Mercedes-Benz Is The Number One Premium Automaker: How It Happened

DAI: DAIMLER AG logo
DAI
DAIMLER AG

Daimler AG‘s luxury division, Mercedes-Benz, lost its title of the world’s largest-selling automaker in 2005 to BMW, and then went on to lose the second spot to Audi in 2011. Mercedes then decided to take on a 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 again. This also warranted large amounts of investment in research and development, and capital expenditure, to expand the production footprint. At one point, one-time costs associated with the launch of new/refreshed models had lowered operating margins to around 3% in the first quarter of 2013 at the brand.

But as the automaker had planned, it reclaimed its number one title, and that too, well within the end of the decade. Mercedes surpassed Audi in terms of volumes in 2015 to reclaim the second spot in the race for the highest-selling premium automaker, and overtook BMW in 2016 to reclaim the lead. This was possible on the back of high demand and timely launches of new models, as well as  impressive growth in China, its single largest market. 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. Consistently high volume growth, especially in higher-end car segments that have broader margins, proved to be accretive to the brand’s operating margin as well. Mercedes managed to increase its operating margin to over 10% during 2015. However, the brand’s operating margin declined from 10.5% in Q2 2015 to 6.4% in Q2 2016 due to added costs of revamping the E-Class sedan. However, high sales of new models and continual strong sales of SUVs resulted in a 26% year-over-year rise in EBIT in Q3. Margin grew to 11.8% in Q3 2016 (Q3 2015 margin: 10.5%). In comparison, BMW and Audi’s margin through Q3 stood at 9.2% and 8.9%, respectively.

Dai Q&A 19

Relevant Articles
  1. Will Johnson & Johnson Stock Rebound To Its Pre-Inflation Shock Highs of $185?
  2. Should You Pick Eli Lilly Stock After A 4x Rise In Three Years?
  3. Down 9% This Year, What’s Next For Lululemon’s Stock Past Q4 Results?
  4. Down 14% In The Last Trading Session, Where Is Adobe Stock Headed?
  5. Will Higher Federal Government Spending, Gen AI Drive Digital Security Stocks Like CrowdStrike Higher?
  6. Up 30% In A Year Is FedEx Stock A Better Pick Over UPS?

What’s behind Mercedes-Benz’s solid growth? Let’s break down the main points:

  • Extremely Strong Growth In China: Mercedes has almost caught up to Audi and BMW in China, on the back of its solid growth in the country in the last couple of years. In China, SUVs are the best-selling mini-segment. While passenger vehicle sales were up 15% year-over-year in 2016, buoyed by government tax breaks, and high discounts offered by dealers, SUV sales rose 45% to comprise ~40% of China’s overall passenger vehicle sales. In fact, a massive rise in China for Mercedes due to more than 15 new or revamped models, expansion of the dealer network to approximately 500 dealerships, extension of local production capacity, where in addition to the C- and E-Class, the two SUVs GLA and GLC are being built, all these helped ensure that China became the automaker’s single largest market in 2015.
  • Sustained Lead In The U.S.: While the overall U.S. passenger vehicle market remained relatively flat year-over-year in 2016, the luxury cars+SUV segment declined 10%, primarily due to a decline in demand for luxury cars. As refueling of fleet took place aggressively in the country following the recession, vehicle demand plateaued last year and is expected to remain stagnant this year as well. But Mercedes managed to keep its lead in this market over BMW and Audi, as the demand for premium SUVs remained strong (growing by 3.2% year-over-year in the country).

The common theme behind Mercedes’ rise to the top is its solid growth in SUVs. While the overall vehicle deliveries for the brand rose 11.3% to 2.083 million units last year, SUV deliveries rose 34.3%. Growth at Mercedes is expected to continue in the next couple of years, buoyed by strong sales of the GLC SUV and the C-Class sedan, which competes against BMW’s aging 3-Series. Daimler expects Mercedes to wrap up 2016 with a slight rise in EBIT, however, low sales and weaker operational performance at Daimler Trucks is expected to lower the financial result for 2016. Daimler is looking to continue to invest heavily in products and technology, which is why the free cash flow in 2016 is expected to “significantly” decrease from the figure of 5.9 billion euros in 2015.

Have more questions on Daimler? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Daimler AG

Get Trefis Technology