Daimler Faces Challenges to Meeting its China Growth Plans
Daimler, based in Stuttgart, Germany, makes the luxurious Mercedes cars. It also manufactures Freightliner trucks and other kinds of vehicles, making it the second-largest automaker in Germany after Volkswagen. In addition to automobiles, Daimler manufactures buses and provides financial services through its Daimler Financial Services arm. Daimler markets its cars globally under the brands Mercedes-Benz, Smart and Maybach. Daimler competes globally with automakers like BMW (GR:BMW), GM (NYSE:GM), Ford (NYSE:F), Audi (NSU:GR), Honda (NYSE:HMC), Toyota (NYSE:TM) and others.
China is currently the third biggest market for Daimler, following Germany and the U.S. Daimler is betting big on the continued growth in Chinese market but several factors indicate that continued growth in Chinese market at its current rate may be unsustainable.
We have a price estimate of $63.50, which is around 14% below the current market price.
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Break Neck Chinese Growth Cannot Sustain
The Chinese automotive market has witnessed a decade of nearly non-stop annual sales growth of 30% or more as rising income levels fueled by a fast-growing economy prompted a surge in car purchases. China surpassed Japan to become the world’s No. 2 vehicle market in 2006 and then surpassed the United States to become the biggest automobile market in 2009.
Thanks to strong government investment and incentive programs, China’s vehicles market has maintained its strong growth momentum through 2009 and 2010. China Association of Automobile Manufacturers (CAAM) reported that automakers in China built and sold more cars in 2010 than in any other country annually in history. In total, they delivered over 18 million new vehicles, 32% more than 2009.
Daimler’s main competitors are BMW, Volkswagen and, depending on the market segment, Fiat, Ford, General Motors, PSA, Renault, Tata Motors and Toyota. In China, Daimler works through its venture Beijing Benz Automotive Co Ltd (BBAC), with Beiqi Foton (a subsidiary of Beijing Automotive Industry Holding Co., BAIC) to build Auman trucks, and with BYD to develop electric vehicle technology.
In the first three quarters of 2010, Daimler tallied more than 101,350 units of Mercedes-Benz cars in China to represent a record year-on-year increase of 129%. Daimler is now producing two models in its venture Beijing Benz Automotive Co Ltd (BBAC), the E-Class and the C-Class. They ranked as the top volume leaders for Mercedes-Benz.
Investing in China’s Future
Towards the end of 2010, Mr. Dieter Zetsche, CEO of Daimler AG, unveiled plans to invest 3 billion euros in China by 2015. This figure is three times what Daimler had invested in China before this announcement. Daimler hopes to use this investment to enhance its richest and most diverse product portfolio in the luxury sector, and sell more than 300,000 cars annually in China by 2015.
Daimler is also targeting the electric vehicle market though a 600-million-yuan joint venture between Daimler and BYD Co, the Shenzhen based automobile manufacturer, wherein a new electric vehicle will be created specifically for the requirements of the Chinese market.
… However, Coastal Markets Slowing Down
After years of phenomenal growth, some coastal markets are getting saturated and competition is heating up as more than 100 car manufacturers are clamoring to get a slice of the Chinese automotive market. Existing luxury cars such as GM’s Buick offer stiff competition to Daimler’s Mercedes-Benz S-Class cars. Also several new brands such as Baojun is planned to be launched in 2011 which will compete directly with Daimler for space in the Chinese car market.
Government Measures to Slow Growth in Automobiles
The current growth of Chinese auto market will be stymied in 2011, due largely to the removal of subsidies on small-engine cars. Also, China’s plans to curb excess growth by potentially raising interest rates can deal a huge blow to German exports.
As a result GM, the world’s second largest automobile manufacturer in terms of volumes and amongst the leading foreign automobile manufacturers in China with 13% market share, has recently revised down its growth expectations in China. GM International Operations President, Tim Lee, opined on January 27th that sales growth in China will slow to 10-15%, down from 32% expansion in 2010.
We also see prospects of further reduction in sales growth in China due to governmental regulations limiting license plate registrations. While the withdrawal of governmental subsidies can halt car sales growth in rural areas and small towns, government regulation of license plate registration will deal a huge blow to car sales in urban areas. This will slow Daimler’s plans, which had hoped to grow its car sales by 60% in Beijing City itself in 2011.
Beijing had 4.7 million registered vehicles in 2010, up from 2.6 million in 2005 and has begun limiting the number of new license plates issued to 240,000 in 2011, or about one-third as many as were registered in 2010. New car buyers will have to draw lots to get a license. Some 100,000 people have already entered to win one of the 20,000 plates to be issued in January 2011. Similar regulations, if implemented in other major urban areas can severely impact the car sales, affecting Daimler’s growth plans.
Based upon the above analysis, lowering the forecasted growth of Total Mercedes Benz Vehicles Sold Globally by 10% for each forecast year will result in close to 20% downside for Daimler. You can modify the chart above to make your own forecast.