View from Frankfurt: Behind the celebration, Daimler is in a mess

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The Independent Online
America is not the place for understated celebration. And so it is with companies launching themselves on to the New York Stock Exchange, an occasion to be marked with something out of the ordinary. Like the Midwestern chocolate manufacturer who led a cow on to the trading floor, which then chomped its way through some newly issued shares.

Daimler-Benz, Germany's biggest industrial concern, will be looking to impress with technological might and wizardry. On Tuesday, the closed-off section of Broad Street, adjacent to the Stock Exchange, will be growling and whirring to Daimler's finest: a helicopter, a Freightliner truck hauling a 'People Mover' (one of those fully automatic airport conveyors), a large model of the Ariane space rocket and another of the European Fighter Aircraft.

A short walk away, on Wall Street, Daimler's chief executive, Edzard Reuter, will be chinking crystal glasses with William Donaldson, who has invited him to the chairman's breakfast. There will be smiles and toasts for the cameras, waiting for 9.30 when the stock exchange opens with a new name on the Big Board. On 5 October, Daimler-Benz becomes the first German company to be listed in New York.

But the smiles on the Daimler executives' faces are unlikely to last. For the timing of this audacious leap across the Atlantic could not have been worse. To qualify for the New York exchange, Daimler had to recast its balance sheet according to American accounting principles, which differ greatly from Germany's.

When Daimler announced last month its results for January to June 1993 using American techniques, it revealed its first loss since the Second World War, a whopping DM949m ( pounds 390m). Under its traditional German accounts, it revealed a small profit of DM168m. Even hardened analysts turned grey. They had expected something sobering from the new US rules, not shattering.

For Daimler is not just any company. The average German would rather wave aloft its three- pointed star than the red, gold and black flag as a symbol of national pride and prowess. Year in, year out, Daimler has gilded its image with a steady flow of profits and dividends.

Small discrepancy

Worse is to come. The cost of the staggering 44,000 job reduction programme will bite hard into the accounts in the current period. Analysts reckon the overall US accountancy loss for 1993 could be near DM3bn. These are heady sums, but they verge on the hallucinatory alongside estimates that, under German accounting practices, Daimler will probably end the year with a profit of about DM800m.

That leaves the small matter of a near DM4bn discrepancy to clear up. And therein lies the whole bitter controversy sweeping Germany's business establishment about Daimler's go-it-alone leap for New York, as well as some awkward questions about the future of Germany's flagship industrial concern.

Accounting has always involved the ability to massage the figures, but what Daimler has achieved appears to defy gravity. The explanation lies in the very different objectives of American and German accounting customs. American - and British - accounting follows the so-called 'true and fair' approach, relatively accurately charting the ups and downs of a company's operating fortunes.

When times are good and profits high, companies have to say so, and reward shareholders accordingly. When times are bad, a company has to bare its chest, and shareholders draw their own conclusions. The German business tradition is oriented more to the long term, and this is reflected in accounting methods, which smooth out highs and lows.

The guiding principle is not shareholder interest but creditor protection. Firms are meant always to have enough cash in the coffers to pay lenders and suppliers. To this end, companies siphon off money during good years into hidden reserves, which can be drawn upon in hard times - a practice forbidden under American law. German firms tend to reveal lower profits than US ones, because they have already slipped a sizeable amount into reserves, and they also post lower losses, if at all, because of the ability to boost results from those reserves.

This all sounds highly dodgy to Anglo-American ears, but Germans argue that it is simply prudent business practice, which has proved its worth over the years in greater stability.

So if the analysts' calculations are near the mark, and Daimler closes 1993 posting a near DM3bn loss under US accounting, it will only be able to turn this into a German-style DM800m profit by drawing massively on reserves.

It will probably do just that, because Mr Reuter has already indicated that the company intends sticking to its DM13 dividend, notwithstanding the difficulties. Under American law it would not be able to pay any dividend at all. But Daimler is determined to keep its shareholders sweet. With a steadily deteriorating balance sheet eating into reserves in recent years, the company needs cash and will go for a capital increase next year.

Golden rule

However, by announcing in the same breath 44,000 job losses including forced redundancies, at a firm that has never laid workers off, and the maintenance of the dividend, Mr Reuter has broken a golden rule, not just of German accounting, but of German business. One of the very reasons for building hidden reserves in Germany is that laying off workers is difficult and expensive. So firms make provisions to carry them through difficult times.

But when job cuts become unavoidable, as is happening on a massive scale across German industry at the moment, companies cease using reserves to keep their results in profit and let them drop through the floor to make clear how serious the situation is.

Germany's business establishment - companies such as Bayer, VEBA and Siemens - was already put out by Daimler's decision to 'capitulate' to American accounting demands in order to get the New York listing. Now, they are seething at what they regard as unforgivably perverse behaviour. Their mood was not helped by the claim from Gerhard Liener, Daimler's chief financial officer, that many other German firms would do just as badly if they presented US-style accounts.

It is certainly true that German companies guard operating results as their most precious secret, so it is impossible to know how they are really doing. But Mr Liener protests too much. All the industrial companies that are cutting jobs are reporting losses, sometimes hefty ones.

No doubt some of them are even deeper in the red than they are admitting, using reserves to present a grim picture rather than a catastrophic one. But in the current industrial climate, as German firms grasp at every means to drive costs down and improve competitiveness, there are reasonable grounds for assuming that results are closer to operating reality than at most times.

To draw the conclusion that Daimler's US-style accounting horror means that most of German industry is far worse off than the books suggest would be unwise. Rather than supporting a generalisation, it serves dramatically to highlight a long-held suspicion: that Daimler-Benz is in a mess, exhausted by an enforced expansion strategy and neglect of its key automobile business. No amount of New York hype will obscure that.