Daimler To Start Production Of Sprinter Vans In North America

This time ten years ago, Mercedes-Benz was the highest-selling luxury automaker in the world. But the vehicle brand owned by Daimler AG lost its lead to compatriot BMW in 2005, and further fell below Audi in 2011, to consolidate its position as the third largest premium automaker. Mercedes has narrowed its deficit with its compatriots this year, with the brand’s volume sales rising by 12.4% in the first eleven months of this year, outpacing BMW’s 9% and Audi’s 10% volume growths during this period.

Mercedes is no doubt closing-in on BMW through new model launches and an extension of its production footprint. However, the product offensive strategy has also taken a toll on the company’s financials. One-time costs associated with the launch of new/refreshed models had lowered operating margins to around 3% a couple of years ago, but a favorable product mix and efficiency initiatives such as the ‘Fit for Leadership’ program has helped Mercedes sequentially improve its profitability. Operating margins for the German company stood at 7.8% through September, with the figure improving to 8.5% in Q3. However, the operating performance at Mercedes still lags that of BMW and Audi, which reported margins of 10.2% and 9.7% respectively through the first three quarters.

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The struggle to become the largest premium automaker has chipped away at Mercedes’ profits in recent times. In a bid to capture some of the potential vehicle growth in the luxury segment and large van segment in the U.S., Mercedes has looked to increase local production in the country. Local manufacturing helps the brand evade large import tariffs and transportation costs, allowing Mercedes to compete better on a pricing front and also improve profits in North America.

Sprinter Vans To Be Built In North America

Mercedes-Benz vans constituted approximately 9% of Daimler’s net revenues last year, and volume sales for the first three quarters of the year have risen 12% year-over-year for the segment. The large-sized van Sprinter constitutes almost two-thirds of the net van volumes sold by Daimler, and U.S. is the second single largest market for the Sprinter vans after Germany. In order to compete better on a pricing front, earn higher profits from sales, and gain from the growth potential of the large van segment in the U.S., Daimler announced plans to produce the new generation Sprinter vans in one of the NAFTA countries as well, in addition to producing in Germany. Presently, Sprinter vans for North America are built in Germany itself, disassembled and then shipped to South Carolina, where the pieces are reassembled in knocked down units. Reassembling unit pieces in the U.S. allows Daimler to evade the high taxes levied on import of complete vehicle units. Building the Sprinter locally from scratch will give the company a competitive advantage in the fast growing van market in North America.

Mercedes-Benz van sales in the U.S. increased by 20% year-over-year to 18,739 units through September. With improving economic conditions in the U.S., including an uptick in construction and infrastructure activity, demand for commercial vehicles is expected to rise in the country. Van sales are estimated to rise in the U.S. due to the growth in small and mid-size businesses, which typically employ vans. The small business optimism index rose by 2 points to 98.1 this month, a tad below the historical average before the Great Recession, reflecting potential growth opportunities for commercial van manufacturers in the near term. ^[1]

The Sprinter has sold 22,457 units in the U.S. through November, up 18.3% from a year ago, but the model still trails chief competitors Ford E-Series and Transit, and Chevrolet Express in terms of volume sales in the country. The Sprinter holds 7% volume share in the U.S. commercial van market, which has grown by 14% through November. ^[2] Through local production, Daimler could bite into a larger share of the van market in the U.S. in the coming years, and potentially improve its profitability.

Mercedes Has Been Expanding Its Production Base In North America

Rising demand for luxury vehicles and the benefits of local manufacturing also prompted the luxury division Mercedes-Benz to produce the new generation compact saloon C-Class in the U.S. itself this year. The C-Class is the first sedan to be produced in the company’s U.S. plant in Tuscaloosa, Alabama, which manufactured only the SUVs M-, R-, and GL-Class before this. The C-Class is a volume model for Mercedes-Benz, and the brand’s first 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 was being manufactured in Germany and South Africa, and production in the U.S. and China began this year.

In addition, earlier this year, Mercedes-Benz extended its partnership with the Japanese automaker Nissan to jointly build compact luxury models in Mexico. ^[3] 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. The plant will start production of Nissan’s Infiniti line of premium vehicles in 2017, with production of Mercedes-Benz vehicles set to begin in the plant in the following year. 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. ^[4] Mercedes could utilize the Mexico plant to feed the luxury demand in North America, particularly in the U.S. In addition, the company 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.

Mercedes has been trailing both BMW and Audi in terms of both volumes and margins in recent years. As Mercedes extends its production base to low-cost countries and places nearer to the end customer, we expect profitability for the company to rise in the coming years. Local manufacturing is also expected to boost Mercedes’ competitiveness where pricing is concerned, and could bolster the brand’s volume sales going forward.

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1. Small business economic trends [↩]
2. Commercial van sales in the U.S. [↩]
3. Daimler press release [↩]
4. Mexico auto sales climb to highest in six years as lending grows, bloomberg.com [↩]