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Mercedes Begins To Feel Pressure Of Global Slowdown

Can It Narrow The Gap With BMW, Audi?
Profit Margin Struggle Will Continue Until 2014

Even mighty German premium car makers have to face reality some time and Mercedes is beginning to feel the pinch from weakening markets around the world.

Mercedes is facing a difficult changeover of important models like the E and S class, while prices are coming under pressure in key markets China and Germany.

Citigroup Global Markets has published a negative research note on Mercedes, while Bernstein Research questioned the company’s ability to compete with its main rivals Audi and BMW, doubting its brand power.

According to Citigroup, Mercedes global sales growth is slowing, sales mix is deteriorating, and premium brand pricing in many markets is under pressure.

“Mercedes was never going to have an easy year while replacing its key profit contributor the S class in the fourth quarter, which should have a negative impact on global sales and pricing in the second quarter and third quarter at least. Second quarter sales growth has slowed from 12 per cent to three per cent. Mix is deteriorating as sales are supported by new B class sales, offsetting declines in E and S class,” said Citicorp analyst Harald Hendrikse.

Weak pricing
Hendrikse said BMW, Mercedes and Infiniti managements have reported weak pricing in China, Germany and Britain. He points out that 2013 should benefit from the new models.

Bernstein Research’s Max Warburton has produced a three part report on Mercedes seeking to find out why it is the weakest of the three German premium brands, with slower growth rates, lower sales, and weaker margins, with BMW at over 11 per cent and Mercedes under nine per cent. Productivity is inferior, price realization and brand are in decline, Warburton said.

“Having been the world’s leading premium brand 10 years ago, Mercedes has been overtaken first by BMW and more recently by Audi, and now lags in sales terms. Mercedes has had poorer unit sales growth in all its main mature markets – and while initially China provided a spectacular boost to volumes and growth rates to match BMW, it now seems to be lagging behind there too, ” said Warburton.

Mercedes used to be the choice for older people, but they have been hit hard by the recession, so even this group is deserting.

Warburton does believe the ship can be turned around though.

“The closer we look at Mercedes, the more we realise the magnitude of its troubles. Can Mercedes be improved quickly and can it close the gap on BMW and Audi margins? We think there are reasons for hope, but it will take time, and Merc will continue to struggle relatively in 2012 and 2013,” Warburton said.

Downgrades, profit warnings
Deutsche Bank analyst Jochen Gehrke agrees that 2014 is the first year for Mercedes investors to feel bullish about, and worries about imminent downgrades and profit warnings.

“Signs of a turnaround (are) unlikely to happen before the second half of 2013 at the earliest,” Gehrke said.

Bernstein’s Warburton says one differentiator between the relative success of BMW and Audi, compared with Mercedes, has been the former’s investment in so-called incremental models like the BMW X1, X6, 5GT and Mini Countryman, while Audi has benefitted from the Q5, A1, A5, A7 and Q3. Mercedes has contrasted more on core models, and moves into smaller cars like the A and B class, and the Smart haven’t paid off.  Mercedes has pledged to fix this with increased spending.

Citigroup points out that Mercedes is now less exposed to China than Audi and BMW, and that this might be a good thing as premium growth there slows.

But other analysts point out that Mercedes’ target of becoming the world’s biggest premium car maker by 2020 by more than doubling sales to 2.7 million assumes China providing over 50 per cent of the growth, so any unexpected crisis there would undermine that plan.

Neil Winton – July 1, 2012

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