Mercedes-Benz, owned by Daimler AG (NYSE:DAI), is set to double production of its Hungarian plant to 300,000 vehicles annually by 2015. The plant was built at a cost of €800 million (or $1.07 billion) for the manufacturing of its B-class compact car and the production began in March 2012.  Mercedes-Benz was the biggest luxury automaker in the world until 2005, but currently trails BMW and Volkswagen’s Audi. Mercedes is determined to regain its lost title, and the plant will help the automaker realize its goal of increasing vehicles sales by at least 27% to 1.6 million vehicles.
While other major autos such as General Motors (NYSE:GM), Ford Motors (NYSE:F), PSA Peugeot Citroen and Fiat are bleeding red due to high operational costs in Western Europe, German automakers are benefiting from low labor wages in Hungary. Average hourly labor wages in Hungary are one-fifth those in Germany and one-third those in the U.S. Overall, manufacturing costs are estimated to be 30% lower than that in Germany. 
Margin Improvement Remains the Focus
Besides boosting its capacity, the automaker is looking to cut operational costs as its margins trail those of BMW or Audi. Daimler’s operating margins in the second quarter were 8.6% compared to 11.6% for BMW and 11.5% for Audi. Furthermore, Mercedes plans to reduce production costs by sharing parts across the model.
Margin improvement has been one of the priorities for Mercedes-Benz. Recently, the German automaker decided to assemble its SUVs, G class and M class in India itself. By manufacturing cars locally, Mercedes-Benz will have more freedom as well as flexibility to price its cars. Moreover, competitive pricing will help boost volumes which could ultimately lead to margin improvement. Mercedes could also be building passenger cars with its alliance partners Renault and Nissan as they look to share technology and R&D costs, and this could further boost its margins.
We have a price estimate of $61 for Daimler’s stock, which is about 20% above the current market price.Notes:
- UPDATE 1-Daimler to expand output at Hungarian plant -paper, August 16, 2012, reuters.com [↩]
- Daimler’s Billion-Dollar Bet on Hungary, April 5, 2012, businessweek.com [↩]