DaimlerChrysler (DCX) Thursday reported fourth-quarter results that fell far short of expectations, hit by a collapse in profits at the Mercedes Car Group (search) luxury division.

The world's fifth-biggest carmaker said operating profits slumped to 785 million euros ($1 billion) from 2.4 billion euros in 2003, badly lagging the average forecast of 1.43 billion euros given in a Reuters poll of analysts.

Mercedes profits shrivelled to just 20 million euros, from 784 million a year ago, triggering an efficiency drive that aims to boost earnings at the division by over 3 billion euros and may entail job cuts.

The company said it expected operating profits to rise in 2005, but only slightly.

"After a weaker first and second quarter for the full year 2005 DaimlerChrysler expects a slightly higher operating profit than in the previous year," it said in a statement, adding that revenues and vehicle sales in all divisions should rise as well.

Even though a weak dollar and high raw materials price pose potential risks to profits, it said earnings should pick up considerably in 2006 and 2007 as new vehicle models roll out.

But the market seized on the weak showing at traditional cash cow Mercedes, whose operating income in the quarter lagged far behind that of the resurgent U.S. auto arm Chrysler. Its commercial vehicles business also shone amid a global trucks boom.

"While all these divisions are doing well the big worries continue to surround Mercedes-Benz," said analyst Michael Raab at Bank Sal. Oppenheim.

Mercedes Car Group's operating profit of 20 million, which was dragged down by exchange rates and one-off provisions, compared with a consensus of analysts' estimates of 374 million euros.

Mercedes has been battling the strong euro, the costs of launching new models, increased spending to fix quality problems and losses at its Smart minicar (search) brand, which it said turned in a "significantly negative" performance in 2004.

Company officials said they were still working on a strategic review of Smart that they will present later this year. The group is around 75 percent hedged against its currency exposure this year, but at less favourable rates than in 2004.

Chrysler, the group's former problem child, raked in profits of 386 million euros in the quarter, in line with expectations. It is benefitting from hot models like the big-grilled Chrysler 300 (search) sedan and minivans whose rear seats stow flat.

Mercedes unveiled a new efficiency programme called CORE which aims to improve its performance by more than 3 billion euros, with the first results expected to be seen this year.

"As a result, the division should once again achieve a return on sales of 7 percent in 2007," it said. That would mean more than doubling its 2004 margin of 3.35 percent.

Analysts wondered just how the company would hit the target now that it has guaranteed jobs for 100,000 staff in western Germany to 2012. Mercedes chief Eckhard Cordes would not rule out job cuts but gave no details on how to reach the goal.

In a note to clients Morgan Stanley said a 7 percent margin — something last seen in 1999 and 2000 — "will be a challenge to achieve under today's currency and raw material environment."

DaimlerChrysler proposed paying an unchanged dividend of 1.50 euros per share. Its 2004 net profit rose to 2.47 billion euros from 448 million in 2003, when one-off charges hit.

DaimlerChrysler stock has underperformed peers by nearly 9 percent since early 2004 and by around 4.5 percent this year.

It trades at around 11 times estimated 2005 earnings, a premium to arch-rival BMW's 10 times, according to Reuters Estimates.

BMW, riding a new model offensive, is neck and neck with Mercedes in the race to be the world's top maker of premium cars. Mercedes also plans to launch two new crossover vehicles, a revamped M-class offroader and an S-class limousine in 2005.