Freightliner Restructuring Plan Makes Deep Cuts
Oct 14, 2001 12:00 PM
Freightliner LLC, the North American truck subsidiary of DaimlerChrysler’s Commercial Vehicles Division, announced a comprehensive restructuring program on October 12 that is designed to return the company to sustainable profitability. The plan is designed 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 approximately $330 million, to be taken in Q4 2001.
"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."
Freightliner’s current chief financial officer, Dr Udo Schnell, will assume new responsibilities as the new chief executive officer of Mercedes-Benz Lenkungen GmbH, the Duesseldorf based steering gear subsidiary of DaimlerChrysler AG. A successor will be announced shortly.
A key part of Freightliner’s turnaround plan will be the further reduction of direct material expenditures by up to 10%, 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. 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.
Aligning the production cost more fully with reduced underlying demand, Freightliner will close its Woodstock, Ontario, Canada, school bus assembly plant in the fourth quarter of 2001 and the Kelowna, British Columbia, Canada, 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% reduction in production costs.
The truck manufacturer will lay off 1,600 hourly employees and 1,100 salaried employees. Taking into account additional savings on non-manpower expenses, the overhead cost reductions will total $170 million annually.
The recently announced minimum five 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 optimization efforts set out above. The changes are effective January 6, 2002.
Compared to 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 total 11,700 employees or 47%.
Freightliner will focus on securing 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 supporting and strengthening the three brands--Freightliner, Sterling and Western Star. The group will more pro-actively pursue the vocational truck markets.
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 (North American Free Trade Agreement) area throughout the 2002–2004 period. Additionally, Freightliner has been reducing new truck inventory levels and expects a return to normal levels by the end of 2001. The turnaround plan assumes a continued high inflow of used trucks stemming from the high level of retail sales in the period from 1998 to 2000.