DaimlerChrylserBenz (DCX), born from the marriage of German luxury and American muscle, is formulating its strategy to accelerate profitability in the face of declining U.S. auto sales and a weaker U.S. dollar.

DCX is open to all opportunities presented towards selling, partnering or reinvigorating its faltering Chrysler group.

Fading speculation about a possible merger with General Motors (GM) and recent excitement over a possible private equity coup of the Chrysler group has captured investor attention.

The usual suspects including General Motors, Nissan, and BMW have all expressed no interest in acquiring Chrysler.

Possible solutions to DCX's profitability could also include the sale of DCX's financing arm or the outright sale of Chrysler group. Operating profits for the financial services unit have increased 17% in '04 and in '05.

Last year Chrysler generated losses of 1.12 billion Euro (USD $1.47 billion).

A new strategy calls for layoffs of 13,000 employees or essentially 3% of DCX's global workforce in an effort to return to profitability by 2008.

In 2005, the Mercedes Car Group experienced operating losses of 505 million Euro (-$665 million) before rebounding in '06 with 2.4 billion Euro ($3.16 billion) in operating profits. While the Mercedes unit stumbled in '05, the Chrysler Group delivered operating profits of 1.5 billion Euro ($1.98 billion).

The two segments appear to balance each other as the winds of demand have shifted consumers from value and back to luxury in 2006. The Mercedes group had a record year for sales in 2006. Leading the way are the new CL, GL and E-Class models.

DCX.gif

Chrysler Group Woes
A weaker U.S. dollar in 2006 and lower sales volumes due to a product mix lacking in fuel-efficient passenger cars and crossover vehicles contributed to the negative results in 2006. Lower unit sales were lead by the Dodge Ram pickup (-9%), Dodge Durango (-39%), Jeep Grand Cherokee (-35%) and minivans (-9%). The heavy losses in the light pickup trucks segment overshadowed improved unit sales of Chrysler's passenger vehicles including the 300, Crossfire, and Sebring brands which increased 6% in 2006 over the previous year.

10 New Vehicles
Chrysler launched 10 new vehicles in 2006 including the popular Dodge Caliber and the Jeep Compass. The new vehicles' greater focus on fuel efficiency helped them secure 7% of Chrysler's 2.7 million unit sales last year. Another positive note is that while unit sales in the U.S. declined 9% last year, sales in Western and Central Europe and other markets outside of NAFTA increased 22%. While these international regions comprised only 8% of total unit sales it still represents the fastest growing segment for Chrysler's business.

Enter Private Equity
Cerberus, the private equity firm that purchased a majority stake in GM's GMAC financing division last year, has met with DCX executives. Mega-deal maker Blackstone group is also slated to visit with DCX executives this week.

Private equity may be eyeing Chrysler with the aspirations of owning an auto manufacture that builds and sells automobiles in mainland China. Chrysler already has joint assembly plants with Beijing Automotive Industry Holding Company and China Motors Company to assemble and service the Chinese market.

DCX is up 6.84% since the beginning of the year and up nearly 27% for the past 12 months. DCX appears fairly valued with a PE Ratio of 16.76 versus the industry average of 16.68. While speculation of a merger with GM pushes DCX above $70, long-term growth will come from its ability to balance its luxury sales cycles should the Chrysler group leave the DCX umbrella and find new leadership behind the cloak of private equity.

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