P&L Check

For Daimler, too many unanswered questions

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Laughing last is the important part, Mr. Zetsche and Mr. Shufu. Source: imago [M]

It’s never sold so many vehicles and never paid out as much in bonuses. Even investors will get a 12 percent bump in their dividend. So why has the share price of Daimler – the maker of Mercedes-Benz cars, Freightliner trucks and Setra buses – flatlined over the past year? Because there are at least half a dozen unanswered questions that not even CEO Dieter Zetsche, who faces shareholders at an annual meeting Thursday, is able to answer.

Last year, the company sold 3.3 million vehicles, bringing in €164 billion in revenue, both records. It had a profit of €10.9 billion and paid each of its 130,000 employees working under a collective agreement a €5,700 bonus. But the stock hasn’t even gained 1 percent. That’s because Daimler’s problems right now aren’t its results.

The most nagging question is how to fend off Chinese billionaire Li Shufu, who picked up a 9.69 percent stake in Daimler in February. Mr. Li owns Geely Automotive, a Chinese carmaker that is just behind 10th-ranked Daimler in global auto sales. Geely has competed directly with Daimler since acquiring the iconic Volvo car brand and a stake in Volvo trucks. It likely wants to peer inside Daimler’s R&D department, too.

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Investors fear that Geely will somehow gain access to Daimler’s labs and create a technology leak to China, ending not just Daimler but even Germany’s automotive dominance. The Geely stake also puts Daimler at odds with its existing Chinese partners, manufacturer BAIC and battery company BYD, just as the market there becomes evermore important for German carmakers. “One has to ask whether Daimler has one Chinese partner too many,” said Ingo Speich, a fund manager at Union Investment. “Geely could be a wolf in sheep’s clothing.”

But that’s not the only unanswered question. Like all German carmakers, Daimler is entwined in investigations and lawsuits surrounding its diesel-powered cars. While Volkswagen has absorbed much of the early attention – and done little to help inquiries – investigators both at home and in the US are now looking at other manufacturers, including Daimler. Though it has pledged its assistance, the company is worried: It set aside €17.2 billion last year to cover lawsuits, up €1.2 billion from 2016, and warned that the probes could lead to “significant monetary penalties.”

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Car owners and authorities have complained about excessive emissions of toxic nitrogen oxide from Mercedes vehicles and of discrepancies between emissions in laboratory tests and on the road. Some Mercedes models appear to be fitted with software programs that switch off exhaust cleaning systems temporarily, ostensibly to protect the engine. A legal gray area in Europe, it’s strictly forbidden in the US, where half a dozen federal and state authorities are demanding information on tests and approvals as well as the managers responsible.

The investigations have led to predictable class action lawsuits in 13 US states from unhappy owners. On top of that, investors are also suing over Daimler’s stale share price. “Unlike VW, I see a will at Daimler to clear things up,” said Marc Tüngler of Germany’s DSW association of small shareholders. Even if Daimler does pitch in, guessing the financial cost of the cheating is difficult.

Still, pitching in will help limit the company’s losses in yet another investigation. EU cartel authorities suspect it and other German automakers of fixing prices on diesel and other technologies over several decades. Daimler could get off lightly because it has claimed whistleblower status, but what “lightly” means is anyone’s guess.

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Mr. Zetsche, who has been at the helm since January 1, 2006, may have few answers for these questions. But he still has plenty to answer for. Daimler hasn’t reduced the CO2 emissions of new models, which increased by 2 grams last year to an average of 125 grams per kilometer, far off the EU’s ceiling of 95 grams by 2021. While consumer taste for SUVs is to blame, Daimler will face hundreds of euros in fines for every new car sold if it can’t reverse the trend.

The answer is easy enough – a massive expansion of hybrid and electric models. But Daimler lags far behind rivals such as BMW, which has offered electric models since 2013, not to mention rising US challengers like Tesla. Daimler currently only makes electric versions of its B-class and Smart cars. It won’t introduce its first electric SUV until next year though it has promised 10 fully electric models by 2022 with at least as many plug-in hybrids on top of that. A quarter of its models could be electric by 2025, Mr. Zetsche has said. But that will cost at least €10 billion in R&D, money that will tap its earnings and, by extension, its ailing share price.

Mr. Zetsche has found answers to challenges in the past – getting out of Daimler’s Chrysler debacle, for example – so investors remain optimistic he’ll find similar answers for its current open-ended challenges. But until he does, the share price isn’t likely to be going anywhere fast.

Marcus Fasse covers the auto industry and Franz Hubik renewable energy for Handelsblatt. Ingo Narat is an editor in the paper’s finance section. To contact the authors: hubik@handelsblatt.com, fasse@handelsblatt.com, narat@handelsblatt.com

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