Mercedes Car Group to Share Technologies Extensively with Chrysler, and to Restructures Smart Business Unit
Focusing on two-seater, Fortwo and putting on the US Market as well in 2008

  The following outlines the latest news of Mercedes Car Group (comprised of Mercedes-Benz, Maybach and Smart), one of the group companies in DaimlerChrysler (DCX).

  Sales growth in Mercedes Car Group had been stagnant since 2000. The unfavorable model mix and stronger Euro resulted in a substantial drop in profitability in 2004. In order to overcome these situations, DCX introduced the following three programs in 2005:
(1) Product Offensive: marketing 50 new models throughout DCX by 2008.
(2) CORE program: enhancing work efficiency to improve profitability by
    3 billion Euros and therefore attain a 7% operating margin in 2007.
(3) Restructuring of the Smart business unit: reaching the breakeven point in 2007.

  In addition, in January 2006, DCX presented a New Management Model designed to increase efficiency across DCX. This incorporates policies to improve work efficiency in the administrative and development departments as well as to extensively share systems and parts between Mercedes Car and Chrysler Groups.

  The Smart business unit's core functions, such as development, sales and purchases, were integrated into the associated functions in the M-Benz passenger car business unit. Production of the four-seater Forfour was discontinued to focus on the two-seater Fortwo. DCX plans to release the new Fortwo in Europe in 2007, and then the US in early 2008.

■New vehicles introduced in 2005 have a positive impact on sales growth in 2006 with drastic improvement in profitability

  Mercedes Car Group's sales in Germany, the largest market for the company, had been declining, which caused its total annual sales to have remained stagnant at a little over 1.2 million. However, January to June 2006 saw sales growth of 9.4% from the previous corresponding period, reaching 606,959 vehicles. This was contributed to by the B-Class and R-Class, both released in 2005, as well as the M-Class and S-Class, both completely remodeled in 2005. This also resulted in a 12.5% increase in sales, allowing operating losses of 942 million Euros to turn to profits of 129 million Euros.

  Sales volumes are expected to rise throughout 2006. The improved model mix will allow further enhancement of profitability in the second half of 2006. The company believes that it is on track to achieve the goal of a 7% operating margin in 2007.

■Mercedes Car Group's Performance Overview

(in millions of EUR)

	2001	2002	2003	2004	2005	Jan.-Jun. 2005	Jan.-Jun. 2006
Revenues	47,705	50,170	51,446	49,630	50,015	22,855	25,718
Operating Profit	2,951	3,020	3,126	1,666	(505)	(942)	129
Investment in property, plant and equipment	2,061	2,495	2,939	2,343	1,629
Research and development	2,402	2,794	2,687	2,634	2,418
Unit Sales (units)	1,229,688	1,232,334	1,216,938	1,226,773	1,216,838	555,049	606,959
Production (units)	1,249,951	1,238,927	1,211,981	1,246,726	1,214,855	603,602	629,883
No. of employees (Dec. 31)	102,223	101,778	104,151	105,857	104,345	106,351	98,635

Source: DaimlerChrysler Annual Report 2005, Q2 2006 Interim report
Note:	Exceptional expenses in connection with restructuring the Smart business unit and reducing the number of employees amount to 1.111and 1.127 billion Euros in the first half of 2005 and 2006, respectively.

■DaimlerChrysler's Business Overview

(in millions of EUR)

		2001	2002	2003	2004	2005	Jan.-Jun. 2005	Jan.-Jun. 2006
Revenues	Mercedes Car Group	47,705	50,170	51,446	49,630	50,015	22,855	25,718
	Chrysler Group	63,483	60,181	49,321	49,498	50,118	23,765	25,033
	Commercial Vehicles	28,572	28,401	26,806	34,764	40,634	21,466	22,487
	Financial Services	16,851	15,699	14,037	13,939	15,439	7,379	8,385
	Total	152,873	147,368	136,437	142,059	149,776	70,167	75,747
Operating Profit		(1,318)	6,854	5,686	5,754	5,185	2,299	2,748
Net income		(662)	4,718	448	2,466	2,846	1,025	2,109
Research and development		6,008	6,156	5,571	5,658	5,649	2,672	2,669
Investment in property, plant and equipment		8,896	7,145	6,614	6,386	6,580	3,081	3,180
No. of employees (Dec. 31)		372,470	365,571	362,063	384,723	382,724	388,758	368,321

Source: DaimlerChrysler Annual Report 2005, Q2 2006 Interim Report
Note:	DCX expects sales throughout 2006 to increase slightly compared to 2005, as well as operating profits of over 6 billion Euros.

■DCX schedules restructuring of Mercedes Car Group and streamlining of organizations across DCX to boost work efficiency

  In February 2005, Mercedes Car Group embarked on the CORE program designed to improve profitability by 3 billion Euros by 2007 and in September, announced the restructuring program to reduce the work force by 8,500 at the German domestic plants.

  In addition, in January 2006, DCX presented the New Management Model designed to eliminate redundancy of organizations across DCX and to promote extensive sharing of parts and systems between Mercedes and Chrysler. According to DCX sources, because DCX's administrative costs are much higher than the average in the automobile industry, the number of employees working in the administrative and management departments will have to be reduced by 20 and 30%, respectively by 2008. This, together with the CORE program, will result in annual administrative cost reductions of 1.5 billion Euros.

■DaimlerChrysler schedules streamlining of all DCX organizations and restructuring of Mercedes Car Group

Programs Revealed in

Outline

■Launch of the CORE program

February, 2005	Thorough reviews of the value chain from development to after-sales services are intended to increase efficiency to improve profitability of Mercedes Car Group by 3 billion Euros, reaching a 7% operating margin by 2007.
July, 2006	The CORE program has been producing positive effects, including material and personnel cost reductions, in improving short-term profitability. Development of models and engines, whose profitability could not meet the expectations, was discontinued.
	As the second phase of the program, the company has been working on structural reform for cost competitive production of most quality products since September 2005.

■Work force reduction by 8,500 at German domestic plants

September, 2005	The company revealed a personnel reduction of 8,500 workers at the M-Benz plants in Germany within one year. This personnel reduction is considered essential in order to continue costly German production.
	8,500 workers, to be made redundant, are broken down into 3,600 from the Sindelfingen Plant for producing the C/E/S-Class, 2,700 from the Bremen Plant for the C-Class, and 1,100 from the Untertuetkheim Plant for powertrains.

■Introduction of New Management Model

January, 2006 July, 2006	■More efficient administrative departments (1) Total 6,000 workers, comprised of about 20% of white-collar workers and 30% of management personnel, will be laid-off over the next three years to eliminate redundancy of organizations for more efficiency. Departments that overlap each other are reorganized into one department (e.g. the finance and controlling departments) to provide the organization with quick decision making ability. (2) The company has finalized the organization structure by the middle of 2006 and will nearly complete the management personnel reduction within 2006 (announced in July 2006). Implementation of the New Management Model will start at the operational level in August 2006.
	■Extensive sharing of parts and systems between Mercedes and Chrysler   Mercedes Car and Chrysler Groups extensively share systems and parts, while maintaining their brand identities. They have already been working together on joint development of hybrid system with GM/BMW, as well as on development of the new diesel engine, BlueTec.
	■Reorganization of development departments for improved efficiency   Corporate-wide Research and Technology will be merged with product development of Mercedes Car Group. This reorganized department will be in charge of advanced engineering for all car groups in DCX. (Note 1, 2)

Source: DaimlerChrysler press releases on 2006.1.24/2006.4.27/2006.7.27, etc.
Note: 1.	DCX will promote use of module parts and standardization in the future development activities and reduce the number of platforms while significantly increasing the variety of versions derived from one platform.
2.	In 1994, Mercedes was reorganized such that greater privileges were granted to the model development department, rather than to the function (e.g. powertrain) development department. This reorganization, however, caused unnecessary development of parts which were not able to be shared with various models. Therefore, in 2005, the company added policies of strengthening the functional development department, improving parts quality and extensively sharing parts and systems among the Mercedes models.

■Smart business unit is integrated into M-Benz passenger car business unit and focused on the Fortwo for release scheduled in the US in 2008

  The Smart business unit has suffered losses since the release of the Smart in 1998. In April 2005, DCX revealed a restructuring program to integrate the core functions in the Smart business unit, such as development, sales and purchases, into the M-Benz passenger car business unit.

  In June 2006, outsourcing of the four-seater Forfour to Mitsubishi Motors at its Dutch plant was discontinued to focus the Smart business unit on the two-seater Fortwo. Concurrently, the company announced launch of the new Smart in the US in early 2008, following the release in Europe in 2007. Taking advantage of oil price hikes, the company has decided the timing is right to market the Smart as an agile city car in the US, predominantly in big cities.

■Restructuring program for Smart business unit (announced in April 2005 and June 2006)

	Outline
Objectives	A 30% fixed cost reduction from 2005 to 2006 to improve profitability by 600 million Euros in 2007 and therefore to reach the breakeven point (announced in April 2005).
Efficient organization and personnel reduction	The core functions of the Smart business unit, such as development, sales and purchases, are integrated into the associated functions of the Mercedes-Benz passenger car business unit. The number of Smart outlets in the M-Benz distribution network is to be increased by 25% using the shop-in-shop concept.
	In 2005, the number of personnel at the Smart headquarters was decreased from 1,350 to 750, and 125 workers at the Hambach Plant in France were laid-off. This resulted in a 26% fixed cost reduction. In 2006, the Smart headquarters schedule further downsizing of 300 employees to 450. (The company posted restructuring costs of 1.1 billion Euros in 2005.)
Discontinued Forfour production	Outsourcing of the Forfour to Mitsubishi Motors' NedCar Plant in Holland, which had started in April 2004, was discontinued in June 2006. (The company is obliged to pay for cancellation of this outsourcing that was supposed to be terminated in 2010.)
Next-generation Smart	Release in Europe in 2007. Mitsubishi Motors will supply the 660cc engine, used for the 'i' that was released in January 2006, to the next-generation Smart. The displacement of this engine will be increased to approximately 1000cc (the current Fortwo uses the three-cylinder 698cc engine).
Entry into US market	The next-generation Smart will be marketed in the US in early 2008. A distributor, UnitedAuto group, one of the Penske group, will set up 30 to 50 dealerships in big cities predominantly on the west and east coasts, with scheduled annual sales of 15,000 to 20,000 vehicles. UnitedAuto owns 296 dealerships in and out of the US (including seven M-Benz dealerships) and deals with 40 brands.
	In September 2004, the diesel engine Fortwo debuted in Canada. 2005 saw sales of 4,100 vehicles, followed by 1,524 vehicles between January and May 2006.

Source: DaimlerChrysler press releases on 2005.4.1/2006.6.28, etc.

■Setting up Product Offensive to expand product lineup

  Setting up the Product Offensive, Mercedes Car Group has been aggressively marketing new models since 2005. In total, DCX will introduce about 50 new models between 2005 and 2008, and Mercedes Car Group has already offered a wide range of products, whose model ages are relatively lower than before, in the first half of 2006.

■Three types of new US-manufactured SUVs were developed and small SUV follows suit

  Between 2005 and 2006, three types of new SUVs, all produced in the US, were launched, which are based on the premium SUV platform using the newly-developed unibody structure.

  The new M-Class that debuted in May 2005 competes with the BMW X5 and Lexus RX. The R-Class, released in September 2005, is a new concept car which combines the spaciousness of a minivan with comfort typical of a top-end sedan. This model is said to have created a new segment called 'sports tourer.' The GL-Class, launched in May 2006, is a full-sized SUV and considered a competitor to the Cadillac Escalade, Lincoln Navigator and others.

  A small SUV based on the C-Class is under development for scheduled release by 2008.

Note: It is not the R-Class that first expressed the sports tourer concept, but the new B-Class launched in June 2005, although the B-Class is not available in the US.

■B-Class and renewed S-Class were launched in 2005, to be followed by renewed Smart in 2007

  In June 2005, Mercedes Car Group unveiled the B-Class, a new passenger car using the compact sports tourer concept, and in September, the renewed S-Class, another passenger car, employing a wide variety of new technologies.

  They will be followed by the new SL-Class coupe based on the S-Class in September 2006, as well as by the renewed Smart Fortwo in 2007.

■Mercedes Car Group's Model Plan for 2005 to 2008

	Debut	Outline
New M-Class	May, 2005	The unibody structure is used in place of the body-on-frame structure for the old model. V6/V8 gasoline engine (GE) and V6/V8 diesel engine (DE) versions are established (only GE version is available in the US), with seven-speed AT.
B-Class	June, 2005	A compact sports tourer concept car, which has combined features of sedan, wagon and SUV. The sandwich structure is used in which part of the transmission and engine is accommodated under the floor to achieve both passive safety and space efficiency. Although this model was designed mainly for the US market, US sales were abandoned due to stronger Euro.
R-Class	September, 2005	A six-seater, sports tourer concept car, which features minivan style spaciousness and comfort typical of a top-end sedan. V6/V8 GE and V6 DE versions are established (only GE version is available in the US), with seven-speed AT. The long-wheelbase version is available both in the US and Europe, while the short-wheelbase version only in Europe. Annual production is scheduled at 50,000, 75% of which will be sold in the US.
New S-Class	Septmber, 2005	A flag ship car of the ninth-generation, having an increased body size. V6/V8/V12 GE and V6 DE versions are established (only GE version is available in the US), with seven-speed AT. A wide variety of new technologies that mainly focus on enhanced safety are employed, such as night vision and adaptive cruise control (distronic plus), which continues to function until the vehicle completely stops.
New GL-Class	May, 2006	A full-sized, seven-seater SUV is to compete with the Cadillac Escalade. Production, together with the M-Class and R-Class, is carried out at the US Tuscaloosa Plant, sharing common platform. V8 GE and V6 DE versions are established (only GE versions is available in the US), with seven-speed AT.
		A successor to the G-Class that has the body-on-frame structure and excellent off-road performance. Production of the G-Class is likely to be continued at the Magna Steyr Plant in Austria until 2010, so that the G-Class and the GL-Class are sold simultaneously.
E-Class (Minor-changed)	June, 2006	Changing 2,000 parts, the conventional brake-by-wire system was replaced with the hydraulic brake system due to recall. The pre-safe system is added as standard equipment with the price remaining unchanged.
		The pre-safe system is designed to reduce collision-related damage by tightening the seat belt and returning the seatback to the normal position upon detecting possible collision risks.
Next SL-Class	Septmber, 2006	A four-seater, two-door coupe based on the S-Class. The new SL-Class is likely to have extended overall length and width, and incorporate advanced technologies, such as pre-safe and night vision systems.
Next Smart Fortwo	2007	Release in Europe in 2007, and then the US in early 2008.
Next C-Class	2007	The wagon type C-Class will additionally debut in 2008 or 2009. As well as the next-generation E-Class, the new C-Class is also the most crucial model for the 2006-2008 development project of Mercedes Car Group (sources: DCX Annual Report 2005), although the details have not yet been clarified. (Previously, the C-Class and E-Class underwent complete changeovers in 2000 and 2002, respectively.)
Next CLK-Class	2007/2008	A coupe and convertible to be completely remodeled based on the C-Class in 2007 and 2008, respectively.
Small SUV	2007 or 08	A five-seater, small sport wagon based on the next-generation C-Class is smaller than the M/GL/R-Class and will compete with the BMW X3.
P8 sports car	2008	A sports car, having the AMG-made V8 6300cc mid-ship engine, will be produced at McLaren in UK, and sold at a price of around US$200,000.

Source:

DaimlerChrysler Annual Report 2005, 2006 Interim report, press releases on 2006.6.28/ 2006.6.13/2006.4.12, Automotive News 05.8.29, etc.

■Clean BlueTec engine is developed to be employed around 2008

  DCX developed the BlueTec, the cleanest diesel engine (DE) in the world, according to the sources, employing the traps & filters and urea-injection system for exhaust system. Practical use of this DE will begin around 2008.

  In the middle of 2004, the E320, a DE vehicle using the CDi engine, was released on the North American market where sales of the DE vehicles had been discontinued since 1999. A cumulative sales volume of the E320 was 8,000 at the end of 2005. In the fall of 2006, the E320 with the new V6 3000cc DE using the piezo-injector will debut. DCX will market in sequence the GL, M/R and S-Class, all with the BlueTec engine, in the US.

Note: Although the E320, to be launched in the US in the fall of 2006, does not use the urea-injection system, it is named the E320 BlueTec in the sense of a clean DE.

■European market: E-Class underwent minor changeovers by modifying 2,000 parts to overcome sluggish sales

  Mercedes Car Group's European sales have shown a continuing downward trend largely due to sluggish sales of the E-Class and C-Class since 2002 when sales were at a peak of 860,000 vehicles. The difference in sales volume between Mercedes Car Group and BMW, whose sales are growing, was reduced from 300,000 in 2001 to as low as 50,000 in 2005.

  It is analyzed that the chief cause of the sluggish sales of the E-Class was a lower reliability of quality due to defects of the by-wire-brake system and alternator, which caused the recall of 680,000 in May 2004 and 1.3 million in March 2005. Mercedes Car Group is in the process of implementing the Quality Offensive. According to J.D. Power Initial Quality Study, the Mercedes brand currently ranks fifth out of 36 brands, an improvement on 10th place out of 37 brands in 2004. In June 2006, the E-Class underwent minor changeovers, which involve complete technical changeovers by modifying as many as 2,000 parts. The pre-safe system is added as standard equipment with the sales price remaining unchanged.

  Sales of the C-Class, the best-seller car, to be completely remodeled in 2007, were also stagnant. This caused the production system for the C-Class at the Sindelfingen Plant in Germany to change from two working shifts to one in January 2006.

■US market: Introduction of three types of new SUVs, scheduled full-scale DE passenger car sales, and release of Smart

  US sales of Mercedes vehicles increased only slightly from 207,000 vehicles in 2001 to 224,000 in 2005. In contrast, sales of BMW and Lexus, whose 2001 sales were equal to those of Mercedes, exceeded 300,000 in 2005. However, Mercedes sales between January and June 2006 were up 16.5% to 114,935 vehicles owing to the three new SUVs.

  The annual production capacity at the Tuscaloosa Plant in the US Alabama, which manufactures the three new SUVs: M-Class, R-Class and GL-Class, was expanded from 80,000 to 160,000 vehicles through investments of US$ 6 million beginning in 2001. This allowed production launch of these models in December 2004, June 2005 and January 2006, respectively. Mercedes Car Group aims at full capacity utilization with annual production of 160,000 vehicles in total for the three models.

  The US is the largest market for sales of the S-Class, accounting for up to 50 percent of annual sales. However, US sales of this model were stagnant at 20,000 in 2004 and 16,000 in 2005. DCX aims at annual sales of 30,000 of the renewed S-Class (record-high sales of the former S-Class were 30,319 in 2000).

  The company also plans to develop sales of the DE passenger cars in the US on a full scale by introducing the E320 BlueTec vehicle in the fall of 2006 and the S-Class DE vehicle in 2007. In addition, release of the next-generation Smart Fortwo in early 2008 is also scheduled.

■Mercedes Car Group: Production Volume at US Tuscaloosa Plant

(units)

	2001	2002	2003	2004	2005	Jan.-Jun. 2005	Jan.-Jun. 2006
M-Class	79,946	88,271	84,100	73,500	77,014	25,080	46,889
R-Class					18,544	123	24,553
GL-Class						0	7,973
Total	79,946	88,271	84,100	73,500	95,558	25,203	79,415

Source: Ward's Automotive Yearbook, Ward's Automotive Reports 2006.7.17/2006.1.16]

■Production of Mercedes Car Group vehicles will increase to about 1.7 million for the mid-term

  CSM Worldwide expects production of the Mercedes Car Group vehicles to increase from 1.43 million in 2005 to 1.68 million in 2010, in which production of the Smart will remain almost unchanged at around 100,000.

  Such production expansion of about 260,000 includes not only a little under 170,000 by Germany, but also a little over 40,000 by the US where production scale will grow to approximately 140,000 (production beyond full annual capacity of 160,000 vehicles between 2006 and 2008). At the end of 2005, production of the E-Class started in China at the new plant of Beijing Benz-DaimlerChrysler Automotive. Production in China is also expected to expand to over 50,000 (light vehicle production including the Chrysler and Jeep vehicles will exceed as many as 120,000 vehicles).

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