Mercedes-Benz, owned by Daimler AG (NYSE:DAI), has warned that adverse market conditions in Europe and a Chinese slowdown could dent its second half profits. Chinese auto sales are up 4.1% only through August while European sales have declined for 11 months in a row with August sales down 8.9%. 
The luxury car market in Europe has generally remained insulated from the debt crisis but that might no longer remain true with automakers sounding gloomy about their forecasts. Even Porsche (owned by Audi), whose sales are up 15% in the first half of the year, recently announced that it is hesitant to increase production as it anticipates sales growth to slow down in 2013.
Chinese auto slow down has resulted in car makers reducing prices and offering greater discounts in order to entice buyers. Moreover, Daimler’s Chinese sales have only increased 6% through August compared to double digit gains for BMW and Audi.  Added expenses related to new launches such as the A-class will also impact the short term profitability. Mercedes-Benz reported an operating profit of €2.57 billion for the first six months of the year. Previously, the automaker had forecast the full year’s profit to be similar to last year’s €5.19billion. 
Margins Already Under Pressure
Daimler already has lower margins compared to BMW and Volkswagen. Daimler’s operating margins in the second quarter were 8.6% compared to 11.6% for BMW and 11.5% for Audi. Shifting production to low cost hubs such as Hungary, where labor wages are one-fifth those in Germany should help widen margins.
Daimler has taken some other steps too, such as forming a partnership with Renault and Nissan which could see the alliance manufacturing an off-road vehicle for Mercedes and cars for Nissan’s luxury brand, Infiniti. Rising costs and a weak macro economic environment have forced automakers to forge alliances in order to share costs and technologies. On the other hand, Daimler’s truck business, has seen strong growth with performances in Japan, Russia and the U.S. leading the pack.
We have a price estimate of $61 for Daimler’s stock, which is about 20% above the current market price.Notes:
- China Aug vehicle sales up 8.3 percent, pickup seen in autumn, September 10, 2012, reuters.com [↩]
- Porsche CEO Says Carmaker will Reduce Initial Production and Investment Targets for 2013, September 19, 2012, carscoop.com [↩]
- Daimler warns on Mercedes profits, September 20, 2012, ft.com [↩]