With Mercedes-Benz Going Electrified, How Does the Company Avoid Tanking?

Everyone’s doing it. It’s as popular as the fidget spinner and Pokémon Go crazes all those years months ago. In a rush to signal their environmental bonafides and display their dedication to the Next Big Thing, luxury automakers are tripping over themselves in an effort to promise an all-electrified model lineup as soon as technology and finances allow.

This time, it’s Mercedes-Benz. The world’s oldest car brand doesn’t want its rivals cashing in once governments around the globe start turning off the fossil fuel taps. So, earlier this week, Daimler CEO Dieter Zetsche stepped up and made a promise we’ve heard ad nauseum as of late: every model in the brand’s lineup will soon sport some form of electric propulsion, be it a hybrid setup or full-on battery electric powertrain.

For Mercedes-Benz, this means 50 hybrid or EV models, including at its irrelevant-to-Americans Smart brand. The move isn’t without a steep cost, however — Daimler is bracing for a slashing of vehicle profit margins. In some cases, the green collected from green cars could be half that of a gasoline Benz. What to do?

“In the beginning of the cycle we believe that we will have to face a significantly lower margin,” said Frank Lindenberg, vice president of finance and controlling at Mercedes-Benz Cars, in an investor meeting this week. He added, “We are still aiming for a 10 percent return on sales, but have to be prepared for a kind of transition, with a corridor of 8 to 10 percent.”

First off, the company must find savings to offset the hit. The automaker’s Fit for Leadership 4.0 streamlining plan targets $4.8 billion in savings by 2025, which Mercedes-Benz’s parent feels should compensate for the lost profitability. It should also make up for increased investment in production and R& D.

Expenditures on plant investment and R&D at Daimler’s car division (which earns the bulk of the company’s revenue) rose from $4.28 billion and $5.59 billion, respectively, in 2015 to $4.97 billion and $6.78 billion last year. The forecast for 2017? $6.18 billion and $7.25 billion. Expenses at Daimler’s other commercial divisions are predicted to stay flat, or just barely budge. Moving past this year, the company plans to find nearly $1.2 billion in savings in R&D, a similar amount in fixed costs, and the rest in product costs.

Part of the automaker’s plan, Reuters reports, has to do with production. With the brand’s first fully electric vehicle, the EQC utility vehicle (based on last year’s Concept EQ and scheduled to start production in 2019), Mercedes-Benz can’t simply dive into EVs on a hope and a prayer. In an investor call this week, the company used the electric SUV as an example.

Sharing a platform with the dino juice-powered GLC, the EQC will also share its assembly plant. Daimler implies production will start out slow, ramping up if and when consumers demand more. If the electric SUV turns out to be an instant hit, well, the company’s profit hit arrives sooner than planned.

By 2025, EV profitability should be on par with conventional cars, Daimler claims.

Going by last year’s sales figures, Mercedes-Benz’s largest growth markets are Europe and China, both of which are keen on legislating away gasoline and diesel. It makes sense for Daimler to pursue a cautious electrification plan. Still, European suppliers who have long depended on Daimler for their livelihoods aren’t too happy about any of this.

Surely there’s other ways of being nice to the planet (while keeping jobs away from China), they’ve implored.

“We need to provide a sensible transition period that doesn’t give unwanted gifts to our Chinese friends,” said Roberto Vavassori, president of the European Association of Automotive Suppliers, after Daimler’s announcement. The organization doesn’t want to see massive quantities of batteries sourced predominantly from Asian nations. Vavassori estimates automakers would send $5,000 to $8,000 to China for every electric car produced in Europe — revenue diverted from European businesses.

Suppliers make up 5 million of the roughly 12.6 million auto industry-related jobs in the European Union.

[Image: Daimler AG]