DaimlerChrysler Announces Freightliner Turnaround Plan

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News of October 17, 2001

DaimlerChrysler Announces Freightliner Turnaround Plan

Four-Point Plan to Return Company to Profitability, Industry Leadership – Includes:

Material Cost Savings of $370 Million
Production Cost Savings of $120 Million
Overhead Reduction of $170 Million
Improvements to the Business Model of $190 Million

Stuttgart/Portland - Freightliner LLC, the North American truck subsidiary of DaimlerChrysler’s Commercial Vehicles Division, today announced a comprehensive restructuring programme designed to return the company to sustainable profitability. The restructuring plan is targeted to deliver annual savings at an operating level of $850 million by 2004. The measures should allow Freightliner, which will report a loss in 2001, to return to breakeven toward the end of 2002. A small operating profit is anticipated in 2003 and Freightliner expects sustainable returns above the cost of capital in 2004 and thereafter.

The implementation of the turnaround plan will result in one-time charges of around $330 million, to be taken in Q4 2001, reflecting separation payments and other costs related to decisions taken to exit current activities.

“This multifaceted restructuring program, shows that we have acted quickly and decisively, to bring Freightliner back on the road to recovery and profitability,” said Dr. Eckhard Cordes, Member of the Board of Management and responsible for the Commercial Vehicle Division. “Despite the deteriorating economic climate, the Commercial Vehicle Division still foresees achieving a slightly positive result in 2001,” Cordes added.

The targeted savings programme comprises four main elements: material cost savings, production cost savings, overhead reductions and improvements to the existing business model.

Material Cost Savings

A key part of Freightliner’s turnaround plan will be the further reduction of direct material expenditures by up to 10 percent, rising to $370 million annual savings in 2004. This will be accomplished by several initiatives; design changes, the reduction of parts proliferation and a closer working relationship with suppliers to reduce costs within the value chain. These reductions will come on top of savings that Freightliner has already achieved with its suppliers during 2001. In a further major initiative to reduce material costs, the company will move to three chassis platforms, from the current six, in its medium and heavy-duty truck business within two years.

Production Cost Savings

Aligning the production cost more fully with reduced underlying demand, Freightliner will close its Woodstock, Ontario school bus assembly plant in the fourth quarter of 2001 and the Kelowna, British Columbia truck assembly plant in the third quarter of 2002. Freightliner also plans to completely overhaul its parts manufacturing operation and intends to close its Portland, Oregon parts manufacturing plant mid 2002, pending discussions with the local unions. With further efficiency improvements in the remaining truck plants the overall cost savings of $120 million annually represent a 15 percent reduction in production costs. 1,600 hourly employees will be laid off.

Overhead Reductions

In an additional initiative to consolidate overhead functions, the company will reduce its salaried workforce by 1,100 employees or 25 percent. Taking into account additional savings on non-manpower expenses, the overhead cost reductions will total $170 million annually.

The recently announced minimum 5 percent cut in salaries and wages for both its salaried and hourly employees, as well as changes in health and welfare benefits are included in the production cost and overhead optimisation efforts set out above. The changes are effective January 6, 2002.

Compared to the peak employment levels in 1999 (25,000 employees), Freightliner had already reduced its workforce by 9,000 employees. Including the announced layoffs of 2,700 employees, the overall reduction will then total 11,700 employees or 47 percent.

Improvements to the Business Model

The improvements in the business model of $190 million annually reflect the need to secure profitable business rather than accumulating market share. In this respect Freightliner will apply more stringent criteria to new truck pricing and residual commitments. Additionally the cost of the used truck operations will be streamlined, while maintaining the trade capabilities of the Freightliner group, supporting and strengthening the three brands Freightliner, Sterling and Western Star. The group will more pro-actively pursue the vocational truck markets.

Underlying Assumptions

Freightliner’s turnaround plan is based on the following conservative assumptions. A continued slow market demand of around 175,000 Class 8 trucks and 160,000 class 6/7 trucks in the NAFTA area throughout the period 2002 – 2004, with a resultant pressure on prices. Additionally, Freightliner has been reducing new truck inventory levels and expects that this inventory will have returned to normal levels by the end of 2001.

Freightliner has also made progress in reducing used truck inventory levels and will continue to work on this further. Nevertheless the turnaround plan also assumes a high inflow of used trucks stemming from the high level of retail sales in the period from 1998 to 2000. Provisions in respect of residual values will therefore be monitored very carefully on a regular basis.

Personnel Issues

The current CFO of Freightliner, Dr. Udo Schnell, will assume new responsibilities as the new CEO of Mercedes-Benz Lenkungen GmbH, the Duesseldorf based steering gear subsidiary of DaimlerChrysler AG. A successor will be announced shortly.

(Oct. 12, 2001)

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