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DaimlerChrysler to slash production

Automaker hopes to reduce the bulk of its inventory by the third quarter.
September 19 2006: 1:00 PM EDT
DETROIT (Reuters) -- DaimlerChrysler AG's U.S. arm Chrysler is cutting production by 135,000 units in the second half of 2006 to reduce a glut of unsold trucks and sport utility vehicles after a failed summer sales effort, the company said Tuesday.

Most of the production cutback - about 90,000 units - will come in the current quarter as Chrysler attempts to cut inventory and reduce the financial burden on its dealers, Chief Executive Dieter Zetsche said in a presentation for financial analysts.

DaimlerChrysler on Friday cut its 2006 operating profit by about $1.27 billion (1 billion euros) and predicted that its Chrysler unit would lose about $1.5 billion (1.2 billion euros) in the third quarter - more than twice the loss initially projected.

Shares of Chrysler (down $0.02 to $49.16, Charts) fell less than 1 percent during afternoon trade on the New York Stock Exchange.

The automaker's U.S. sales were down 8 percent in the first eight months of 2006, compared to an industry-wide sales decline of 4 percent.

Zetsche said Chrysler management had held out hope that a successful summer sales season based on its revived offer of employee-level pricing would have allowed the automaker to reduce inventories with only a limited production slowdown.

But in a presentation for analysts from Stuttgart, Germany, monitored by Web cast, Zetsche said Chrysler was unprepared for the continuing shift in the U.S. market away from the light trucks and SUVs that make up 71 percent of its sales.

Zero-percent financing offers by Detroit-based rivals General Motors Corp. (up $0.25 to $31.73, Charts) and Ford Motor Co. (down $0.17 to $7.65, Charts) also hurt Chrysler, Zetsche said.

"We were not able to realize our retail sales plan," said Zetsche, who was featured in a series of advertisements this summer for Chrysler as Dr. Z. "The reality is that we fell short of those plans and relatively significantly."

Chrysler will cut dealer shipments to about 290,000 units in the current quarter and 705,000 for the second half of the year, down from an initial forecast for a second-half shipment of 840,000 units, the company said in a text prepared for Zetsche's presentation.

The company also now expects that Chrysler's share of the North American market will slip to 11.7 percent, compared with an earlier forecast of 12.6 percent share.

Lower forecast for dealer inventories
Dealer inventories, which have been a source of friction between the automaker and its retail sales network, are now projected to be in the low 500,000-unit range, from an earlier forecast of 580,000 units, the company said.

Higher U.S. interest rates have driven the cost of financing vehicle inventories higher for all dealers.

Chrysler dealers had complained that the company's aggressive production targets saddled them with too many 2006 models, forcing some to cut back on orders for the new model year.

"We realized that our dealer inventories were increasing and were at pretty unhealthy levels," Zetsche said, adding that "after the disappointing sales in July and August we had to finally bite the bullet."

Zetsche said he could not yet give an operating forecast for Chrysler in 2007, but said that the one-third of the company's sales next year would come from its new model launches, including the Chrysler Sebring sedan and the Dodge Caliber hatchback.

Zetsche said DaimlerChrysler was still analyzing any one-time charge it would take as a result of its production cuts. "I cannot be more specific because we have not done the job, the analysis," he said.

Meanwhile, Zetsche said the dynamics of the U.S. market have shifted to favor Japanese automakers, which are stronger in passenger cars and have a strong r