What I found out for myself when buying a car
E-cars and Mercedes = MÄR-Cedes? Can Mercedes do China?
#mercedes
$MBG (+1,05%)
Disclaimer: This is not investment advice. While I endeavor to provide accurate and up-to-date information, I do not guarantee the completeness, accuracy or timeliness of the content. Readers should seek independent professional advice before making any financial decisions. I am not liable for any loss or damage arising from the use of or reliance on my content. I am not a tax advisor. I am not an investment advisor.
Hi folks,
Today will be about Mercedes and its change of strategic direction. Can Mercedes do electric cars? And if so - how well against the Asian competition?
I'll start with a number: 127.
What is that? The maximum speed of electric cars?
No - it's the number of cars newly registered by Mercedes from January to August.
Yes, surely these are some lame special vehicles that nobody cares about?
Far from it - it's actually 127 new registrations of the E-Class in Mercedes' cab segment from January to August this year. Plus one B-Class. That's right. A whole B-Class. So we're basically talking about a car that perhaps everyone knows from traveling or being picked up from the airport. The cab business was a cornerstone of Mercedes' economic performance. Unfortunately, however, this seems to have become rather dilapidated - with a significant drop of 90-95 percent compared to the same period last year. Looking at all cab models offered by Mercedes, the picture clears up only minimally: We are now at 497 units TOTAL for a former German market leader. In a year-on-year comparison, this represents a drop of 71% (see (1), (2)).
Doesn't that bother Mercedes? What do combustion cabs have to do with the question?
Yes and no. According to (2) and (3), Mercedes cites a decline in the profitability of the cab business and may even want to stop producing cabs directly in the near future. Instead, as I understand it, subcontractors could fill this gap by buying up conventional B-Classes and then equipping them with cab equipment. This could completely simplify the production of this segment (see (2), (3)).
A look at the significance of the cab segment says a lot:
Whereas in 2019 around 52% of the cab market still belonged to Mercedes, in 2023 it was only 38% and meanwhile Mercedes can possibly be happy to still have a double-digit presence in this segment at all. We are down to around 13%. From the former 52%. That would be roughly an annual degression rate of 24.2%. This essentially followed the decision by Mercedes CEO Ola Källenius to no longer subsidize the cab business and at the same time to no longer produce special versions as mentioned above (see (2), (3), (4)).
On the one hand, the cab market with its approx. 6,000 to 7,000 new car registrations per year is probably not in the front row economically - on the other hand, these cars are present. When you get into a cab, some manufacturers speculate that you are unconsciously or consciously evaluating the driving behavior of the car. In the style of a test drive without an appointment, the respective manufacturer can try to address its potential customers directly and without advertising gobbledygook. An advantage that is also emphasized by Mr. Oppermann in his role as managing director of the Federal Association of Taxi and Rental Cars. However, Mercedes does not seem to respond to this in the first step. The following statement is repeated like a mantra (see (4), (5)):
"Taxis simply don't fit in with our luxury standards" - Mercedes manager in Handelsblatt (6)
This raises the following questions for me (in addition to giving me heartburn):
1. is Mercedes luxury image wanted by the market or successful?
2. why is Toyota, the world's largest automobile group, relying on this cab gap that Mercedes so willingly leaves behind?
In order to answer the first question, I would first take a look at the distribution of sales. How has Mercedes earned its money so far and in which countries? For the sake of clarity, I will list these data from 2023 in abbreviated form:
- The "Mercedes Benz Cars" division with €112.76 billion (71%)
- The "Mercedes Benz Mobility" division with €26.72 billion (17%)
- The "Mercedes Benz Vans" division with €20.29 billion (13%)
But that's not 100% accurate?
Yes, that's right - there is also the area of discontinued operations. However, as these are less than 1% according to (7), I will focus primarily on the 3 main areas (see (7)).
And where does the money from these areas come from?
Well of course from Germany HURR DURR. GERMAN BRAND HURR DURR. (sarcasm)
The truth is much more complex and explains why some German manufacturers were against the import of tariffs on e-cars from China. BMW boss Zipse, for example, called the introduction of tariffs a "fatal signal" (see 8).
A look at the distribution of countries suggests why this might be the case:
While Europe ex Germany and the USA together are responsible for €72.05 billion, China also accounted for €25.28 billion in 2023 (cf. ibid.).
And where is Germany in this calculation HURR DURR?
Germany is at a legendary, incredibly high and dreamy....
25.8 billion € (cf. ibid.)
Yes 😊
It is only just under € 0.52 billion that separated the emerging market China from the home port of Germany in 2023. No more than that. This may still be a proud achievement for a single country, but in my opinion this share of 16.84% cannot fully guide the future of Mercedes as a doctrine. I think I can see the following correlations (see (8), (9), (10)):
(a) The Chinese market for mobility is being disrupted in favor of e-cars. There is a risk of losing market share.
b) The profitability of the German market is less scalable in terms of returns than the emerging market China due to the tax burden. The EM is also significantly larger than the 2nd largest economy in the world (see (11))
c) If tariffs rise for competitors, this will not remain without consequences from the Chinese side.
d) Mercedes and other German car manufacturers are scoring an own goal if they believe that a customs tariff cannot be circumvented.
A look at China provides an initial answer to 1) whether Mercedes' luxury strategy can work. There is already a report on Q3 from 2024 that I didn't want to miss. It states that deliveries to China alone fell by 13%, resulting in an overall drop of 3% in total vehicle deliveries. However, the fantastic and legendary luxury strategy was able to compensate for this and ....(see 11).
Of course not. Instead, Mercedes was hit hard with a 12% drop in sales in the luxury segment. Unfortunately, you have to put it like this. While sales fell by 7%, net profit fell drastically from €3.7 billion to €1.72 billion. This is in line with the twofold lowering of expectations in Q3 (see (11)).
The luxury segment therefore currently seems to have a profitability problem and, on the other hand, due to the declining figures in China, has neither growth nor profitability in line with expectations in my opinion. In particular, the quote from Harald Wilhelm that the earnings "do not meet our expectations" - i.e. that the earnings did not meet Mercedes' expectations (cf. ibid.)
I think the statement on b) is possibly correct if you take a look at your pay slip and remember the enormous social contributions and costs for an appropriate salary, because the employer naturally does not only pay your own salary or wage. Then there are the non-wage labor costs, which can be high by international standards (see (13)).
Can this be more specific?
With pleasure. In 2023, an hour's work cost an average of €41.30 in Germany. This put Germany in 6th place in the EU. That doesn't say much. More the fact that, compared to the average, German employers had to pay around 30% more than the EU average. The problem seems to be known, but not addressed. In 2022, non-wage labor costs were already priced at the same ratio. This puts German industry at an additional disadvantage compared to other countries (see (12), (13), (14)).
The fact that the EU is desperately clinging to the principle of import duties in accordance with (c) does not really make things any better. On 04.10.2024, the following tariff conditions were imposed on imports of e-cars from China and other countries. The aim was to calculate the subsidies of the Chinese state on the e-cars and to set the customs duty at the appropriate level. For this reason, there is no general tariff for all Chinese imports, but rather certain exceptions. In general, these tariffs range from 10% to 45% (see (15), (16)):
- BYD: 17%
- Geely: 18.8%
- SAIC: 35.3%
- Others: 20.7%
- Tesla: 7.8%
While on October 4, 2024, contrary to some feedback from the German automotive industry, MEPs imposed concrete tariffs on Chinese imports, China struck back with relative caution and, for its part, introduced so-called anti-price dumping measures (see (15)).
For cars?
No - for cognac. No joke. News outlets like the Diplomat are philosophizing at this point about whether the intention here was merely to demonstrate strength without actually striking. Because this measure does not affect the entire EU, but mainly France, and to a limited extent in my opinion. There is not even a whole week between this customs decision on 04.10.2024 and this "cognac" counter-attack on 09.10.2024. So far, however, China seems to have expressed a desire to avoid a large-scale trade conflict with Europe. In addition to a proposal to make it mandatory for Chinese e-cars to start from €30,000 with immediate effect, the main focus is on avoiding further tariffs. As the whole thing could be a current and newly escalated conflict, I am very curious about the consequences at this point (cf. ibid., (16)).
However, I am separating this government view from the corporate view. Certain Chinese manufacturers already seem to be bracing themselves for a further escalation of the tariff conflict and may not be able to agree with the government's de-escalating view. Specifically, according to (17), there were initial demands from Chinese car manufacturers as early as the middle of the year that a Chinese tariff should be introduced against European brands. Not only Chinese brands were present, but allegedly also Renault and Mercedes, who were probably less enthusiastic about these proposals to the Chinese Ministry of Commerce (see (17)).
But what do BYD, SAIC and co. want with tariffs?
While Europe fears losing a major industry as a result of the e-car "revolution" and is therefore shooting against e-mobility from other continents, Chinese companies are hoping for a counter-attack in just one direction: European combustion vehicles. As things stand today, this is still a segment that German manufacturers in particular still seem to dominate more than average (see (11), (17)). The problem here is the decline in the Chinese growth market, the decline of e-cars per se and the shift in market entry barriers for new players in the automotive market (cf. ibid.).
This shift and its significance was demonstrated by the fact that several international brands responded to the Ministry of Commerce's call. The above-mentioned slump in Q3 of e.g. Mercedes and the 26% increase in sales in Q1 and Q2 of Asian brands in Europe compared to last year do the rest to emphasize the importance of a stable global economy for the automotive industry (cf. (16), (17), (18)). For this reason, the German automotive industry did not applaud when the way was cleared for these tariffs. Although Germany voted against them, it was outvoted and now has to explain to a growth market why it imposes tariffs itself - but does not deserve any. Unfortunately, it produces more cars in China than in Germany - and has been doing so since 2018 (see (18), (19)).
Now that I have highlighted 4 exemplary reasons for the problematic situation of the luxury segment and its market, I would like to briefly discuss what, in addition to the luxury segment, can be a possible hope in the e-mobility market for Mercedes - and it is what German motorists also had before the e-car wave: technological progress. A short quote from the head of Mercedes himself (see (20)):
"We will develop the market for electric cars organically. (...) with a new, self-developed e-drive" (20)
Briefly on the fragment "the market":
This contrasts with, for example, the approach of Volkswagen and XPENG, where the perspective seemed to me to be more towards cooperation and market development with a familiar face. Mercedes, on the other hand, may be looking for a direct fistfight and wants to achieve technological progress. However, in a market that is dominated by Chinese brands in the younger customer segment. In a report from 2021, Mr. Troska from Mercedes already emphasized in an interview that Mercedes had already achieved important milestones in China and would also take care of the needs of the Chinese population via social programs. At the time, the whole thing ran under the motto "Grow in China, with China". At that time, 280 million yuan (approximately USD 44 million) had been invested in corporate social responsibility programs. They had also established a local dealer network of 600 dealers and were employers of around 5,500 international talents. Since the data is a bit sparse at this point, I researched a current comparative value from May 2024 via (22) and apparently around 20,000 employees are now working in a BBAC manufacturing plant in Beijing in May 2024. I can therefore roughly speculate that the role as an employer has become more important here (see (21), (22), (23)).
In order to maintain this importance, refinancing is of course necessary for the steps towards e-mobility. (23), in particular, is very detailed in this regard and focuses on age-structural phenomena of young Chinese people buying cars. I immediately noticed that the average age of the Mercedes customer is around 36. This is not without reason, because in Europe or the USA this age is around 15 years further back. So around 51 years (see (23)).
What does that matter to Mercedes?
A lot. It almost causes neurodermatitis. Because while the elitist posturing and luxury pomp with inconspicuous colors and "the main thing is the star" may still attract older Europeans, the clock ticks very differently in China. To this day, I am still amused every time an Asian brand presents a car there. Instead of car salespeople dressed strictly in suits and looking disrespectful, whose image and demeanor alone disturb parts of the 30-plus generation, Chinese brands work according to a different principle (see (22), (23)).
Instead of a look along the lines of "Can you even afford that at your age?", neon-colored rings, metallic paintwork and, let's say, presentably dressed men and women literally scream at you to at least take a look. The picture of (23) in particular could be exemplary and speaks volumes. For those who don't want to/can't look at it: You can see a centered car platform in neon pink and a ring with cat ears and neon tubes running diagonally to the picture. Together with 2 rings, this results in a kind of caricature of a cat. The base and surfaces are all in pink or white and beige. The model is a young Asian woman in a white skirt with an umbrella and stockings (cf. ibid.).
Are you describing an LSD trip or a car sale here?
I'm beginning to wonder the same thing. However, this type of presentation of car presentations is quite common in Asian countries (cf. (25)).
And what does Mercedes do?
Receive criticism. Especially from younger Chinese, some of whom are still loyal to the brand. But the contrast between (25) and (23) alone is very clear. The stiff, staid image of "we are Mercedes, gallant, elegant and the top technology in the car does the rest" is less well received. While the one picture offered the explosion of colors described above, the Mercedes picture shows a typical silver-colored Mercedes, presumably the C-Class, on a gray platform. In the interior you can see red brick-colored walls on which driving excerpts are shown via beamer. This is not intended to be a judgment of the design. Not everyone has the same taste and the topic is perhaps also culturally dependent. But in my opinion, this design problem alone shows what Mercedes may be doing wrong in China. Various sources have commented that Mercedes' image is still too old-fashioned or that the technology used is simply not competitive. In order to retain Gen-Z customers in China, one source called for stronger and more comprehensive on-board assistants, for example. This topic alone opens up a huge can of worms, which I will be happy to shed light on next time (see (23), (24), (25)).
The next part on Mercedes will deal with the second fragment - the "self-developed e-drive" (20) and my experiences with Mercedes and the Asian brands when I bought a car.
Feel free to follow me so you don't miss it 😊
Are you Team BMW or Mercedes?
Your Bass-T
Sources
(3)https://www.mobiflip.de/shortnews/luxus-strategie-der-dramatische-niedergang-der-mercedes-taxis/
(4)https://wirtschaftsjournal.com/taxi-geschaft-von-mercedes-bricht-ein-das-ende-einer-ara/
(5)https://www.tichyseinblick.de/gastbeitrag/deutsche-automobilhersteller-weiterhin-unter-druck/
(7)https://de.marketscreener.com/kurs/aktie/MERCEDES-BENZ-GROUP-AG-436541/finanzen-segmente/
(9)https://thediplomat.com/2024/10/chinas-cautious-moves-in-the-eu-tariff-conflict/
(10)https://automobility.io/2024/10/state-of-chinas-auto-market-october-2024/
(11)https://www.dw.com/en/germanys-mercedes-sees-profits-nosedive-on-weak-china-sales/a-70598243
(12)https://group.mercedes-benz.com/investors/reports-news/annual-reports/2023/
(13)https://www.hrworks.de/lexikon/lohnnebenkosten/
(14)https://www.destatis.de/DE/Themen/Arbeit/Arbeitskosten-Lohnnebenkosten/_inhalt.html
(15)https://thediplomat.com/2024/10/chinas-cautious-moves-in-the-eu-tariff-conflict/
(16)https://www.bbc.com/news/articles/cly20n4d0g9o
(18)https://mobilityportal.eu/tariffs-chinese-electric-vehicles/
(20)https://www.inside-digital.de/news/mercedes-teuer-strategie-bleibt-doch-es-kuendigt-sich-grosses-an
(21)https://epaper.chinadaily.com.cn/a/202112/10/WS61b27ee1a31019b029ba26ab.html
(22)https://www.elektroauto-news.net/news/mercedes-produktion-in-china
(23)https://www.chinadaily.com.cn/a/202302/20/WS63f2ac16a31057c47ebaf9ed.html
(24)https://www.osk.de/projekte/mercedes-benz-cla-galleria-beijing/
(25)https://jingdaily.com/posts/opinion-how-mercedes-bmw-and-audi-can-reclaim-china