Mercedes boss Ola Källenius has used one word remarkably rarely recently: luxury. When the Stuttgart-based group presented its new strategy two years ago, things looked completely different. “Sustainable Luxury” is what cars should be in the future, as Källenius emphasized at every opportunity.
The Swabians want to play in the same league as manufacturers like Porsche. Källenius liked to compare the G-Class off-road vehicle with the “Birkin Bag”, the handbag from Hermès, for which you sometimes have to wait over a year because only a few examples are made, but the demand is enormous.
But doubts are increasing as to whether Mercedes can really be as luxurious as the company would like it to be. The profit margin has been crumbling recently, in the first quarter it was only nine percent, and the outlook for 2024 is only in the lower double-digit range. Real luxury manufacturers such as Porsche or Lamborghini, on the other hand, aim for at least 20 percent. And then Mercedes sold 27 percent fewer vehicles in the first quarter in the top segment, where the S-Class or the Maybach models are located. Profits fell by almost a third to 3.9 billion euros. “We see a market weakness that top-end products could not escape,” explained CFO Harald Wilhelm. But isn’t the definition of luxury that it also works in times of crisis?
“Desire and reality are far apart,” said Ingo Speich, representing Deka Investment, at the general meeting on Wednesday, which only took place virtually. Speich sees an important reason for this in Mercedes’ weakening business in China. So far, the Swabians’ electric models have been particularly poorly received there, and sales figures for the EQS electric sedan in particular have fallen short of expectations. The Chinese still like the combustion engine S-Class, which is why Mercedes has already reduced the prices for the EQS. “Slow sellers and price reductions don’t fit into the luxury segment,” said Deka representative Speich.
In fact, Mercedes has miscalculated in the electric business in China, the most important car market. The Swabians relied on a streamlined design for the EQS, which enabled lower consumption and therefore long ranges. But other things are more important to the Chinese, such as plenty of space in the back seat or game apps on large displays. That’s why Mercedes had to improve its electric luxury sedan. Whether this will help boost demand remains to be seen.
“The competition is getting tougher.”
The other German premium manufacturers are not doing any better at the moment, for different reasons. At Audi, profits fell by more than half in the first quarter and BMW also announced on Wednesday that it earned less money between January and March than in the same period last year. “Competition is getting tougher,” said BMW CFO Walter Mertl. Because car production is running smoothly again after the pandemic and more vehicles are available, prices for new and used cars are falling. At the same time, inflation is particularly affecting wages. In the first quarter, BMW earned almost three billion euros, which is almost a fifth less than a year ago. The profit margin in the car business, which is important for the company, was 8.8 percent, 3.3 percentage points below the previous year’s level.
According to BMW, demand for premium cars is declining, especially in China, but more people around the world want to buy cars in the mid-price segment. A trend that Mercedes has also recently felt – and which calls its luxury strategy into question. The average sales price for a new Mercedes car rose from 51,000 to 74,000 euros from 2019 to 2023 alone. But there are doubts about how far this number can be pushed up.
The Swabians would like to sell even more super-expensive luxury cars that bring a significantly higher return, but customers are currently more interested in the group’s cheaper models. By 2026, the proportion of entry-level A-Class and B-Class models is actually expected to shrink from 30 to 23 percent – in favor of the particularly expensive models. But in 2023, of all things, the cheapest segment grew.
And then there is the forced change in strategy for electric cars. As early as 2030, Mercedes only wanted to sell battery-powered vehicles – or at least be prepared to meet this demand. Although there was always the afterthought “where market conditions allow it”, the Swabians’ electric expectations are now significantly less ambitious than those of the competition. Just half of all Mercedes sales in 2030 are expected to be electric or hybrid cars. Instead, the company is preparing for the combustion engine to play a major role in sales into the 1930s.
Like BMW and Audi, Mercedes also hopes that business will pick up again over the course of the year. New models such as the electric G-Class and the new E-Class should help. In addition, the delivery problems with 48-volt batteries from Bosch, which recently meant that Mercedes was able to build tens of thousands fewer cars, will soon be resolved. However, it will take until 2025 before there are new electric cars in the Mercedes entry-level segment.