Mercedes Benz Adventurous Design Should Pay Off At The Bottom Line

Feb 12 2014, 12:16pm CST | by

It’s a virtuous circle for shareholders at Daimler’s Mercedes Benz, as attractive new cars boost sales while investment in more efficient manufacturing cuts costs.

And the imminent launch of the German luxury car maker’s new C-class is going to add more momentum.

While competitors like VW’s Audi produce ever more impressive but plain-vanilla looking vehicles and BMW design is patchy, Mercedes new cars and SUVs have been exciting buyers. Mercedes A and B class cars used to be worthy, utilitarian and dull, but the latest versions are certainly eye-catching. The slightly bigger CLA version of the A class, the new flagship S-class, compact SUV GLA, and soon to be launched new C-class all turn heads. And nobody ever doubted the excellence of the engineering under the skin of a Mercedes, except briefly perhaps during the “Elk test” crisis, when A class cars flipped over during testing in Sweden in 1997.

According to Commerzbank analyst Daniel Schwarz, this radical change in the looks of Mercedes is down to a new designer.

“Those products that were developed under Mercedes’ new design head Gordon Wagener – A, B, CLA, S-class – have much higher conquest rates than previous models and develop exceptionally well regarding volumes and pricing. If this continues for the new C-class, BMW’s 3-series will face tough competition in its third year of production,” Schwarz said.

The BMW 3-series is the leader in the small, luxury sedan sector, and the Mercedes C-class, Audi A4 and Cadillac ATS have been playing catchup.

Mercedes has belatedly followed Audi and BMW into modular production, and this should raise the total output based on these methods to 44 per cent, although this compares with Audi’s 85 per cent and BMW’s 77 per cent, Schwarz said.

“Modular” is shorthand for designing more common engineering systems in the manufacture of vehicles to increase economies of scale and cut costs. This also raises the risk of a hugely expensive recall as parts are often used much more widely than in the past.

“This should allow for sustainably lower variable cost that compensates for increased content,” Schwarz said, in a report reacting to news Daimler’s earnings before interest and taxes (EBIT) rose to the equivalent of $3.5 billion in 2013’s fourth quarter from $2.4 billion in the same period the previous year.

Macquarie Equities Research said it likes Daimler shares because of Mercedes’ strong product momentum and the C-class will be a key profit margin and volume driver in 2014 and 2015. Macquarie expects an operating profit margin of around eight per cent in 2014, with 10 per cent reached in 2015, bringing it firmly into line with Audi and BMW.

Max Warburton, analyst with Bernstein Research, pointed out that Mercedes lost billions on its tiny Smart car and previous A-class over 15 years, but the new small cars are what he calls a “big bet-the-house effort – and it is working”

Warburton believes he may have underestimated progress made by Mercedes.

“We concede that it (Mercedes) may well have more growth and earnings momentum in 2014, and perhaps beyond, than we’ve previously concluded,” he said.

Warburton likes the new C-class.

“Mercedes has been a perpetual laggard in this segment, unable to compete with BMW on volume, price or profit. The new car is an attempt to change that. The car features every possible technology, feature, material quality and styling possible. The car is almost literally a mini S-class,” Warburton said.

The Mercedes S-class is a top-of-range sedan, which competes with the BMW 7-series, Audi A8, and Lexus LS.

Mercedes invited investment analysts to drive the new C-class at an event in Germany held to discuss the company’s financial performance.

Citi Research analyst Philip Watkins points out that Mercedes won’t have everything its own way, as the German luxury manufacturers pull out all the stops.

“New product rollouts from here for 2014 include the new BMW 2-series, X4, Mini and the new electric (plug-in hybrid) i8. For 2014 we continue to see Mercedes as offering the best product momentum of any European Auto, though we also believe that going into 2015 and 2016 this advantage tapers off as Audi revamps most of its product. By the end of 2016 we see Audi’s average fleet age at 2.4 years versus 2.9 years for Mercedes,” Watkins said.

International Strategy and Investment analyst Arndt Ellinghorst is slightly less enamoured of Mercedes though.

“We still prefer BMW over Daimler. BMW to our mind has better cash generation, delivers higher margins in less volatile fashion and has a model cycle story which is at least as compelling as Daimler’s as the former renews SUVs while the latter launches small cars,” Ellinghorst said.

Source: Forbes Auto

 
 

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