Mitsubishi Motors Corp., whose losses hit DaimlerChrysler's second-quarter net profit by almost 500 million euros, was no longer a drag on earnings due to a change in accounting for Daimler's stake.