Daimler Signals Intent To Grow Chinese Sales With A $850 Million Investment

Daimler AG (NYSE:DAI), the German automotive company that owns the Mercedes-Benz brand, is leaving no stones unturned to boost its Chinese sales and get them closer to those of BMW and Audi. It recently acquired a 12% stake in its automotive partner Beijing Automotive Group for 625 million euros ($845 million), which will help the company acquire a greater control over its sales network. In the past, Mercedes has struggled to align the sales of its imported vehicles with those that are produced locally, resulting in the two competing against one another. ^[1] The automaker is now in the process of rectifying its mistake.

We have a price estimate of $78 for Daimler’s stock, which is about 5% lower than the current market price.

Daimler sold 206,750 Mercedes-Benz cars in China in 2012 but plans to raise that figure to 300,000 by the mid-decade. Sales are up 8% year-to-date in 2013 but it is only in the second half that the sales have accelerated. Mercedes’ deliveries were flat till the first half of the year. In contrast, Audi and BMW sold 405,308 and 326,444 units last year. ^[2] Sales for both the automakers are up ~20% this year. ^[3]

Mercedes’ Chinese sales lag behind those of BMW and Audi primarily because of the following reasons:

a) Smaller portfolio compared to that of BMW and Audi

b) Higher vehicle prices

c) Relatively scarce dealership network

Sales next year could show a sudden acceleration with the revamped versions of the A-Class, E-Class, the S-Class and the new CLA and GLA becoming available in full swing. The model refreshments and new introductions should lift pricing, help the automaker appeal to a wider customer base and improve its brand image. Overall, a total of 13 new vehicles will be launched in addition to the model refreshments.

Earlier in the year, Mercedes announced its decision to pour in $2.7 billion in China in order to raise the local production. Currently, about a half of Mercedes cars sold in China are imported and are subject to excise duty of 25%. Manufacturing more cars locally will make the cars more affordable and boost overall sales. This should help the automaker sort out its pricing issues. ^[4]

Similarly, another problem that the automaker faces is that most of its operations are concentrated in the eastern part of the country, making it difficult for people living in interiors to buy a Mercedes car. On the other hand, BMW and Audi have a better penetration within China and is one of the reasons why these companies have performed so well in the country. In order to appeal to people in the more interior parts of the country, Mercedes plans to add 50-75 new dealers annually. ^[5]

China An Important Luxury Car Market

While Daimler was the global market leader in luxury cars for long, it is now playing catch up to its German rivals BMW and Audi. Success in China is critical to the automaker’s goal of reclaiming the title of the world’s largest luxury automaker by 2020.

Currently, luxury cars account for about 9% of the total sales in China while in the mature markets, luxury cars constitute ~13-15% of the total units sales. Therefore, going forward, it is expected that the sales of luxury cars will outpace that of the overall automotive market. In fact, a report by McKinsey& Co slates the Chinese luxury car market to rise to 2.25 million by 2016 and to 3 million units by 2020, making it the biggest luxury car market in the world. ^[6] Thus, China is one country where Mercedes cannot afford to get things wrong.

Meanwhile, new vehicle sales in Europe grew for two consecutive months signalling that the worst may be behind and that the automotive market might have bottomed out. Daimler generates almost half its sales from Western Europe so a rebounding auto market should be great news for the automaker.

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1. Daimler recovering lost share in China, November 25, 2013, journalgazette.com [↩]
2. press.bmw.com [↩]
3. German Auto Makers See a Promising 2014 in China, November 21, 2013, wsj.com [↩]
4. Daimler Aims to Double China Car Output, August 27, 2013, wsj.com [↩]
5. Daimler.com [↩]
6. China on track to become globe’s top luxury car market, March 7, 2013, nbcnews.com [↩]