China Seems Kinder To Mercedes-Benz

It’s been a slow year for most automakers who depend on their sales in China, considering how the country had been a cash cow over the last few years. The world’s largest automotive market has suffered a substantial hit this year, with sales of passenger vehicles declining in both June and July by 3.4% and 6.6%, respectively. Overall, automobile sales are up only 0.4% year-over-year through the first seven months. The slowing economic conditions and the stock market crash in China have had a contagion effect on the rest of the world too, especially emerging economies that export to the country, and multinationals who have for long looked at China for growth.

We have a $91 price estimate for Daimler AG, which is above the current market price.

See Our Complete Analysis For Daimler AG

Luxury automakers haven’t been aloof to this downtrend either. Audi and BMW — the leading premium automakers in China — have witnessed profit declines in the country in Q2. But amid the normalization of the Chinese automotive market, one foreign player has remained steady on its growth path in the country. Daimler AG‘s Mercedes-Benz has defied the China slowdown and posted a 14.7% year-over-year rise in global vehicle deliveries through July, with a solid 22.7% rise in deliveries in China.

Mercedes Set To Overtake Audi By Next Month?

Mercedes lost its global premium vehicle sales lead to BMW in 2005, and then the second place to Audi in 2011. But it looks like the German number three is on its way to regaining the second spot this year, and this could in fact happen as soon as next month. Mercedes is merely 272 units away from overtaking Audi, and could carry this momentum through the end of the year.

China has been a key growth driver for Mercedes this year, while its chief competitors have suffered. BMW’s joint venture in China contributed €156 million ($177 million) to the group’s earnings in Q2, down 22.8% year-over-year. Operating margins fell to 8.4% in the last quarter for BMW, lower than the previously achieved 9-10% margins, and much lower than Mercedes’ 10.5% operating margins. The tough pricing environment in China forced the automaker to lower its prices, impacting net profits, even as revenue growth remained strong. On the other hand, net profit for Volkswagen, which owns Audi, declined to €2.67 billion ($2.95 billion) in Q2, impacted by the weakness in China — its single largest market. Although Audi’s margins remained solid at 9.7%, this figure doesn’t include the China business, which is recorded in the financials using the equity method of accounting.

On the other hand, aided by the solid growth in China, Mercedes reported a 19% rise in revenues in Q2, over the previous year, and a whopping 58% rise in operating profits. The brand’s EBIT margins have reached 10.5%– more than that at BMW and Audi. Remember when one-time costs associated with the launch of new/refreshed models had lowered operating margins to around 3% in the first quarter of 2013? Mercedes seems to have recuperated well.

China is the world’s second largest premium vehicle market, and the downturn in this market has impacted both Audi and BMW. However, it seems like Mercedes is now reaping the benefits of its large investments, and with the massive jump in China, the brand is now well placed, considering the large demand for SUVs that persists in the market. Sales of SUVs are up approximately 45% in China through July, even as the rest of the market crumbles around it. Audi sells 1.5x the vehicles sold by Mercedes in China presently, but the latter seems better placed in the market, also, with better profitability.

Is Mercedes now the choice luxury vehicle in China?

See the links below for more information and analysis:

• 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

View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research