Mercedes is stepping on the accelerator pedal in China
The Daimler group which is producing the Mercedes Benz cars has the ambition to become number one in the world within the luxury car segment. China is expected to become a huge growth market.
Last month Mercedes Benz announced that the car producer is heading for obtaining its best quarterly result ever measured by the number of sold cars. In connection with the publication of its financial report, Daimler, which owns Mercedes Benz, is announcing that the car producer is well under way in becoming number one within the luxury car segment in 2020. Senior portfolio manager Asger Lund Nielsen at Danske Capital has followed Daimler for several years, and he expects the car producer to exhibit solid growth rates - particularly in China.
”In 2010 and 2011 Mercedes Benz have sold far more cars in China than expected. Particularly the newly rich Chinese are buying the western brands to show their high status and financial standing. Moreover, the Chinese are buying cars with large engines and a lot of accessories. This is rendering the sale in China more profitable than the sale elsewhere,” says Asger Lund Nielsen, who is a member of the team providing advice for Danske Invest on among others car producers. Daimler is e.g. a part of the Danske Invest Europe Focus portfolio in which the share accounts for 2.18% of the assets.
Local production in China
So far Daimler has had a modest production in China, where only part of the demand has been met. Daimler has now decided to increase its China-based production significantly via a local joint venture partner to ensure that more cars are produced locally as opposed to being imported to China from either the USA or Europe. The new agreement implies that Daimler can keep up with the expected increase in demand, which will be underpinned by an extension of the company’s network of distributors. On the other hand, this also implies that its sales profit to a larger extent is to be shared with the partner.
Another interesting development in China is the potential for obtaining a part of the incipient market for second-hand cars. It still remains to be seen for how long the Chinese will drive in their brand new Mercedes cars before they, once again, sell them and thus will be paving the way for the sale of second-hand cars. However that may be, Daimler has the potential for becoming a player in the market for second-hand cars, explains Asger Lund Nielsen. He is also highlighting the fact that today by and large all Chinese are buying their new Mercedes for cash, but in the future Daimler is hoping to be able to built a financing business in China.
100 million cars in 2020
The total market for cars worldwide is expected to increase from 70 million cars in 2011 to 100 million cars in 2020. China is already the world’s largest market based on the number of cars, and China will continue to be so in 2020. Daimler is estimating that the Chinese luxury car market will increase by an annual rate of 14% up to 2020. The total car market in China amounted to almost 12 million cars in 2012. In 2020 the market is expected to reach 30 million sold cars.
”When Daimler is expecting to regain its top-of-the-list position, this can be explained by the fact that Daimler has taken in hand recent years’ challenges during which period BMW and Audi have outstripped Daimler within areas such as product development and sales growth,” says Asger Lund Nielsen. One example of this is the competitors’ success with the so-called SUV-cars (cars which are combining the power of the pickup with the passenger capacity of the MPV), while Mercedes has been less dominant.
10 new models
“Daimler may surprise on the upside. The company has announced that it intends to launch 10 new models before 2015, and among others within the SUV-segment Daimler is to fill in the gaps. In addition, the company is dividing its business into two production platforms: A front-wheel drive platform and a rear-wheel drive platform. This is opening up for the potential for using the same car parts for more car models thus saving money which should otherwise be spent on developing and streamlining the production," explains Asger Lund Nielsen.
Danske Invest Europe Focus, which among other sub-funds has invested in Daimler, has provided a return of 8.97% for the past three months.
