SUV Strategy

Mercedes Speeds Into Record Year

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  • Why it matters

    Why it matters

    Daimler is making money with gas-guzzling SUVs but will need to invest substantially in hybrid and electric cars to meet E.U. emission targets.

  • Facts

    Facts

    • The PWC consulting firm projects SUV production in Europe to increase by 37 percent between 2014 and 2018.
    • By 2014, Daimler had achieved 85 percent of its austerity program to reduce costs by €4 billion.
    • As part of the company’s cost-cutting effort, plants are expected to improve their efficiency by 3 percent a year.
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    Audio

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There was a time when Bodo Uebber, Daimler’s chief financial officer, was dissatisfied with certain aspects of the company’s model lineup, in particular the lack of a sports utility vehicle, or SUV, to compete with rival BMW’s X1. It was in October 2012 when Mr. Uebber also had to warn investors of a massive decline in profits.

Daimler has since closed that gap. “2015 will be the year of the SUV,” Mr. Uebber told Handelsblatt.

After reporting record profits in the first quarter, Mr. Uebber now expects even better results for the Mercedes-Benz cars division. “In terms of sales and earnings for interest and taxes, the second half of the year will be even stronger than the first,” he said.

“2015 will be the year of the SUV.”

Bodo Uebber,, Chief Financial Officer of Daimler

Mercedes plans to introduce four new or redesigned SUVs in the second half of 2015, bringing the number of SUV models up to BMW’s level. In addition to the compact GLA, introduced in 2014, the M class will also debut as the GLE and GLE Coupe. The GLK, which is still a little boxy, is being turned into the more elegant GLC, and the brawny GL will also receive a face lift – although Mercedes is being coy with details.

Mr. Uebber argues Mercedes needs to ride on the SUV bandwagon while the price of oil is low and the euro is weak. The U.S. economy remains strong, and sales are also picking up in Europe again.

The PWC consulting firm projects SUV production in Europe to increase by 37 percent to 4.8 million units between 2014 and 2018. And in China, the world’s largest auto market, sales are forecast to grow from 4.5 million units today to 7 million in 2018.

Mercedes aims to build its new models more efficiently than it has done with previous models. By 2014, the car divison had already achieved 85 percent of its austerity program to reduce costs by €4 billion, according to Mr. Uebber. The effects are evident today, with profits rising at a significantly higher rate than costs.

Lower procurement prices for materials such as steel have helped. Technical harmonization within the series allows models to be produced more profitably in smaller quantities. Now almost every new SUV, for instance, is accompanied by a coupe version. This year’s GLE Coupe will likely be followed in 2016 by the GlC Coupe unveiled in Shanghai, paralleling rival BMW’s X6 and X4 models.

 

Audi BMW Mercedes Germanys Carmakers-01

 

For Mercedes, catching up with the competition in terms of its model lineup isn’t enough if competitors are making more money. The Mercedes car division achieved an operating return of 9.4 percent in the first quarter, just short of its targeted 10 percent.

But like BMW and Audi, Stuttgart-based Daimler still needs to invest billions in hybrid and electric cars to satisfy the European Union’s emission targets. Expanding SUV sales won’t help, since the heavy off-road vehicles can’t be designed to be nearly as fuel-efficient as small cars.

That’s why Daimler will continue to cut costs in the future as part of its “Next Stage” program. By summer, the company aims to have reached agreements with workers in its German plants.

Under the program, the company will outsource portions of production logistics, and plants are expected to improve their efficiency by 3 percent a year. The blueprint for these efforts is a factory agreement already concluded for a plant in the southern German town of Sindelfingen, which employs 22,000 people. Mercedes intends to invest €1.5 billion in the facility but also expects savings in the triple-digit millions.

 

Daimler WTB 2014

 

The sales network in Germany is also being realigned. While Munich-based competitor BMW now runs only about a dozen of its dealerships, Mercedes still runs 33 of 158 dealerships, which the company believes are operating too expensively. The dealerships tie up capital, and returns in auto sales are significantly lower than in the industrial sector.

Mercedes now plans to sell 63 dealerships, affecting about 4,500 jobs, of which 340 have already been eliminated. “We have a sufficient number of potential buyers for the dealerships,” Mr. Uebber said. Dealerships in Erfurt and Wiesbaden have already been sold, while the Baden-Baden site is about to be sold. The remaining dealerships will be converted into limited liability companies.

“This will have no impact on customers,” Mr. Uebber said.

 

Markus Fasse covers the aviation and automobile sectors for Handelsblatt from Munich. To contact the author: fasse@handelsblatt.com

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