Daimler AG Is Putting Its High R&D Expenditure To Good Use
Daimler AG has from time to time increased its expenditure aggressively in research and development in order to develop new products. This caused the operating margin for its industrial business to drop to below 7% in 2012 and 2013, especially as the margin for the Mercedes-Benz suffered due to high R&D expenses. However, as can be seen from the table, Daimler has managed a sound gross profit to R&D expenses ratio, which has remained below 25% in the last five years. A quick comparison with Volkswagen shows that Daimler has capitalized more on its high R&D expenses.
Daimler will invest €14.5 billion in research and development projects in 2016-2017, which is an average of €7.25 billion per year, up 10.5% from the 2015 levels. Most of this investment will be used to create new products, innovate drive and safety technologies, develop vehicle connectivity systems and to further develop autonomous driving technologies. The company has the goal of launching more than 30 new car models between 2012 and 2020, and simultaneously expand its range of commercial vehicles as well. In 2015, Mercedes-Benz Cars, which forms nearly 60% of the company’s valuation as per our estimate, invested €4.7 billion on research and development, up 17% year-over-year. On the other hand, Daimler Trucks invested €1.3 billion, up 9% year-over-year.
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While Volkswagen has had a more aggressive approach towards investing in R&D, Daimler has derived more benefit from it, as can be seen from the relative progression in R&D expenses as a percentage of gross profit. In fact, in 2014, Volkswagen spent more on R&D than any company in any sector globally, hurting its profitability. The emissions scandal has further brought into question the group’s efforts in innovation. On the other hand, Daimler has benefited from the higher investments, and its luxury brand Mercedes-Benz is on track to overtake BMW as the world’s highest-selling premium automaker this year. Mercedes had lost the lead to BMW in 2005, and further lost its second position to Audi in 2011.
Daimler still expects both revenue and EBIT to grow this year, but the growth rate is expected to slow down from the high levels seen in the last couple of years. EBIT for 2016 is expected to see only a modest rise. Daimler is looking to continue to invest heavily in products and technology, which is why free cash flow this year is expected to “significantly” decrease from last year’s figure of 5.9 billion euros ($6.6 billion). The company is looking to increase its CapEx and research and development expenses for the next couple of years, which will negatively impact cash flow. However, the fact that the automaker has made a habit to grow profit by more than its expenses bodes well for its future.
Have more questions on Daimler? See the links below.
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