Gloomy Outlook Daimler's False Dawn

Daimler announced record results this week, yet there was little celebration at its Stuttgart HQ. The automaker's outlook is clouded by the slow development of new technology, falling truck sales and the policies of Donald Trump.
Daimler CEO Dieter Zetsche has a lot on his mind.

At first glance, things appear to be going well for Daimler chief executive Dieter Zetsche. His firm sold more cars in 2016 than ever before - nearly 2.2 million. As a result, the group has never made more money, hauling in about €8.7 billion, or $9.4 billion.

And 2017 promises more of the same: Daimler's Mercedes Benz unit reported sales growth of 18.3 percent in January.

But despite all this, Mr. Zetsche looked a bit miffed in Stuttgart on Thursday as he announced the firm's fourth quarter results. After a number of record-breaking years, he gave only a cautious outlook for the current fiscal year, expecting only a slight increase in sales and revenues.

And although Mr. Zetsche was positive about overall performance, he remained tight-lipped on certain topics. He chose to ignore, for example, the policies of Donald Trump, Brexit and a possible end of free trade. "If marginal conditions change, one has to be prepared," was all he said, avoiding any clear commitment to open markets, free movement or democratic values.

The nervousness among Daimler's management is palpable: The Stuttgart-based company has a lot to lose in the United States. Every seventh Mercedes is sold in the U.S., and North America is Daimler's truck division's most important market.

But unlike rival BMW, which the new U.S. president recently threatened with punitive tariffs, Daimler has so far managed to fly under the Trump administration's radar. This is despite the fact that Mercedes Benz wants to use Mexico as a cheap manufacturing base.

Daimler must pull away from its old business model, which is based solely on combustion engines.

Specifically, Mercedes' compact cars are scheduled to be built in cooperation with Nissan in the town of Aguascalientes in the coming year. But the threat of Mr. Trump's punitive tariffs on products from Mexico could significantly harm the project. And things could get worse: If tariffs between the U.S. and Europe are raised, Daimler is likely to be one of the biggest losers.

Mercedes produces 90 percent of the cars sold in the U.S. in Mexico, according to calculations by the bank NordLB. But the most profitable sedans, the luxury S- and E-Class, are produced exclusively in Germany and exported to the United States, generating just 2.5 per cent import tax. Nothing would dampen Daimler’s spirits more than an end of free trade.

In 2016, the truck business experienced a small taste of what could come. In May, the division cut its outlook, with sales in the U.S., Brazil and Southeast Asia far below expectations. Daimler sold about 17 percent fewer trucks than in the previous year. This put the company's return under pressure: Instead of the targeted 8 percent, it was 5.9 percent.

Meanwhile division head Wolfgang Bernhard increased the savings target for 2017 and 2018 by €400 million to €1.4 billion. Now the truck unit can't rule out job cuts. Mr. Bernhard doesn't see much scope for improvement in 2017.

The carmakers at the Mercedes unit are far removed from this kind of gloom. SUVs and last year's introduction of a new E-Class model boosted sales by 10 percent. For the first time in more than ten years, Mercedes sold more cars than arch-rival BMW on a brand basis — which was deeply satisfying for Daimler.

It remains to be seen how sustainable this success can be. Mercedes has now completed its major new model offensive, while BMW is set to present its new 5 Series. Experts expect a close race in 2017.

But it's about much more than numbers. Daimler must pull away from its old business model, which is based solely on combustion engines.

Mercedes has not been directly implicated in the diesel emissions scandal swamping Volkswagen, but due to a class action suit of car owners, the U.S. Justice Department has asked Mercedes for clarification. When it comes to climate protection, Daimler is under pressure: Every third Mercedes sold is now a SUV with a powerful, gas-guzzling engine.

This puts Mercedes in a quandary: while Gasoline engines emit too much carbon dioxide, diesel engines are under fire for releasing nitrogen oxides.

Daimler is beginning to realize it must change. "We're flipping the switch," Mr. Zetsche said from the stage on Thursday. "In the best year so far in our history, we have also launched our biggest transformation." Daimler wants electric cars, autonomous driving, networking and services to significantly shape the group in the coming years.

In a bid to become the largest maker of luxury electric cars, Mercedes wants to begin production of ten electric models under the label "EQ" by 2025. This will cost a lot of money – €10 billion, according to the firm. However, because Daimler expects that in 2030 the majority of cars on the road will still be fitted with combustion engines, it wants to invest an additional €3 billion in the development of conventional cars.

Indeed, the company's financial burden is constantly increasing. Capital expenditures will go up in the current year by €1.2 billion to €7.1 billion, and the development budget will increase from €7.6 billion in 2017 to €8.1 billion in 2018.

Accordingly, success will be a balancing act. While the production and sale of conventionally powered cars is easily calculated, Daimler and other carmakers are entering new territory with electric cars. And as Daimler's financial arm bankrolls half of its sales, the company controls its own fate when it comes to opportunities and risks of sales prices, lease payments and residual values.

 

Markus Fasse covers aviation and automobile industry news for Handelsblatt. To contact the author: [email protected]