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Mercedes Long-Term Plans Fail To Convince

As Big-Three Germans Flex Sales Muscles, All Profits Will Suffer.

Mercedes Management Control, Expertise Said Inadequate“Unless there is a dramatic change of strategy we remain sceptical that all players will remain as profitable as today”

Investors believe Mercedes’ plan to be the world’s biggest-selling premium carmaker by 2020 is incompatible with its aim to raise profits too, while BMW and Audi remain the two most favoured manufacturers in this sector.

But investors are also worried by the seemingly ego-driven nature of the race by the three German companies to be number one, which is seen as guaranteeing that profits of all suffer.

The breadth of Mercedes’ model renewal programme is being questioned, while its lack of a powerful and independent shareholder is leading to complacent and inexperienced management.

“Even allowing for generous unit growth at Mercedes, the division is unlikely to achieve its 10 per cent margin target by 2015. Mercedes model cadence does not sufficiently address existing weakness in high growth segments including SUVs, the second largest driver of automotive (profits) at peers,” said Credit Suisse analyst Erich Hauser in a report.

“Meanwhile, higher R&D and Capex per unit, lower productivity per worker, and continued production shortcomings will not be addressed through growth alone and as a result we believe Daimler will continue to underperform peers,” Hauser said.

Management performance is under scrutiny.

“We ask whether the lack of a major shareholder’s representation at the supervisory level and lack of external experience at the management level has a part to play in the on-going underperformance,” Hauser said.

Waiting for S class
Morgan Stanley analyst Stuart Pearson said Mercedes will have to wait until the end of next year for its big profit-making new S class to reach the eager buyers in China. The face-lifted E class will arrive there from July. 

Meanwhile BMW and Audi are having a “good crisis” in Europe, but even these two leaders will have difficulties in 2013.

“Europe is not improving, however and remains a risk to pricing and hence margins in 2013. Both firms still believe 8-10 per cent is the right margin range for 2013. This is in line with our view that premium margins will moderate,” Pearson said.  

Pearson said Mercedes sees 2013 as a transition year, laying the foundations for a pickup in 2014-2015.

“Next year will still see a heavy burden from investment in product and capacity. Mercedes admits to having underestimated the time it would take to prepare for planned growth,” he said.

Bottom line
Credit Suisse’s Hauser doubts whether all this growth – 2.6 million sales by 2020 – will help the bottom line.

(Mercedes sold 1.26 million cars in 2011, 120,000 less than BMW. Mercedes has also pledged that operating profit margin would be more than 10 per cent in 2020. Mercedes has been slipping down the premium league and over the last 10 years its sales rose 1.4 per cent while BMW’s rose six per cent and Audi’s 7.4 per cent. Mercedes share of the premium segment slipped to 21.4 per cent last year from 25 per cent in 2001, according to industry forecaster IHS Automotive.)

“Even if we assume CAGR (compound annual growth rate) of 6.4 per cent between 2011 and 2015, unit sales are unlikely to be sufficient to close the current margin gap with BMW and Audi, given incremental volumes are set to come from lower-yielding smaller vehicles. Hence we believe Mercedes’ margins will not meet its 10 per cent target by 2015 and absolute EBIT (earnings before interest and tax) will merely match BMW’s auto EBIT as of 2012,” Hauser said.

Deutsche Bank worries that overly ambitious targets will hurt the profits of all, and hopes that drastic changes are made.

“With all brands having stated ambitions to exceed two million units by 2020 and all brands wanting to be number one, all are collectively sacrificing pricing to the benefit of volume gains,” said Deutsche Bank in a report.

Dramatic change required
“Unless there is a dramatic change of strategy we remain sceptical that all players will remain as profitable as today, particularly given the incremental technology cost to meet ever stricter emission regulation will harm margins in the coming years. And all this against a backdrop of robust growth,” Deutsche Bank said.

Neil Winton – November 30, 2012

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