- A look into the past
- Finance in focus
- Innovation: EQXX concept as a glimmer of hope?
- Quality of Mercedes-Benz vehicles
- Autonomous driving – the current state of affairs
- Vehicle approvals
- investors of the group
- Growth: Outlook into the future
- What the future will bring – my opinion
Mercedes-Benz vehicles are the expression of ultimate luxury in the premium segment, but at the same time it is also one of two companies in Germany that I have serious concerns about either losing their independence or even risking bankruptcy. Such an opinion might sound false and unrealistic to most considering the tremendous positive earnings growth the company has been seeing lately, but it is a conclusion based on facts and figures. In this article, I explain why I believe Daimler is in trouble and that a continued downsizing, consolidation, or silent takeover by Chinese investors could happen faster than most expect.
A look into the past
Like all car manufacturers worldwide, without exception, Daimler initially did not believe in battery-powered electric vehicles and made many strategic mistakes that they still suffer from. But unlike all other manufacturers, Daimler invested in Tesla early, ordering an electric powertrain for the B-Class that saved the Californian company from early bankruptcy. Without Daimler, Tesla would probably not exist today. Despite the success, the Tesla project was not taken seriously internally because there was more profit to be made with combustion engines and as a finance and shareholder-driven company it was decided to exit and continue to sell the combustion engine rather than the electric car B-class.
The request for Tesla in the early days to develop a powertrain for the B-Class was a demand that Daimler mistakenly believed Tesla would not be able to meet, which it was. Tesla provided the powertrain, but Daimler abandoned the project when they realized they would make more profit from selling ICEs. When managers of well-established automakers with “gas in their veins” decide on the future of an electric car project, the outcome is unsurprisingly negative. A dilemma that is repeated with every technological upheaval and from which nobody seems to learn.
Not only did Daimler end a valuable partnership that gave them invaluable technological insights to capitalize on, they also sold their 9.1% stake in Tesla, which they had acquired in 2014 for €50 million. A share that is worth around 100 billion euros today – much more than the entire Daimler company. For the remaining 4% Tesla shares, Daimler received 600 million euros in 2014, which 7 years later is worth 71 times the amount received. I called Daimler‘s sale of Tesla stock to my friends that day the stupidest decision Daimler has ever made, and this incident contributed to my buying my first Tesla stock a few months later.
Daimler CEO Zetsche did not believe in battery technology and cell production, stating in 2014: “Cell production is a matter of size. It is unlikely that this will happen on a large scale in Germany.Years later he left the group and was not given the usual position as chairman of the supervisory board. The reason for this was the diesel scandal, but also the many strategic mistakes that caused the company to fall behind in a difficult environment with electric cars. One of these mistakes was cell production, which Daimler initially rejected and is now resuming.
Like most automakers, Daimler decided not to choose and develop all technologies in parallel, instead of learning from Tesla’s experience and success and focusing entirely on the electric car business. The result is a company that’s shrinking but still investing in hybrid, hydrogen, and battery-electric vehicles, and when that wasn’t enough, in internal combustion engine technology. The valuable resources are now divided between four different drive technologies. This decision later led to mediocre electric cars such as the EQC model, which disappointed customers with low efficiency and corresponding sales figures, or the Denza X sold in China, a model of which only about 4.000 units were ever sold. Since the Chinese BYD-Denza joint venture was unsuccessful, Daimler recently reduced its stake from 50% to 10% and is likely to pull out altogether in the future.
Finance in focus
Profitability and cash flow are key components to keeping a business independent. In view of declining combustion engine sales and a high cost structure, Daimler decided on a new finance-driven CEO with, in my view, limited understanding of technology. New CEO Ola Kallenius launched a cost-cutting program and a new strategy in 2020 to shrink the company profitably. An approach that makes sense, because with around 2.5 million vehicles sold per year and without a clear decision on a transformation program towards electric cars, the company is too small in all segments in which it sells vehicles to generate reasonable profits and the to generate the necessary cash flow. Up to 400.€000 was therefore paid to employees who left Daimler at a time when Tesla was just beginning to look for managers for its new gigafactory in Brandenburg, and quite a few took the money from Daimler and began the switch from a backwards, combustion engine with Tesla -oriented, undecided company to become the undisputed world market leader for pure electric cars with a nice bonus in the bag.
With an incredibly high debt structure compared to market cap, refinancing the OPEX and CAPEX investments in batteries, software and new production technologies as sales shrink is a major challenge. This challenge not only led to the downsizing of employees, but also to the IPO of Daimler Trucks as an independent entity, while Mercedes-Benz remains as a car and van business. What many do not know is that Daimler was split not just in two, but in three parts, with Daimler Mobility, a unit that does not make many headlines, now being split in two again. All these measures have only one goal, to keep the cash flow high and to reduce the cost structure, thereby increasing the profit per vehicle and thus also the bonuses of the top managers.
The pandemic years of 2020 and 2021 saw supply chain disruptions, but nonetheless they were the best years for Daimler‘s bottom line for a number of reasons. First, the semiconductor scarcity and limited supply allowed it to allocate to high-margin, premium vehicles, which has been done extensively. Secondly, price increases were easily accepted by customers who had been waiting for their vehicles for a long time, which also helped to increase profits. And finally, due to periodic and prolonged shift and plant closures, Daimler received state subsidies for short-time work, which reduced the high wage costs for unused workers to almost zero and enabled unprecedented cost flexibility in a difficult environment. Although it is in the government’s interest to keep workers employed, taxpayers’ money ended up being invested in high corporate profits and shareholder dividends. All these three factors together with the low capital interest rates lead to the highest profit per vehicle that Daimler has ever achieved, although they are actually not a sign of strength, but of weakness, because none of them will persist for a long time, and once they are disappeared, the required reorganizations were not made, and there are lower profits or even losses likely.
Despite Daimler‘s declining sales figures, quarterly profits are high and the dividend is increased, which makes shareholders happy and the share price rises. These are fantastic years for all the top executives in the auto industry like CEO Kallenius, who get big bonuses when they make big profits, but they’re just fantastic for anyone who loves to appear as short-term shining stars without the long-term business success into account. After each of those three factors is gone, declining NGV sales will continue to shrink, and it all depends on how quickly EV models can compensate, if at all. This also applies to electric car models such as the EQC, EQA and EQS, which cannot yet successfully compensate for the combustion engine A, C and S classes, while their profits are lower anyway. The EQS has so far been the only model that hasn’t met with heavy criticism from its customers, but as a premium luxury model it will only attract a very small group of buyers anyway and on its own will not guarantee the company’s financial future. For comparison, if Tesla’s Model S and Model X were the only models, how big would the US automaker really be today??
What has looked like a sales and profit victory for Daimler in recent years could turn out to be a Phyrus victory for which the company will pay a heavy price. The marketing efforts of Daimler, which claim the technology leadership in electric cars and autonomous vehicles, are high, but if we take a closer look at the technology, they are not based on innovations or even existing solutions, but on a vision of the future and unfortunately also for technical ignorant people with misleading statements. If Daimler offered the innovations they claim to have, EV registrations would grow faster than the market, but that’s not the case when we compare volume of new EV models to additional sales.
Innovation: EQXX concept as a glimmer of hope?
Daimler has introduced the innovative EQXX concept with a stunning design and groundbreaking technical specifications, including a range of 1.000 km on one battery charge, but few have analyzed the presented technology more deeply and critically. Audiences are naturally and quickly wowed by well-crafted marketing presentations that use lots of buzzwords and get the impression that the company is ahead of both Tesla and any other electric car maker, but past experience has shown us that there’s a big difference between announcements of the German manufacturers and the delivered electric vehicles. If we take a closer look at the technical data described, we see a summary of efficiency measures that many car manufacturers have either already implemented or are planning to implement. Each of the technologies Daimler describes as groundbreaking is a collection of what other electric car manufacturers have been doing or are already developing for years, but none is unique or even new. Putting them all together in a concept car might be considered novel, but prototyping is easy to make and cost-effective to mass produce is bloody difficult.
In the small print of the Mercedes-Benz press release, which is not usually read because you need a strong magnifying glass to read it, it is pointed out that the 1st.000 km range of the EQXX is the result of a digital simulation, i.e. a computer simulation. Daimler rightly calls the range in the footnotes an assumption and in an interview Daimler managers deliberately did not confirm the range and even questioned its usefulness.
Indeed, in a computer simulation everything really works if you just define the conditions correctly, but a simulation is not and never will be the world we live and drive in. And if it were, all the stunning promises Daimler and other automakers have made in the past would all have come true. Is that you? Realistically, the EQXX is an exciting concept and vision and nothing more, while a rebuilt and real Tesla Model S covered the amazing distance of 1.Traveled 210 km on one battery charge and that was not a simulation.
Daimler‘s claims of shortening the vehicle development cycle also have yet to be proven, as this would require an entirely new internal organization as well as a restructuring of suppliers, which we have not heard of but would have done had it been implemented. The challenges of changing an internal and external organization to shorten development cycles are daunting and cannot be implemented without great difficulty, while new start-ups have the opportunity to F&Make e-departments and supply chains much easier to design from a blank sheet of paper. If it were as easy as the company makes it out to be, all established automakers would have developed a new electric car model within 3 years, but that is not the case.
Quality of Mercedes-Benz vehicles
Instead of a faster development cycle, Daimler had 16 recalls with defective vehicles in the last 2 months, millions of which had to be returned to the workshops. The crankshaft can fail, the entire engine, fire hazard, problems with the diesel particle filter, problems with the steering and last but not least airbag safety problems made these measures necessary. Given all of these quality issues, which are more likely to have a systemic root cause, shortening the development cycle and adding new technology and complexity will not solve the problems, it will only increase them.
In conclusion, it must be said that the EQXX vehicle seems to contain many exciting technologies new to Daimler, with increasing complexity and many innovative elements that can hardly be mass-produced, which is why the challenges and price of this vehicle will be very high. Furthermore, Mercedes has announced that the entire powertrain for the new MMA and MB.To build EA electrical architectures themselves from 2024, a technology that was previously completely outsourced to suppliers such as ZF. All the know-how for this has to be built up internally first, but with a development cycle of 7 years it is hard to imagine that the company would suddenly be able to deliver the new, self-developed powertrain in less than 2 years, despite these additional challenges.
In summary, Daimler presented a concept or vision for a vehicle that does not currently exist, and if it did, it would not be affordable due to its price and niche even for those who can afford it, and that everything for a range that the average driver never drives without a stop anyway. As much as I would like to believe that Daimler created something outstanding with the EQXX, if they had even half of the technology presented available today, their vehicles would be superior to a Tesla and the registration data would reflect that. Instead, however, we see a manufacturer who will only have 4 in 2021.1% pure electric cars despite declining total sales and, like Audi and BMW, is almost the size of a Nio or XPeng.
Autonomous driving – the current state of affairs
The same goes for the Level 3 autonomous technology that Mercedes has unveiled on the high-priced S-Class and EQS. This is essentially a lane keeping and cruise control assistant that can be used up to a speed of 60 km/h on the motorway, with the speed limit only allowing use in traffic jams or in stop-and-go traffic. While many believe calling a system Level 3 is unique and that Mercedes-Benz is offering the first autonomous vehicle ahead of Tesla, Mobileye and Waymo, what most don’t realize is that it’s just the liability assumed by the automaker and it does not represent a technological innovation. Daimler has introduced a driving assistant that many automakers have been using for many years, but they call it Level 2 to keep the driver responsible for the time being. Declaring a change in liability as autonomous driving is more evidence of a desperate attempt to keep the media talking about the topic than of real innovations.
In view of this, Daimler and Mercedes-Benz have presented neither an innovation nor a first autonomous function, only taking liability in a traffic jam and nothing more. Frankly speaking, a level 3 driver assistance system on a motorway is a technologically easy task to solve, since the lane markings are usually very good and the environmental conditions are precisely defined, without, for example, pedestrians and cyclists or other unexpected situations or traffic conditions appearing in traffic jams.
Anyone who is now claiming that you can take your hands off the wheel and your eyes off the road with a Daimler S-Class Level 3 system should be told that it might be a bit more convenient, but other systems also allow this. After users have experienced for months and years how perfectly their Level 2 system works under the conditions described, many things are done every day in these vehicles that exclude liability. It is a myth to believe that the users of the level 2 system do not make much others and their eyes have all the time on the street and hands on the steering wheel.
The Level 3 system, which is marketed as an “autonomous Mercedes system”, is in no way unique, apart from its liability status and is not really remarkable in the narrow scope of application. The SAE stages 1-5 do not define technological maturity or ability, but solely liability. A Level 2 system can therefore quite level 4 skills The manufacturer may be attributable to staying at the Level 2 definition and the FSD beta system from Tesla in the USA of CA. 11,000 users have been used for many months without an accident, its success shows.
In summary, the marketing department of Daimler likes to set up the statement of being a technology leader. But if Daimler is the technology leader they claim to be, why are global sales shrinking by -5% in 2021 and almost -25% in the fourth quarter yoy?! A breathtaking 1 of 4 vehicles sold and that after a weak sales year 2020? A devastating result that neither creates the necessary cash flow to keep the operative business running nor enables the announced enormous investments. Daimler‘s electric car sales are at 99.301 units in 2021 if we include cars, vans and smart vehicles, which is a big step forward, but that still puts the iconic brand on par with start-ups like Nio or XPeng, which until now have only produced their electric cars in China sell, a market where Mercedes-Benz has shrunk by 2% while Nio and XPeng have grown by 100%. Overall Mercedes-Benz sales are shrinking faster than EV growth can compensate, and unless this vicious cycle is broken, the company faces restructuring, layoffs, and underperforming financial results and share prices for many years to come.
Supply chain issues and component shortages may explain some of the decline in sales, but after two years component and system problems remain for all, but not all are suffering as severely. In 2020 it said the troubles would end in the second half of 2021, and today the timeline is pushed back to the second half of the year or 2023. If all the problems are related only to the supply chain, then why do sales figures remain at low levels even after newly developed models are launched? Supply chain issues are a welcome explanation for incumbent automakers, but the claim that they have high demand isn’t supported by registration data or customer surveys. The problems in the supply chain are a result of the disrupted logistics and production due to the corona pandemic, but as long as the pandemic is ongoing, why should the problems in the supply chain suddenly disappear?
Realistically, the challenges in the supply chain will remain for a long time to come, but more importantly, with each passing month, consumers are becoming less interested in ICE and more interested in pure electric cars, while more and smaller competitors have attractive models to choose from to have. In such a market, if you sell internal combustion engines, which are becoming less and less in demand, and electric cars at a lower sales rate than necessary, the company is shrinking, and that’s exactly what Daimler‘s sales figures for 2021 reflect.
investors of the group
The strength of a company can be read on its shareholder structure, and in the course of the IPO of Daimler Trucks, it became known that nearly 20 percent and thus significantly more than previously known and expects to be in the hands of two Chinese companies. The Beijing Automotive Group (BAIC) announced that it has held a total of 9.98 percent of Daimler shares since 2019. The founder of the Chinese automotive group Geely, Li Shufu, holds a further 9.7 percent. If you add Kuwait’s share of 6.8 percent, the group holds 26.5 percent of Daimler.
In addition, Mercedes is quietly shifting production further from Germany to China and shutting down an entire factory in Brazil without replacement to cut costs. With the Chinese market being crucial due to its size, with 20 percent of the company already owned by Chinese investors, and with production increasingly moving to China, we have reason to worry that the German automaker will lose its capability over time to make independent decisions.
Daimler is the ultimate mass luxury brand and as such has always been well represented in Asia, but the largest and most important sales region for the Stuttgart-based company is China and a recent survey showed that the majority of consumers prefer a Chinese luxury vehicle to a German brand would buy. This survey alone should make Daimler think very carefully about what they can do to overcome the pre-existing perception that they are no longer the brand that consumers are willing to pay a premium for. So far, neither Daimler nor other German automakers have come anywhere near the level of electric car makers in China, and that’s a big problem.
Daimler has been quietly restructured into three divisions: Daimler Trucks, Mercedes-Benz and Daimler Mobility, leaving the smaller units vulnerable to takeovers. A consolidation in the truck business is underway ahead of the first Tesla long-haul heavy-duty trucks to be delivered to PepsiCo later this month. The shift in the heavy-duty trailer truck business from diesel to electric is imminent, and while it begins in North America, it’s only a matter of time before the Tesla 40-ton, 1.000 km comes to Europe, while so far not a single truck company, including Daimler Truck, has developed a competitive product in the heavy-duty segment. As Daimler invests in hydrogen and hybrid trucks, the cost per kilometer for a fully-fledged electric car truck will be significantly lower, making it highly attractive to trucking companies.
Although the EQS is a good luxury electric car, Daimler will only make money if the EQA, the EQB and the other new mass-market models become a big hit, but that’s not foreseeable at the moment. In terms of software, the company plans to develop its own operating system, battery technology, and autonomous vehicles while continuing to produce four different powertrains. All of this eats up a lot of capital and resources while sales figures continue to shrink and a very similar trend is emerging in the truck sector.
Growth: Outlook into the future
Since sales peaked in 2019, Daimler has around 380 in total.000 gas sales lost, but only 80.000 additional pure electric cars of six different models sold, resulting in a net loss of 300.000 vehicles. With an average heel of 13.300 units per electric car model in the same period, they are well below the average. With a total of 99.301 electric cars sold with more than 6 models in 2021, the cost per model is higher than the cost of competitors. The EVs sold by Mercedes-Benz passenger cars and vans in 2021 represent only 4.1% of all vehicles sold, which, despite the introduction of numerous new models, means only a small improvement in the EV share compared to all vehicles sold in previous years.
In the last two years, Daimler has increased its annual electric car sales in 2021 by 80.901 additional electric cars, Tesla by 568.672 – and all this despite doubters constantly claiming that the incumbent automakers have a production advantage and high demand. The gap between the two automakers in annual EV deliveries isn’t narrowing — it’s widening. In this year or at the latest in 2023, Tesla will be larger in vehicle sales than Mercedes-Benz with all vehicles and in sales and profits anyway. All of this taken together shows that there hasn’t been any real improvement over the past three years, and it’s hard to see how the company, without an existing best-seller, expects to transition from its ICE business to electric cars in any reasonable timeframe.
What the future will bring – my opinion
My prediction about the future of Daimler, the Mercedes-Benz Group and Daimler Trucks is based on the information and data currently available, but it could also be completely wrong. The only justification for daring to make a prediction at all is the fact that the predictions I have dared to publish for about 4 years have later turned out to be largely to completely correct.
There is a high probability that Chinese investors will increase their stake in the company and determine the future of the 120-year-old company. In the future, Daimler could be a brand owned by Chinese investors, a car with mainly Chinese-made technology inside, and the remaining German contribution is only the luxurious interior design and the Daimler logo.
There is a high probability that without a tangible electric vehicle in the heavy-duty and long-distance segment being developed, Daimler Truck will have to merge or be taken over by a competitor. Now that the company is public, hostile takeovers are more likely, and unless further consolidation takes place, financial distress looms. What does the future hold for a truck maker investing in hydrogen and diesel, while electric car costs per kilometer are several factors lower, maintenance is almost non-existent and autonomous driving features you may need. license can also make the driver of an electric truck superfluous?
The probability that the passenger car business will continue to shrink is high, and the A, B, C and E classes have already lost significant market share. Chinese manufacturers and Tesla will continue to compete fiercely in the mid-range segment, while the small premium vehicle market will remain as the last bastion for customers wanting high-end luxury interiors.
The likelihood that Daimler will depend on external suppliers for batteries, software and solutions for autonomous driving is high and limits the company’s ability to shape its own destiny and generate the required value creation. Future profit is found in software and data and therefore most of the profits will no longer come from Daimler but will be created by the suppliers.
Of all the German automakers I’ve analyzed, Daimler is the one I’m most concerned about surviving the historic shift from internal combustion engines to software-controlled battery-electric vehicles.
The author is aware that the article could polarize and reflects his personal opinion.
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