Mercedes-Benz Ramps-Up Production in North America as Luxury Demand Rises

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DAIMLER AG

Luxury vehicle sales have been growing around the world due to rising proportion of affluent customers and their increasing disposable incomes, especially in emerging economies. China is poised to overtake the U.S. in terms of luxury vehicle sales in the next couple of years, and almost double its present sales figure to 3 million units by 2020. On the other hand, despite the decline in the overall automotive industry in Brazil, luxury volumes are rising due to low ownership rates and a lesser impact of rising interest and tax rates on the rich individuals. But along with premium vehicle growth in emerging countries, the developed North American market is also witnessing strengthening luxury demand, which had subsided significantly during the recession.

Rising demand has also prompted Daimler AG‘s Mercedes-Benz to expand production in the U.S., its single largest market. The luxury automaker began local production of its compact sedan C-Class in the country in June. [1] Mercedes fended-off growing competition from BMW to hold the lead in the U.S. luxury auto market last year, however, the company has since posted lower volumes compared to the latter in the first half of the year in the country. With the new C-Class rolling out in September, Mercedes will aim to remain the premium automotive leader in the U.S. this year, and also strengthen its bid to regain the global luxury sales crown from BMW by the end of the decade.

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New C-Class to be Produced Across Four Continents

Smaller-sized luxury vehicles are gaining popularity as they attract a wider consumer base, comprising people who intend to buy premium vehicles but have limited resources. Around 44% of all unit sales for the world’s highest selling luxury carmaker BMW were constituted by the upscale small/mid-sized 1-series, 3-series and 4-series last year. On the other hand, the compact executive cars A3 and A4 accounted for 35% of Volkswagen’s Audi volumes in 2013, up from 33.7% in 2012. Mercedes-Benz also launched its compact CLA-Class last year and followed it up with the new model launch of its best selling C-Class, which sold over 300,000 units in 2013, a dip as consumers decided to wait for the refreshed model in 2014. The new C-Class launched in Europe in the first quarter and will roll-out in the U.S. in September.

The C-Class is the first sedan to be produced in the company’s U.S. plant in Tuscaloosa, Alabama, which presently manufactures the sports utility vehicles (SUVs) M-, R-, and GL-Class. For this purpose, the automaker has spent over $2 billion on the Alabama plant to expand capacity for the C-Class along with other models. [2] The C-Class will be the first Mercedes-Benz model to be produced in four continents, reflecting the high demand for compact luxury vehicles worldwide, and also the company’s commitment to draw cost-benefits from local production. The model is already being manufactured in Germany and South Africa, and will begin production in the U.S. and China this year.

North America Automotive Market Nearing Pre-Recession Levels

As the automotive sector continues to regain momentum in North America following the economic downturn, vehicle production volumes are expected to surpass the previous record of 17.3 million units in 2000 by the next couple of years. Although the North American vehicle market is relatively mature, growth lies in potential upgrades to luxury vehicles and/or replacement of ageing vehicles in the region. In fact, the average age of a passenger car in the U.S. reached 11.4 years in 2013, while the average age stood at 8.4 years in Europe and below 5 years in China. [3] In addition, as some of the emerging economies have become more volatile, and the European countries are still trying to rebound from the double-dip recession, investments in the relatively stable North American market could be beneficial for automakers. According to IHS Automotive, light-vehicle production is expected to rise by 3.8% to 16.8 million units this year in North America, and grow to 17.5 million units by 2016. [4] [5]

As Mercedes ramps-up capacity in the U.S., its suppliers have also followed suit to feed the rise in demand. Rehau, a polymer processing company, spent $115 million to expand its plant in Alabama to manufacture bumpers for the new generation C-Class. According to PricewaterhouseCoopers (PwC), capital expenses of thirty publicly-traded suppliers rose from a low of 3% of the net sales in 2009 to 4.4% last year. [5] Rising investments in the North American auto industry are a testament to growing confidence among vehicle and parts manufacturers in the region’s vehicle market.

Mercedes-Benz Aims to Strengthen Passenger Car Sales in the U.S.

The C-Class is a high-volume model for Mercedes, constituting over one-fifth of the company’s U.S. June sales. However, the model’s volumes fell year-over-year through June as consumers waited for the new generation model. But despite this fall, the C-Class still remained the second-highest selling model for Mercedes in the country, behind the mid-size sedan E-Class, due to the large demand for compacts. [6] At 151,624 unit sales in the first half of the year, Mercedes lags BMW’s sales by 5,758 units. [7] However, Mercedes’ light trucks, which comprised 35.5% of the company’s net U.S. volumes through June, outsold BMW’s lineup by 15.5%. This means that Mercedes trails BMW only in terms of passenger car volumes in the U.S., and that is mainly due to higher sales of the 3- and 4-series compact sedans, in comparison to the old C-Class model. With the launch of the new C-Class in the U.S., Mercedes will aim to improve passenger car volumes in the last quarter of the year in order to narrow its current gap with BMW in the country, as well as earn higher profits on the new locally produced model to drive margin expansion. Mercedes’ operating margins stood at 7% in the first quarter, lower than the margins of 9.5% and 10% reported by BMW and Audi respectively. [8]

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Notes:
  1. Daimler press release []
  2. News release, al.com []
  3. Average age of vehicles on the road remains steady, June 2014, wsj.com []
  4. Lear 10-k []
  5. Auto demand prompts suppliers to expand, June 2014, rubbernews.com [] []
  6. Mercedes-Benz June sales []
  7. BMW June sales []
  8. BMW group q1 profit rises 3% on SUVs, autonews.com []