Mercedes-Benz cuts back entry-level cars in bet on luxury

Mercedes-Benz will cut back its entry-level suite of cars as part of a strategic overhaul that will channel more than three-quarters of the carmaker’s investment to its higher-end vehicles.

The company unveiled its plans to major investors on Thursday, placing the drive for greater profitability on its so-called top-end vehicle segment, home to the iconic G-Wagon, the flagship S-Class sedan and the high-performance AMG division. 

“We are further sharpening the focus of our business model and product portfolio to maximise the potential of Mercedes-Benz even in challenging conditions,” CEO Ola Kallenius said.

“At the heart of that is our goal to build the world’s most desirable cars.”

The strategy builds on a trend that pushed profitability to record levels during the semiconductor crunch, but the jury is out on whether it would be as effective if supply constraints ease and carmakers return to chasing market share. While Mercedes sold 10% fewer vehicles in the first quarter compared to a year ago, profit surged 20%.

Mercedes sees top-end vehicle sales increasing by 60% by 2026, a jump that would help push its operating margin to about 14% by mid-decade. But the carmaker acknowledged that headwinds, including raw-material prices, supply-chain bottlenecks and broader economic risks, pose a threat to the targets.

Variants for entry level models such as the A-Class will be cut to four from seven. Mercedes now produces numerous entry level variants, including estate and sports utility vehicle models.

Mercedes will launch its next car operating system on an entry-level compact car and brand them as flagships for affluent, tech-savvy buyers.

“We are not chasing volume,” Mercedes-Benz CFO Harald Wilhelm said on a call with reporters. “This is entry luxury.”

The company is also starting a Mythos brand of collectable vehicles aimed at marketing exclusivity. Mercedes gave a teaser of the first Mythos car — a speedster based on the new Mercedes-AMG SL — and suggested it could become a rival to cars such as Ferrari’s limited-edition Icona series.

The carmaker was expected to unveil a prototype car based on its future electric AMG platform on Thursday. Famous for its roaring V8 engines, the division faces a challenge in convincing performance-car enthusiasts to switch to all-electric models.

“We see great potential here to expand our top-end portfolio with even more fascinating products for our customers,” Kallenius said.

After the successful separation of Mercedes and its sprawling truck division, management is intensifying efforts to transform the inventor of the automobile to compete with Tesla. The company aims to have battery-powered models in all its segments in 2022, a staging post for its ambition to sell only electric cars by 2030. 

While the carmaker is Europe’s most valuable company brand, according to consultancy Interbrand, Tesla boasts a market capitalisation ten times greater than the Stuttgart, Germany-based firm. And Volkswagen’s Porsche sportscar unit would command a valuation of about 95bn euros (roughly R1,588,872,396,050) should a planned share sale go ahead, according to Bloomberg Intelligence. That compares to Mercedes at about 74bn euros (roughly R1,238,059,220,000).

But some analysts warn that the push towards more profitable luxury vehicles may be misguided.

“The high margins of car manufacturers are not sustainable and will fall again significantly when the car market returns to normal,” Nord/LB analyst Frank Schwope said in an email.

Achieving a higher return would help Mercedes finance the expensive shift to electric vehicles and digital car technology. 

But there are risks as global economic forecasts deteriorate, potentially undermining projections by BCG Consultancy that sees growth in the luxury-car segment three times faster than that for normal vehicles.

“The premium carmaker from Stuttgart has a simple plan: make fewer small cars and make more large cars,” said Bernstein analyst Daniel Roeska, who sees a 30% upside to the company’s current share price of about 65 euros. By 2025, the average price for a car may rise to more than 85,000 euros (roughly R1,422,124) from 70,000 euros (roughly R1,171,067) in 2021.

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