Daimler Focuses On Partnership & Local Production To Improve Margins

Mercedes-Benz, owned by Daimler AG (NYSE:DAI), could be building passenger cars with its partners Renault and Nissan. The three companies formed an alliance back in 2010. The final decision is yet to be announced, but the deal could see the alliance manufacturing an off-road vehicle for Mercedes and cars for Nissan’s luxury brand, Infiniti. Daimler performed strongly in the second quarter with revenues rising 10%, but the margins were suppressed. The company’s operating margins in the second quarter were 8.6% compared to 11.6% for BMW and 11.5% for Audi. So, there is considerable pressure on Daimler to improve its margins.

Rising costs and a weak macro economic environment have forced automakers to make alliances in order to share costs and technologies. General Motors (NYSE:GM) is involved with PSA Peugeot Citroen wherein the two companies will share research and development (R&D) costs. Similarly, BMW is in partnership with Toyota Motors (NYSE:TM) which will see the two auto giants working together on projects involving fuel cells, electrified powertrains and lightweight construction. [1]

Mercedes-Benz to Manufacture SUVs in India

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Mercedes will assemble its SUVs, G class and M class in India. Imported cars attract high import duties in India and thus erode any pricing power that the automakers might possess. By manufacturing cars locally, Mercedes-Benz would have more freedom and flexibility to price its cars. Moreover, the reduced prices could lead to a surge in vehicle sales, which could lead to margin improvement.

The move also shields the automaker from any currency fluctuations. The Indian Rupee has depreciated 10% against the U.S. Dollar in the last year, and the automaker is finding it hard to pass on the full extent of the jump in costs, fearing it might hurt sales. Although vehicles sales in India are only a small fraction of its global sales, the market is set to grow in the coming years as rising incomes allow more Indians to afford luxury cars. [2]

We have a price estimate of $61 for Daimler’s stock, which is about 20% above the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

  1. UPDATE 1-Daimler may build Mercedes cars with Renault -report, August 23, 2012, reuters.com []
  2. Mercedes to start assembling M and G-Class in India, August 29, 2012, moneycontrol.com []