German’s Slow Electric Car Pace Makes Sense For Profit.
Is It Deliberately Slowing Electric To Boost Bottom Line?
If So, The Election Campaign Might Take Notice.
“Daimler is the first company to state explicitly how much EVs are going to hurt margins”
The Frankfurt Auto Show underlined how slow the European industry in general and the Germans in particular have been in meeting the electric car challenge, but there is method in their sloth.
Because, according to analysts, the more electric cars you sell, the less money you make.
At the show there were plenty of battery only electric vehicles on show, but not many you could actually buy.
This glaring lack of foresight, or cynical delaying tactic depending on your point of view, has even become an issue in Germany’s election campaign. CDU/CSU leader Chancellor Angela Merkel has complained about the industry’s slow progress in moving to electric propulsion. The opposition Social Democratic Party (SPD) threatens E.U. wide electric car quotas, saying the industry hasn’t planned seriously for the future. Germans go to the polls September 24.
But the quicker the likes of BMW, Mercedes, Audi, and Porsche bring electric cars to the market, the sooner they have to stop making the cars that made them rich – the high mileage gas guzzlers with massive profit margins. The more expensive low margin electric cars they sell will likely just replace the big earners.
At the press previews to the show Tuesday, the Germans unveiled many impressive electric and plug-in hybrid vehicles, even a fuel-cell powered one.
But most of these were concept cars which may or may not see the light of day. The most practical offering was the BMW i3S, an improvement to the original little electric city car. But don’t expect a challenger to the Tesla Model 3 any time soon, while it will be 2019 before the Germans bring to market a competitor for the Model S or Model X.
BMW launched the iVision Dynamics EV at the show – launch date maybe 2021. The electric Mini will appear in 2019 and the electric X3 in 2020. Mercedes said all its models will be electrified, by 2022. Meanwhile its first electric model, the EQC SUV will be first on the scene, in 2019. Volkswagen announced at the show it will spend more than $24 billion on EVs by 2030. It will roll out 80 new electric cars by 2025. VW unveiled its I.D Crozz SUV concept model at the show, said to be a Tesla Model 3 rival, but gave ho hint when it might go on sale.
And as Mercedes was excitedly lauding the future of electric cars at the show, back at its Stuttgart HQ the previous day it was outlining a more prosaic outlook to analysts; the more electric cars it produces, the less money it makes.
Mercedes current profit target is 10%. When electric cars hit the road in numbers by 2019, up to two percentage points will be knocked off that number. That’s the verdict of investment bankers and analysts who attended the meeting.
“Daimler (Mercedes’ parent) warned that the shift to electric vehicles was going to take margins down by two percentage points, towards 8%, after these cars launch in 2019,” Bernstein Research analyst Max Warburton said after attending a meeting at company headquarters in Stuttgart.
“And that sounds like a best-case scenario, as it bakes in substantial growth and 4 billion euros ($4.8 billion) of extra cost cutting,” Warburton said.
Other analysts had a slightly more generous view of the outcome, with Citi Research’s Michael Tyndall saying the profit target was now from 8 to 10%.
Mercedes repeated its target that by 2025 between 15 and 25% of it vehicles will be EVs, not including 48v versions and plug-in hybrids.
At the show, BMW CEO Harald Krueger said the company was sticking to its long-term profit target of 8 to 10% despite the need to develop electric vehicles.
That will take some doing.
Tyndall said “So in theory Daimler will have lower volumes on its traditional powertrains and broadly speaking two-times the number of offerings. This explains why capex and R&D look set to stay high. The good news is that the current production footprint is being adjusted to accommodate all variants, so at least from a capital intensity perspective the company is limiting is expansion.”
“The (profit) margin is expected to be roughly half that of conventional engine vehicles, at least until the next generation of batteries arrive in post 2022,” Tyndall said.
Investment bank UBS put it this way.
“The (Daimler) team highlighted that upcoming EV launches will have roughly half the current gross margin of conventional cars,” UBS analyst Patrick Hummel said.
So what, said investment researcher Evercore ISI analyst Arndt Ellinghorst.
“Anyone covering the industry with eyes even half open should be aware of that,” Ellinghorst said.
Ellinghorst said Daimler’s earnings outlook is still solid at a time of major industry challenges, and rates the stock “outperform”.
At the meeting, Daimler announced another round of its Fit for Leadership cost cutting program targeting 4 billion euros ($4.8 billion) of annual savings by 2024/2025.
Bernstein Research’s Warburton said after the news about electric cars and profits broke, that nobody was surprised as Daimler’s stock price barely moved.
“Daimler is the first company to state explicitly how much EVs are going to hurt margins. It was brave to go first – but of course it won’t be the last. Yet everyone seems to have been expecting this – and see Daimler’s guidance as inevitable,” Warburton said.
Warburton offered this summary of Daimler’s presentation.
“R&D cost are going up, we’re going to build some battery assembly plants, then we’re going to launch electric cars with HALF (his caps) the contribution margin of our current cars. We’re going to sell about 500,000 of these things by 2025 – but we don’t really know what demand looks like, so there’s a risk there too.”
“About 75% of the EVs we sell will cannibalize current combustion engined cars – so not only will we be selling low/no margin EVs, we’re also going to affect current cash cows. But we are going to work really hard on cost to offset this, and keep margins at the bottom end of an 8-10% corridor,” Warburton said.
If the politicians in Germany are paying attention this might become an election issue as polling day approaches.
The show opens to the public from September 14 through September 24 at the Messe Frankfurt.