Will your franchise win in the NEV wars? Part 3: Daimler

This entry is part 3 of 9 in the series New Energy Vehicles

This post is the third of a series reviewing the financial resilience of seven major auto makers and their ability to make profits during the transition from conventional to electric vehicles. The auto-makers reviewed are Daimler, BMW, Volkswagen, PSA, Ford, General Motors and Toyota. The first post asked where they might get the money to fund the transition to new energy vehicles (NEV’s). The second gave the financial results for each firm under three scenarios based on the speed of adoption of NEV’s: SLOW, MODERATE an FAST. The rest of the posts look at the outlook for each firm individually taking into account its publicly stated strategy for the transition. This post assesses Daimler.

Click on images or tables to enlarge.


Daimler EQ brand concept

Daimler took overall #1 place in the Financial Forecast, ranking most profitable on all three scenarios. Two factors drove its success: Low operating leverage and high gross and operating profit margins. Its  lower operating leverage (1.96 times in 2018 and averaging  2.0 times over the forecast period) helps it when volumes drop, while its high operating profit margin supports it when volumes rise. It works like this: in the SLOW scenario registrations are expected to fall most as the auto-maker progressively offers vehicles less suited to large segments of the global market. In addition there are no reductions in Sales G&A expense, as dealers are retained instead of switching to direct sales. So, in the case of the Daimler forecast, a 1% drop in sales leads to a 2% fall in operating profit (1%  x 2 Times) during the forecast period. All other firms have higher operating leverages so suffer even greater


losses in the SLOW Scenario. As a result, Daimler achieves the best profits in those difficult conditions. In the MODERATE and FAST scenarios Daimler’s profits grow more slowly than its rivals, again due to its operating leverage, but it starts from the highest average Gross and Operating Profit margins which helps it to maintain first rank in both these scenarios as well.

Daimler ranks #3 in Financial Resilience, behind PSA, which undervalues its absolute depth of resources. Its market capitalization is more than double that of PSA and its equity is more than treble. Daimler generates four times the level of annual operating profit. However, it is investing these funds at high speed in new models which is the primary reason it is ranked below PSA. Its capex level, running at around €8BN a year, reduces its net profitability. Could Daimler find the funds to generate their transition to NEV’? It could..but it shouldn’t need to. It has invested €27BN in R&D in the last 5 years from a total CapEx of €39BN. Daimler appear to have already selected the FAST scenario.


Opening of Daimler Giga-Factory at Kamenz, Saxony, 2017

But Will Daimler’s NEV Strategy Work?

Daimler’s technical capability and commitment to NEV’s has only become clear recently. In 2009, under the leadership of Dr. Dieter Zetsche, Daimler AG invested $50MN to acquire almost 9% of Elon Musk’s Tesla Motors. Keep in mind that, at that time, the break-up of Daimler-Chrysler was barely complete, sales growth was stalled due to the financial crisis, and Tesla was on the brink of collapse. It unloaded 40% of its Tesla stake to the Abu Dhabi state-owned investment company by 2010. In 2014 Daimler sold it’s remaining stake and pocketed $780MN before costs and expenses. Hindsight is a wonderful skill. If Daimler had kept it, its stake would have been valued at $5BN by January 2020. A Daimler spokesman said in 2014, “Our strategic partnership is an important step to accelerate the commercialization of electric drives globally”, so why did it relinquish its holding? Given the sales results of their NEV product line-up to 2018, observers might conclude that Daimler made a bad bet when it backed Plug-in Hybrid over Battery Electric technology in 2014. Daimler only sold 53,000 units of both drive types between 2012 and 2017, around 60% PHEV – see the Table. However, with its German and China Giga-Factory investments unveiled in 2017, the announcement of an $11.8BN commitment to fully electric vehicles in the same year, signalling the end of further development on new combustion engines in 2019, making a $60MN investment in StoreDot’s fast charging technology and the launch of their own EQ brand (rather than Chery Auto’s eQ  brand) it appears that Daimler’s top management has finally agreed that fully-electric is to be their way forward. That may be one reason why Ola Källenius emerged as the new CEO – he headed up Group Research and Mercedes-Benz Cars Development before he moved into the top job.

Can Daimler Win The NEV Wars?

Daimler’s EVA Platform

By looking at their investments it’s emerging that OEM’s believe four factors are critical to success in NEV’s: First, the senior management must be committed and aligned with the strategy. Second, they need the money to fund the technology and the transition. Third, the OEM requires control of battery and fuel cell production and technology. Otherwise, much of the potential profit is in the hands of the cell or battery supplier.  Finally, a dedicated NEV platform is required. It costs more but, without it, the vehicles produced are, at best,  an acceptable compromise. For a manufacturer aiming at the mass-market, two additional factors are critical: the know-how to build low cost vehicles and access to a volume NEV market.

Daimler have already signalled their intention to follow the FAST adoption route for NEV’s. As mentioned above, they have already committed to their own battery production, a dedicated NEV platform and management are aligned. Given that, can Daimler fund the transition through cash flow or borrowings? The forecast suggests that it can and that, ultimately, the FAST adoption route is their most profitable choice. In that scenario they lose volume from 2020 – 2025 but recoup much of it afterwards. Their Sales G&A costs fall quickly, as they switch to direct sales. These savings offset the extra R&D and Depreciation expenses. Their sales results suggest that they maintain steady appeal. Revenue and Unit Volumes grew by over 7 and 8%, respectively over the 2013 – 2018 period, 4 times faster than

DAIMLER FAST Scenario Cost Changes 2020 – 2045

the surveyed OEM’s average and faster than the global market, so global market share has consistently increased. Free Cash Flow has been negative for over a decade, as they’ve invested heavily in new products and technology, but low debt and high margins means they can pay their interest charges more than 10 times over. Part of that has been at the expense of working capital management – trade debtors were at an all-time high in 2018.  While shareholders might not be willing to pump in more money, they have earned under 5% pa in 10 out of the last eleven years, Daimler still has significant headroom for further borrowing. Should an investor be worried about a take-over bid? Not if they bought shares in 2014 or earlier: the assets backing the shares are higher than the share price if you bought back then and the share price has already jumped 273% between 2008 and 2018. Of course, if I was a dealer, I might have a different take on things. In terms of long-term product acceptance, a lot will depend on how well their Electric Vehicle Architecture (EVA) platform works out. This is the EV-only modular platform for sedans and SUV’s built especially to house Daimler’s own EV components and batteries. Keep your eyes on results for the Denza 500EV in China. That is one of their test-bed projects.





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