Daimler's Bump in the Road

It's hard to sugarcoat $1.5 billion in red ink. That's the amount DaimlerChrysler (NYSE: DCX  ) expects its Chrysler unit to bleed in the third quarter.

The German-American automaker's forecast for a staggering loss in its U.S. division has a familiar ring to it. Like General Motors (NYSE: GM  ) and Ford (NYSE: F  ) before it, Daimler has caught the SUV flu, as sales of its larger vehicles have plummeted in response to high gasoline prices. Still, investors should remember that Daimler isn't as sick as its American competitors, and it probably won't be long before the firm is back in good health.

The company has desperately tried to clear out its 2006 inventory of Chrysler vehicles by, among other things, reviving employee discount pricing and loosening credit restrictions for cut-rate financing. Unfortunately, it seems the success of these efforts has been limited. Fortunately, management is ensuring it doesn't repeat the same mistake twice: It's slashing production for Chrysler autos in the second half of the year by 135,000 units, with steep cuts in the Dodge Ram pickup truck and Dodge Durango SUV.

The changes certainly will be painful, and given the ongoing drama at Ford and General Motors, such cuts might even seem downright scary. But as the backlog clears, the 2006 gas guzzlers will be replaced by fuel-sippers more attuned to current consumer preferences. The 2007 Jeep Caliber, Jeep Patriot, and Chrysler Sebring will all offer fuel ratings exceeding 30 miles per gallon on the highway.

Granted, gasoline prices have been sinking of late, and that could mean that consumers will become less concerned about fuel economy. In the near term, though, a shift in buying habits back to gas-guzzlers seems unlikely. It took some time for consumers to realize that higher gas prices were going to linger and adjust their buying habits accordingly. By the same token, a renewed laissez-faire attitude on fuel economy will require sustained lower prices, which are hardly a given.

In the near term, DaimlerChrysler looks like it's well on its way to regaining its traction.

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Fool contributor Brian Gorman does not own shares in any the companies mentioned.


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