Is Mercedes-Benz Running out of Steam?

Mercedes-Benz is hoping for big sales with its new front-wheel-drive CLA-class sedans, like this 2014 CLA250. (Photo credit: Mercedes-Benz)

Mercedes-Benz is one of the great auto brands of all time. But is it running out of steam?

Mercedes was once the dominant luxury-car brand. But several years ago, it fell behind BMW (NASDAQOTH: BAMXF  ) -- and then, more recently, behind Volkswagen's (NASDAQOTH: VLKAY  ) Audi brand, in total worldwide sales.

Despite strong growth rates for luxury-car sales in general around the world, Mercedes' parent company, Daimler (NASDAQOTH: DDAIF  ) , actually lowered its profit expectations last month, after its first-quarter earnings missed Wall Street estimates.

Daimler, which is also the world's biggest big-truck maker, blamed weaker than expected Mercedes sales in China for the miss.

But the problems with the famous brand may be larger than that. Is the shine wearing off of the famous three-pointed star?

An important and fast-growing market
Luxury cars are a small part of the overall auto market, but they're important to investors because they're exceptionally profitable products. To take just one example, Audis represent a small portion of VW's overall worldwide sales, but they account for roughly half of VW's total profits – and VW's profits lead the industry.

VW is using profits from Audi to fund a massive global expansion. That example hasn't been lost on VW's chief rivals. General Motors (NYSE: GM  ) is in the midst of a massive multi-year overhaul of its Cadillac brand, a key part of its push to close the profit gap between it and VW, which remains significant.

But what of Mercedes-Benz? While BMW and VW have seen their stocks jump in the seven years since Dieter Zetsche took over as Daimler's CEO, Daimler's stock is up just 14% over that same period. That disparity is mostly due to the fact that Mercedes-Benz hasn't performed as well as its rivals in two big areas: China and smaller cars.

Why Mercedes lags in China
So far in 2013, Mercedes is the leading luxury-car brand here in the U.S. It's a different story in China, though. Mercedes is a distant third behind BMW and Audi, China's luxury-car leader. That gap has grown recently: Mercedes' sales in the world's largest auto market fell 11% in the first quarter, while both of its German rivals score gains.

Daimler blames a restructuring effort for the China decline, but the deeper story is that the restructuring was necessary because Mercedes' initial China strategy was a mess. The company had two separate Chinese distributors, who competed aggressively with each other via loud ad campaigns and deep discounts. That did considerable damage to the brand.

The larger challenge facing Mercedes-Benz
Mercedes-Benz has a larger challenge, though, one that has become increasingly apparent as the auto industry has consolidated: Simply put, the company lacks the scale of many of its rivals.

To take the most obvious example, Audi shares engineering resources (and many parts) with other brands in Volkswagen's vast global empire. That gives Audi advantages in both engineering and in costs that Mercedes can't really duplicate. Similar advantages favor GM with Cadillac, which will compete more and more directly with Mercedes over time, and Toyota's (NYSE: TM  ) Lexus brand.

BMW, like Mercedes, lacks an affiliation with a major global automaker. But it has done better, in part by expanding downmarket with smaller and less-expensive models that depart from old-school notions of "luxury cars". That strategy has increased BMW's volume and scale, and so far BMW has mostly appeared to avoid the dilution in brand cachet that has worried many analysts.

Mercedes has followed in that direction, though its smaller cars haven't had great sales. The company is looking to change that with its new CLA, shown above. The CLA is an "affordable" compact sedan that it hopes will attract younger buyers to the brand (and away from the likes of BMW).

The CLA's starting price is over $5000 less than that of the C-Class, long the cheapest Mercedes sold in the U.S. But that affordability comes with an interesting trade-off: Unlike most other Mercedes cars, and most of the cars from Mercedes' rivals, the CLA is front-wheel-drive – a layout more commonly associated with mass-market cars.

Are more drastic moves in Daimler's future?
So can Daimler turn Mercedes around? It seems strange that such a great luxury-car brand is struggling to find growth at a time when luxury-car sales are booming in many parts of the world. Certainly the brand still has tremendous strength, and many of its products remain very strong.

But competition in this space continues to intensify, and in time Daimler may find itself stretching its resources to keep up. Will that lead the company to try to find a mass-market partner for Mercedes, an approach it tried (and failed at) with Chrysler? Only time will tell.

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Read/Post Comments (5) | Recommend This Article (3)

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  • Report this Comment On May 23, 2013, at 6:03 AM, rick99rick wrote:

    Ohhh blah blah blah duh! Wow its this and its that and this technical reason and that technical reason....

    Hello McFly!!! Look at the cars! They look dated, plain, and some downright ugly. The new look in this post LOOKS like a CHRYSLER!!!

    The reason the shine is OFF the BENZ is that there is NO SHINE!

    As someone who went out recently and spent $60k on a new lux vehicle, in my opinion there were only two to choose from that were fresh and innovative and provided a luxurious look and feel...AUDI and BMW.

    I didnt even need to go into the Benz showroom, I see their dated looking cars going past me all the time and I am NOT impressed.

    Sometimes the answer is staring RIGHT AT US!

  • Report this Comment On May 23, 2013, at 6:17 AM, KHDB wrote:

    The answer is: yesssssssssssssssssssssss

    MB management should know that in today super competetive auto market, there are key factors:

    Automakers must deploy the best designer in the world, not the best CEO, etc. MB's designs always compromising attrcative design againsy the brand' logo (famous MB star)! They just want to keep this star (as big as possible) and lower the Cd (as much as possible) while ignoring the design! They also know they need a cheif designer like Chris Bangle, but Mr. Bangle knows very well what to design, even if CEOs are not happy with (all today successful cars in the market are somehow inspiring from what Chris Bangles did in BMW). Even Korean knows better what they need for this market! (refers to cheif designer of KIA and Hyundai)

  • Report this Comment On May 23, 2013, at 7:47 AM, TMFMarlowe wrote:

    Good comments, folks. Thanks for stopping by.

    @rick99rick, I'm thinking that the upcoming new Cadillac CTS might make 3 to choose from in that $60k space. What do you think?

    John Rosevear

  • Report this Comment On May 23, 2013, at 8:37 AM, Dutchman61 wrote:

    Why is it so hard to understand? Daimler Benz is an old company that has staggered around for years. The takeover of Chrysler was an attempt to fix the cultural issues on one hand, but mostly it was a grab for cash. Daimler was nearly bankrupt, a fact that German law concealed very well. Chrysler on the other hand had nearly $9 billion in cash on hand and massive cash flow. After the merger, Daimler quietly diverted virtually all of the cash and profits to Germany and shut down most of the product work at Chrysler. They ordered buy low bid and then cut the price 10% so the parts suppliers quality disappeared. They then literally gave the remaining husk away to the firm that had to bankrupt the company.

    And as far as engineering goes, most people think MB engineering is top notch, yet in 1986, Daimler was forced to go hat in hand to GM and beg for help to redesign their electrical systems from scratch since the best they could do was circa 1955. GM's Packard Electric division actually set up separate shell companies in europe to hide the work. GM employees had to sign agreements to conceal it. To this day, the former Packard Electric organization still designs and build Mecedes electronics. A similar effort occurred for transmissions.

    Time is catching up with Daimler. There is in fact no where left to hide. The real question is can they adapt to survive or will they fade away like Volvo and others.

  • Report this Comment On May 23, 2013, at 3:43 PM, rick99rick wrote:

    Let's face it, we buy cars that reflect our personalities. I don't know much about the technology or improvements in the Cadillac line, but to me the new ones look like something out of an Arnold Schwarzenegger SiFi movie...ie "edgy"

    Aside from that, the way they are marketed it just doesn't come across to me as a car of "class" and distinction, so I dont see BMW Audi or even Mercedes customers migrating towards the Cadilac......kind of like a Corvette....I owned one when I was a teen, but as an professional adult I wouldn't give it a second look vs a Porsche or Maserati.

    Then there is the issue of respect. I have little respect for N. American autos given the scre**** they gave us for years with their inferior service and quality. I switched over a long time ago and cant see any reason to go back.

    But in the end as I said, the auto has always been a reflection of the buyer, and that takes a long time to change.

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