Mercedes-Benz Set To Expand Production In Mexico In Partnership With Renault-Nissan

June 30th, 2014 by Trefis Team
DAI: DAIMLER AG logo
DAI
DAIMLER AG

As demand for compact luxury sedans rises around the world, Daimler AG‘s Mercedes-Benz has extended its partnership with the Japanese automaker Nissan to jointly build compact luxury models in Mexico. [1] The Renault-Nissan Alliance and Daimler will establish a 50-50 joint venture, which will oversee construction and operations of the new manufacturing facility in Aguascalientes, Mexico. For building the new facility, both Daimler and the Renault-Nissan Alliance will together invest around $1.4 billion in the country. With increasing disposable incomes and a rising proportion of the population upgrading to entry-level premium vehicles from their large non-luxury sedans, Mexico sales for Mercedes-Benz could rise. However, the biggest advantage for the German automaker with respect to its Mexico plans would be the cost-cutting benefits derived from local production in the low-cost country.

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The Aguascalientes plant will start production of Nissan’s Infiniti line of premium vehicle in 2017, with production of Mercedes-Benz vehicles set to begin in the plant in the following year. [2] The new manufacturing facility will add around 5,700 jobs and have an annual capacity of 300,000 units by 2021, when fully ramped-up. Presently, the cooperation between Mercedes-Benz and the Renault-Nissan Alliance, which began in 2010, is limited to compact non-luxury models such as the Mercedes Smart and Citan van, and Renault Twingo. In addition, Daimler and Infiniti also launched production of four-cylinder gasoline engines for the Mercedes C-Class and Infiniti Q50 models in the Tennessee plant in the U.S. this month. With the new deal in Mexico, partnership between the two companies will extend to complete manufacturing of compact luxury vehicles.

Nissan presently leads Mexico’s automotive industry, with a 25% market share, on the back of strong sales of non-luxury models such as the Versa. The Japanese automaker opened the first stage of its production complex in Aguascalientes late last year, as part of its $2 billion investment in Mexico, increasing the company’s annual production capacity to over 850,000 units in the country. The new facility to be constructed in partnership with Daimler will also be in the vicinity of Nissan’s Aguascalientes assembly complex. Mercedes is already a renowned global luxury brand, and could leverage Nissan’s stronghold in the Mexican automotive market to drive sales going forward.

Local Production In Mexico To Boost Margins For Mercedes

Mexico only ranks 16th in the world in terms of annual vehicle sales, but the country has emerged as an auto export hub, bolstered by lower wages, raw material and operational costs. The country exported around 83% of the 2.93 million vehicles produced in 2013. In fact, the U.S. constituted 68% of these shipments abroad. [3] Mercedes will utilize the Mexico plant to feed the luxury demand in North America, particularly in the U.S., where the automaker trails BMW in terms of volumes so far this year. In addition, Mercedes could earn higher profits on incremental sales due to lower costs of production in Mexico, as well as reduced product development and production costs owing to joint manufacturing with Nissan. This is expected to bolster margin-growth for the German automaker going forward.

Although operating profit for Mercedes-Benz rose by a whopping 157% year-over-year in Q1 2014, margins remained at 7%, 50 basis points less than the previous quarter. This was due to higher start-up costs related to the company’s growth offensive strategy of launching around 30 new models by 2020, in a bid to surpass both BMW and Audi in the global luxury vehicle market by then. Mercedes’ margins are lower than those of BMW and Audi, which posted operating margins of 9.5% and 10% respectively in the first quarter this year. [4] Expanding production network in Mexico could boost profitability for Mercedes, and help the company reach its target margins of 9-10% in the medium term.

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Notes:
  1. Daimler press release [↩]
  2. Daimler, Nissan investing $1.4 billion in Mexico to jointly produce cars, June 2014, wsj.com [↩]
  3. Mexico auto sales climb to highest in six years as lending grows, bloomberg.com [↩]
  4. BMW group q1 profit rises 3% on SUVs, autonews.com [↩]