Auto Industry

Mercedes shifts gear

Daimler plans China breakthrough with more local production

AUTOSHOW-LUXURY/

Give me a bling: Mercedes hopes to grow China market share

National Socialism is not an appropriate topic for car advertising. This was the understandable rebuke from Daimler last month, after a homemade commercial featuring one of its C-Class Mercedes-Benz and a youthful Adolf Hitler went viral online.

The ad, put together by a group of film students, was intended to promote the car’s collision prevention system. But when a boyish Hitler appears playing with a kite, the car actually speeds up. Once it runs the boy down the commercial concludes with: “Detect dangers before they come up.”

(As an aside, Hitler really was knocked over by a car once. As detailed in Craig Brown’s Hello Goodbye Hello, the future Führer was hit by John Scott-Ellis in Munich in 1931 – but the Briton was driving too slowly to injure him. And the car was a Fiat, not a Mercedes.)

Anyway, the ad’s meaning may have been lost on many of Daimler’s prospective customers in China, where the Stuttgart-based firm actually has a much larger problem: how to close the gap on its Germanic rivals, Audi and BMW.

Daimler, owner of the Mercedes brand, reported 206,000 deliveries last year, an increase of less than 4% on 2011. By contrast Audi sold 408,000 cars, a gain of 32%, while BMW sold 314,000 vehicles, up 41%, according to consulting firm LMC Automotive.

Sales actually fell 0.5% over the first half of this year, unimpressive compared with respectable growth for BMW and Audi over the same period. “If we are not more successful in China, then our goal of global position number one will be difficult to achieve,” admits Hubertus Troska, Daimler’s senior executive in the Chinese market. “There is a recognition that we need to improve our performance in China vis-à-vis some of our competitors.”

Hence the accompanying announcement at the Chengdu Auto Show late last month that Daimler aims to boost its China sales by a third to 300,000 units by 2015. Company executives say they’ll do it by offering more models (at least 20 new or upgraded products in the next two years) through a wider distribution network, with 75 new dealerships opening in 35 new cities this year alone.

The other part of the strategy is more local production. Daimler says it will invest $2.67 billion in its joint venture with Beijing Automotive to establish its largest production facility worldwide, including the first Mercedes engine plant outside Germany. The intention is to reconfigure the sales mix of imported and China-made vehicles. About half of Daimler’s sales in China are imports from overseas at the moment (a much greater share than its rivals) and it wants deliveries of made-in-China vehicles to make up two-thirds of the total by 2015.

Daimler is clearly desperate to catch up with its German peers, although some wonder if the move has come too late in the day, following BMW’s chief executive Karsten Engel remark to the Wall Street Journal in June that the days of “breakneck growth” are over in the Chinese market.

Still, McKinsey, the consultancy, says that sales of premium models in China will outperform other types of car for the foreseeable future, increasing 12% a year to 2020 compared with 8% for the market in general.

“Sales in the Chinese market are some of the most resilient worldwide and it’s also where demand is most likely to grow,” agrees GE Anderson, an industry specialist and author of Designated Drivers, an in-depth account of the evolution of China’s automotive sector.

“Of course, the huge question is whether it will be viable for foreign automakers in the longer term, as they are teaching their Chinese competitors how to beat them in the future. But my sense is that Mercedes and Ford were the most cautious of the foreign firms about committing to local production in the past. Short term imperatives mean that they are now jumping in with both feet.”

Foreign automakers were first allowed into China by forming joint ventures with local partners. Although this led to domestic production, they also maintained a lucrative sideline selling imported cars, where they had no need to share returns with their Chinese counterparts. To discourage the practice, the authorities set high tariffs on imports. But in July the Chinese media turned the spotlight on the same sales channel, claiming that Chinese customers are being ripped off. One of the examples was an Audi Q7 costing $163,000 when shipped to China but selling for half as much if bought in Canada. Media said tariffs alone couldn’t explain the price gap.

The carmakers have denied the allegations of price gouging, saying comparisons across different markets are difficult but insisting that duties are largely to blame. “Most of the price differences between some imported models in China and, for example, Germany result from import duties and taxes,” Audi said. “In addition, the entry price vehicles in China are usually higher equipped than the base models in Germany.”

Could Daimler’s move to localise more of its production have been prompted by the hostile coverage? Anderson doesn’t think so, telling WiC that the new strategy would have been devised long before the media campaign began. Instead he cites changes in the market brought about by a need to target a wider range of customers. “Until recently Mercedes has been trying to get away with more of a focus on importing cars, helped by customers at the top-end who don’t seem too bothered about paying the tariffs. But the overall trend is that prices are starting to come down in the luxury market,” Anderson warns. “Without a greater share of local production, Mercedes is at a disadvantage. It won’t be able to compete on price without dropping its margins.”

In fact, sales of imports dropped 10.7% in the first half of this year, reports Xinhua, the first fall in half-year terms since 2006.

Advances in domestic quality are helping too. “The days when Chinese consumers thought Mercedes is Mercedes only when they are made in Germany are long gone,” a company official told Reuters. “If you can deliver German precision and quality in products you produce here, Chinese buyers have no problem at all with them and consider them genuine Mercedes.”

Daimler’s China boss Troska made a similar point.“Customers will never know – nor do they need to worry – where the parts come from,” he said. “Beginning next year we’re actually going to ship [China-made] parts to Germany. They’re waiting for them.”

Even so, Daimler may need to think more about how the Chinese respond to Mercedes as a brand. “In the West we tend to regard Mercedes as the epitome of luxury,” Anderson says. “But in China it is seen as a more conservative car, not as exciting as the BMW and also lacking the same association with leadership or status that has helped the Audi become a top-seller in the premium segment [Audis are still a favourite among senior government officials].”

In fact, McKinsey’s latest research suggests that marketers of other high-end cars will have to look afresh at how they appeal to new customers. Previously, many of the more expensive models were sold to customers who used chauffeurs, for instance, while premium cars today are increasingly self-driven, which changes how their owners appreciate them. Much of the older generation also bought higher-priced cars with a view to showing off. That trend continues (McKinsey’s findings saw 30% of respondents cite “reflection of social status” as a main motivation) but a similar percentage now cites “self-indulgence” as a reason for buying, while other respondents have mentioned “sophisticated functions and innovative designs” or “excellent service” as determinants in their purchase decision.


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