How Mercedes-Benz Accelerated Its Growth In 2015

Daimler AG‘s Mercedes-Benz has had a stellar 2015. The brand, which along with the Mercedes vans segment, forms over two-thirds the company’s valuation, as per our estimates, has overtaken Audi as the world’s second-highest-selling luxury automaker in the world, and is closing in on BMW for the top position. This constructive volume growth has been possible on the back of Mercedes’ product offensive strategy, where the brand aimed to launch various new models before the end of the decade in a bid to become the world’s largest premium automaker. This also warranted large amounts of investment in research and development, and capital expenditure, to expand the production footprint. While large costs had kept Mercedes’ margins subdued till a couple of years back, the benefits of efficiency programs, the higher price of new models, and more volume sales, have boosted the brand’s profitability more recently.

In 2015, Mercedes has outpaced the growth seen by both its chief competitors and compatriots BMW and Audi, in terms of both volume sales and profitability. Much of the volume growth has been helped by the Daimler brand’s strong performance in the U.S. and China.

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While car sales have fallen by 2% year-over-year in the U.S. in the first eleven months, light-duty truck sales have risen 12.5%, bolstered by a solid 15.6% increase of SUV and Crossover sales. Growth in sales of luxury SUVs, which form just over 2% of the light-duty truck segment, stood at nearly 17% through November. ^[1] Mercedes’ strongest competition in the U.S. is BMW, but the company has maintained its lead over the world’s highest-selling premium automaker, on the back of a strong SUV/Crossover lineup. In the year of SUVs, Mercedes’ SUV sales in the U.S. have grown by a strong 16%. And this is when Mercedes’ sales in the country fell last month, hurt by limited availability of top-selling SUVs, including the new GLC.

Continual strong sales in the U.S., the world’s largest premium vehicle market, have been a boon so far this year, but what has really formed the backbone of Mercedes’ excellent 2015 is the strong sales growth in an otherwise tough Chinese automotive market. As the Chinese economy undergoes normalization, automotive sales through October rose only 1.5% year-over-year. This, however, includes an impressive 50% rise in sales of SUVs. Audi is the runaway leader in premium vehicle sales in China, followed by BMW. But Mercedes’ 28.4% year-on-year growth in the country, through the first ten months, is far more than BMW’s 2% growth and Audi’s 0.6% decline. While lower-than-expected China sales have been a negative for both Audi and BMW this year, strong volume sales in the country have boosted Mercedes’ top line.

Mercedes’ global sales rose 15% year-on-year through October, outpacing BMW’s 5.8% and Audi’s 3.6% volume growths. A solid SUV portfolio is partly responsible for this growth. Sales of Mercedes’ SUVs, which formed 27% of the net volumes, rose over 25% through October. Mercedes has recently revamped its SUV lineup, which bodes well, since the demand for these bigger and spacious vehicles is as strong as ever. The smallest compact SUV crossover is the GLA, followed by the compact SUV GLC — a new addition.  Mercedes renamed its M-Class model lineup the GLE-Class last year, and introduced the GLE Coupe, rivaling the BMW X6.

The boost in volumes has also trickled down to Mercedes’ margins. As automotive companies typically have large fixed costs, they have a high degree of operating leverage. This means that a significant increase in volume sales/top line trickles down to the profits, as well. Driven by the high volume rise and product and price mix, Mercedes reported EBIT from ongoing business of €2.2 billion in Q3, up 38% year-over-year, and profit margins of 10.4%. The company has recuperated well after one-time costs associated with the launch of new/refreshed models had lowered operating margins to around 3% in the first quarter of 2013. High demand for the luxury automaker, and favorable pricing, should boost profitability in the last quarter, as well. In fact, Mercedes’ 10.2% operating margins for Q1-Q3 2015 are more than Audi’s 9.2% and BMW’s 9% reported operating margins during the same period.

Growth in terms of profitability could continue, with Mercedes laying the foundation stone for its future compact-car plant in Mexico. As demand for compact luxury sedans rises around the world, Mercedes-Benz has extended its partnership with the Japanese automaker Nissan to jointly build compact luxury models in Mexico. 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. Local production will be beneficial for Mercedes, as it would help evade the large taxes levied on import of luxury vehicles, and also improve the brand’s price competitiveness, as model prices could be set low in the absence of the large taxes. An example of this is the Mercedes C-Class, the brand’s highest selling model, which has witnessed a sales-rise of 46% year-over-year through November. The C-Class is Mercedes’ first model to be produced in four continents, being manufactured in Germany, South Africa, the U.S., and China. In addition, just about six months after the start of production of the GLA in Beijing, China, Mercedes-Benz has started to manufacture the GLC — its second all-new localized SUV model in the country. China is the largest market for both these SUVs.

As we near 2016, continual strong performances in developed markets (U.S. and Europe), and solid growth in China, despite industry weakness, should bode well for Mercedes.

See the links below for more information and analysis:

• Daimler earnings review: Mercedes’ operational performance holds strong into Q3
• Mercedes-Benz is catching up with competition in China
• Who will gain most from the large SUV/Crossover demand in the U.S.?
• Trefis analysis: Mercedes-Benz Cars and Vans Revenues
• Trefis analysis: Daimler North America Revenues
• Trefis analysis: Daimler International Revenues

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1. Auto sales WSJ [↩]