DaimlerChrysler is to spend #828 million this year in an attempt to revamp its ailing Smart brand.

The announcement yesterday added to the car group's woes just a day after it announced its biggest recall for its Mercedes brand.

"The substantial expenses in connection with the new Smart business model will impact DaimlerChrysler's earnings forecast for 2005," the company said in a statement on Friday.

Daimler reiterated it expects a slightly higher operating profit this year compared to the last, but only when excluding the one-off restructuring charge for the loss-making marque.

The announcement came on the heels of Thursday's recall of 1.3 million Mercedes-Benz vehicles worldwide, including its E-Class full-sized saloon and its brand new CLS four-door coupe, signalling just how dire the situation is at Daimler's flagship division.

In the fourth quarter of last year, operating profit at the Mercedes Car Group, Daimler's former jewel, comprising the Mercedes, Smart and Maybach brands, plunged 97 per cent to #14 million.

"Key component of the new [Smart] business model is a restructuring programme with which earnings are to be increased by #414 million in the year 2007," the carmaker said. It aimed to lower fixed costs at Smart by about 30 per cent within the next two years - in part through "significant" reductions in the workforce.

Robert Heberger of the Munich-based bank Merck Finck downgraded shares in Daimler to "sell" from "hold" yesterday.

"The negative financial impact of both actions is above our expectations," he wrote to clients. "Second, Mercedes' and Smart's image will further suffer, and we believe negative headlines will continue in the months to come."

As part of the rescue plan, Smart will discontinue production of its roadster model at the end of 2005 and will discontinue plans to build the Smart ForMore compact off-roader.

This leaves just the original microcar ForTwo and its new ForFour subcompact in the brand's model range.

"The new product concept calls for the intensified development of the successor to the Smart ForTwo, including fulfilling the requirements for the US market," it said.

The co-operation with Mitsubishi Motors on the production of its Smart ForFour at the Japanese carmaker's plant in the Netherlands would continue, but measures would be taken to ensure the model will break even in the future, it said.

The brand will lose more independence as key areas of development, sales, purchasing, after-sales and service would be integrated into Mercedes-Benz to generate greater cost savings.