Daimler Ups The Ante For Long-Term Growth


BMI View : Daimler's decision to invest EUR2.0bn in China over the next two years is part of the premium automaker's turnaround plan, which involves introducing new models to woo different groups of buyers and increase the localisation of its operations, allowing the firm to compete more efficiently with its luxury segment rivals.

German luxury automaker Daimler AG plans to spend EUR2.0bn (US$2.65bn) in China over the next two years to increase sales of Mercedes-Benz cars by a third to over 300,000 units annually. With sales of 208,000 cars in 2012, such a bold target will see the country becoming the carmaker's largest market by 2015 (assuming sales in the US and Germany remain constant).

China Poised To Grow Its Share
2012 Sales Of Mercedes Cars In Selected Markets, Units

Commitment To The Market At A Challenging Time

Through this planned investment, Daimler is reiterating its strong commitment to the premium market. At present, BMI sees the Chinese luxury car market experiencing a near-term slowdown as it navigates challenges such as a pricing probe and austerity measures aimed at curbing extravagance ( see 'Pricing Probe And Mini-Stimulus Could Impact Sector', August 16). However, we believe Daimler is looking to the future as it expects these headwinds to pass and growth rates in the segment to recover.

Mercedes Addresses Product Woes

To be sure, this bold strategic move is backed up by investment in new models. While China is already the largest market for the high-end S class sedan, the firm does not intend to rely solely on this model's sales for its success. Mercedes will launch 20 new or upgraded car models over the next two years, which we believe will aid the carmaker in wooing new premium car buyers, who fall into different sub-segment categories such as entry and mid-level luxury.

The firm's investment into new models is also timely given that Mercedes has been lagging its German luxury rivals, Audi and BMW. Although Mercedes achieved record 2012 sales in China, its sales growth rate of 4% paled in comparison to Audi's 32% (407,738 unit sales) and BMW's 41% (313,638 unit sales).

Mercedes Clearly The Laggard
China - 2012 Domestic Car Sales Of Select Automakers, Units (LHS); Sales Growth, % (RHS)

We have highlighted the dearth of new models as one of the key factors which had impeded the firm's performance in recent times. To be sure, Daimler has taken steps to address the other issues responsible for its poor performance; including a management team shake-up and the merging of two separate distribution networks, which had handled imported vehicles and locally produced vehicles separately, causing confusion among dealers.

Indeed, the firm's turnaround strategy is already beginning to bear fruit with domestic sales growing at a rapid year-on-year (y-o-y) clip in the past few months. Sales grew 7% y-o-y in May, 16% y-o-y in June and 31% y-o-y in July. Additionally, the arrival of a slew of revamped models in the next two years will go a long way in supporting this turnaround.

Localisation Will Provide Cost Savings

As part of its 2020 initiative, the firm intends to expand manufacturing capacity and sales networks in countries where car density is still relatively low. The firm intends to raise the proportion of locally produced models from 50% to 70% of its Chinese sales by 2015. Mercedes intends to increase its localisation by using its Beijing factory which it operates with its joint venture partner, Beijing Automotive Group.

Similar to Audi, which currently produces nine out of 10 cars it sells in China, and more recently GM, which has decided to build a Cadillac factory in Shanghai ( see 'GM Marks Its Space With Cadillac Plant', May 8), Mercedes will enjoy greater cost savings from increased localisation as it avoids costly import tariffs and will thus be able to price its offerings more competitively.

This article is tagged to:
Sector: Autos
Geography: China, China, China, China