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INTERVIEW - Daimler CEO wants broader cooperation with BMW

FRANKFURT/STUTTGART (Reuters) - Daimler would like to expand plans for cooperation “as equal partners” with BMW beyond an agreement to bundle purchasing of components, Chief Executive Dieter Zetsche told Reuters.

Daimler's CEO Dieter Zetsche arrives to address the audience during the annual shareholder meeting in Berlin April 8, 2009. Daimler would like to expand plans for cooperation "as equal partners" with BMW beyond an agreement to bundle purchasing of components, Zetsche told Reuters. REUTERS/Hannibal Hanschke

“In general I only see a few areas where working together is in principle out of the question,” Zetsche said in an interview at Daimler headquarters in Stuttgart’s Untertuerkheim district.

“It’s clear that we are two independent companies whose success in the market depends of the strength of our brands, so brand integrity is a cardinal imperative. This has to be considered at all times but it is not something that would prevent broad cooperation.”

While he would not say what areas were off limits, he explained that Daimler had to ensure that when its customers drive off a dealer lot, they believe they have bought a luxury car with the unique characteristics of a Mercedes.

Unlike German rival Audi or Volvo of Sweden, BMW and Mercedes share a specialisation in rear-wheel-drive cars. At the same time the performance and design of their cars appeal to two largely different customer groups.

“The issues we are discussing (with BMW) have to be examined closely from the very beginning in order not to realise later halfway through that you made a mistake. That is why any results we might achieve would be that much more thorough,” he said.

Zetsche refuted the credo of pure production size that has come to exemplify Sergio Marchionne’s vision at Fiat, but he acknowledged that a key ingredient to success was the consistent use of modules to build Mercedes-Benz cars across segments as a method of gaining economies of scale.

“That offers the main opportunity for volume effects and then we can look at whether they can be applied jointly across company borders, which is certainly a sensible goal,” he said.

Modules are gradually replacing traditional platforms used in the industry since the early 1990s as groups of components that comprise a system are more versatile, used not just across brands like Volkswagen’s PQ35 platform that makes the VW Golf, Skoda Octavia and Audi A3 but across entire segments as well.

Surprised by the sudden success of the Toyota Prius, BMW and Daimler began cooperating to develop hybrid technology, which Daimler is bringing to the market this year in the form of the Mercedes M-Class full hybrid SUV and S-Class mild hybrid saloon that will also use a next-generation lithium-ion battery.

The two companies are also jointly buying less than 100 different components that do not compromise their branding since drivers neither see nor feel these parts.

Despite burning through billions in cash and posting heavy losses, Zetsche cautioned investors not to mistake Daimler’s momentary weakness with a fundamental shift in demand away from large luxury cars or a sustained loss of profitability since fewer high-margin eight-cylinder engines are in demand.

NO NEED FOR MORE CAPITAL

“While it may not be a law of nature that the share of premium cars in the market will stay the same for all eternity, it seems very plausible to us that with the focal point of the world moving from West to East, the premium market share will tend to grow over the mid to long term,” Zetsche said.

Increasingly stringent regulations for carbon dioxide emissions did not pose a critical threat to Mercedes, he added.

“I thus see no reason to change our business model to entry-level vehicles or volume cars nor alter our long-term EBIT margin target (of 10 percent at Mercedes). Downsizing the number of cylinders while turbocharging the engine doesn’t dramatically change the cost to the customer.”

The Daimler CEO confirmed that one investor who held a small stake in the company had pushed for a disposal of its industry-leading commercial vehicle business, but said this debate was now over in part thanks to Aabar.

The investment vehicle of Abu Dhabi’s sovereign wealth fund IPIC paid nearly 2 billion euros to become Daimler’s largest shareholder with a 9.1 percent stake acquired via a capital increase in March that excluded existing shareholders, prompting some speculation the company surprisingly needed the cash.

“We didn’t have any real need back in March, so we see even less of a reason for a further capital increase” once a lock-up period with Aabar ends in September, Zetsche said, adding that gross liquidity was now high enough to ensure the company could endure a longer period of drought in capital markets.

He said Daimler was not making any cuts nor delaying its 800 million euro investment to build a plant in Hungary with an annual capacity of 100,000 cars. The plant is set to begin making the next generation of Mercedes A-Class and B-Class compacts in 2011.

Nor did Zetsche see any need to consider closing any factories elsewhere: “We do not have any big problems with plant capacity.”

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