SUV Boom

Daimler counts the cost of electric vehicles

Daimler AG – Jahrespressekonferenz
With the best-ever for Mercedes car sales, why isn't Dieter Zetsche smiling? Source: dpa

Most everyone knows that the next big thing in the automobile world will be self-driving cars and trucks and vehicles that operate on battery power rather than gasoline or diesel. What’s now becoming clear is that this shift from traditional cars to tomorrow’s vehicles is going to be hugely expensive to design and build, especially for luxury carmakers.

Just how expensive emerged Thursday when Daimler, the maker of Mercedes-Benz vehicles, tempered its best sales figures ever with a forecast of flat earnings this year because of the heavy outlays needed for investments in research and development. The company earned €10.9 billion ($13.6 billion) net profit in 2017.

The warning of flat earnings sent Daimler’s share price lower by 3 percent. In addition to the profit warning, Daimler’s share price has been affected by a sheaf of industry scandals, ranging from software that helped cheat emissions tests for diesel vehicles, to accusations of cartel law violations and hugely embarrassing news reports about tests conducted on monkeys using diesel fumes.

“We could sell more cars in 2018 if we had more factory capacity.”

Bodo Uebber, Daimler CFO

“You can see in the stock price that market has priced in risk premia and fears about the diesel crisis and cartel allegations,” said Sven Diermeier, an analyst at Independent Research

CEO Dieter Zetsche told the company’s annual press conference that Daimler sold 3.27 million vehicles in 2017, more than at any time in its history and outpacing German luxury rivals BMW and Audi. The sales boom was strongest for SUVs, which now account for a third of Mercedes car sales.

“We could sell more cars in 2018 if we had more factory capacity,” said the company’s chief financial officer, Bodo Uebber.

As a result, Mr. Zetsche outlined a program of increased capital spending to ramp up the company’s ability to churn out the latest vehicles. Investments in property, plants and equipment, as well as research and development costs, which totaled €15.5 billion in 2017, will rise to €16.3 billion both this year and next, he said.

Daimler, which has already been fined €1 billion by European Union antitrust authorities because it participated in an illegal cartel with other European truck producers over emissions, now faces similar charges in the so-called Dieselgate scandal because company officials participated in meetings with other German carmakers and discussed how much to charge for emission-control devices for diesel cars.

So far, Daimler has not been charged with installing illegal software on diesel cars to cheat on emissions tests, but prosecutors in Germany and the United States are looking at Mercedes cars as part of a broader investigation that began with cars manufactured by Volkswagen. VW has already pleaded guilty to breaking US environmental laws.

If that wasn’t cause enough for concern, Daimler was identified as one of the carmakers that paid to conduct tests on monkeys to prove that diesel fumes were not toxic. Reports about the testing have caused a furor in animal-loving Germany, with the carmakers, who have largely escaped being reprimanded by politicians because of the diesel scandal, now facing a chorus of political disapproval.

On Wednesday, Daimler suspended its head of environment protection, who had signed off on the monkey tests. At Thursday’s meeting, Mr. Zetsche spoke about a “highly disappointing individual case,” but promised to clarify Daimler’s involvement.

He said the monkey tests showed “how important it is to have a common understanding of integrity that everyone in the company shares.”

Markus Fasse is a Handelsblatt correspondent in Munich, Franz Hubik covers renewable energy for Handelsblatt and  Charles Wallace is an editor for Handelsblatt Global in New York. To contact the authors: fasse@handelsblatt.com, hubik@handelsblatt.com, and c.wallace@extern.handelsblatt.com.

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