Wealth goes hand-in-hand with luxury. It is a point that comes through strongly in a Mercedes-Benz slide presentation made public on October 6 while detailing its new strategy drive.
The German carmaker expects the number of wealthy individuals (defined as those with private investable wealth of over $250,000 / Rs 1.85 crore) on the planet to nearly double to 95 million from 2019’s levels of 52 million. The US, China and Western Europe will account for a large chunk of these affluent people.
More specifically, Mercedes estimates the numbers to be 45 million in the US, 20 million in China and 12 million people in Europe. Interestingly, China is tipped to surge the fastest with a three-fold jump from 2019 levels of seven million wealthy people (at par with Europe but way behind the US tally of 26 million), a clear indication of its standing in the world’s wealth power stakes.
It is in these markets that the new Mercedes strategy will revolve as part of its new goal to be perceived as a hardcore luxury brand. The fact that India does not figure in this list should not be entirely surprising even while it has its share of uber-wealthy people from the business, entertainment and sports fraternities. Yet, as in the case of today, India is still minuscule compared to China in the luxury space even while Mercedes sees it as a market with tremendous potential.
From the company’s point of view, the new credo is ‘Luxury is who we are and we will use it to grow economic value’. As Ola Kallenius, chairman of the Board of Management of Daimler AG and Mercedes-Benz AG, reiterates, the new strategy is designed to avoid non-core activities and focus on “winning where it matters”: dedicated electric vehicles and proprietary car software.
“We will take action on structural costs, target strong and sustained profitability. With this new strategy we are announcing our clear commitment to the full electrification of our product portfolio and our determination to ensure the business is fully carbon-neutral, in line with our Ambition 2039 target,”
Reading this vision statement also puts in context the choice of markets which goes beyond affluence alone. China leads the way in electric while the US continues to be a strong and robust market which continues to post good growth. Never mind the present challenges from the Covid-19 scourge; it is only a matter of time before the global economy is back on its feet over the next 2-3 years and the consumption story starts ticking all over again.
The focus on profitability is clearly important as Harald Wilhelm, Member of the Board of Management of Daimler AG and Mercedes-Benz AG, responsible for Finance & Controlling, says, “All measures together are designed to make our business weatherproof, address the challenges of the transformation and lead to solid profitability levels even in rough weather, with significant upside in favourable market conditions.”
Clearly, this will mean rebooting the current strategy and shifting priorities to ensure that profits are assured. Mercedes has made clear in its presentation on the need to ‘rethink volume ambitions, re-orientate pricing and channel mix and reshape future product portfolio to optimise return’.
In the process, continues the company, it is important to reinforce contribution margins with the current portfolio ‘shifting upwards over time’. What this implies to phase out certain models is not clear but there is no question that the period of low margin products will soon be history. Further, the carmaker will pull out all the stops to ensure that its volume targets ‘focus on the most profitable models and regions’.
As for the need to re-orientate pricing and channel mix, Mercedes believes it is critical to enhance positioning with ‘optimised product substance’ while managing residual values to determine new car supply. Additionally, it is important to ‘get stricter’ about channel mix and improve lifecycle pricing.
Profitable resource management
The quest towards reshaping its product portfolio will lead to a refocus of product development resources to grow in the ‘most profitable parts of our relevant segments’. The fact that the luxury segment is tipped to grow the fastest during the course of this decade also gives Mercedes the confidence that it is on the right track with its new strategy. Sub-brands like Maybach and AMG will be the key growth levers for affluent markets like the US, China and Europe.
An interesting part of the presentation pertains to customer bonding and its description as ‘The value of monogamy: Life-long relationships with our customers’. As Mercedes elaborates, it is about owning the customer relationship and ‘leveraging our car parc and customer base’. This will happen both through physical dealings at showrooms as well as online where the sales target is 25 per cent by 2025.
India, in particular, could see some brisk momentum in the digital space as Martin Schwenk, MD and CEO of Mercedes-Benz India, had pointed out in an earlier interview with this writer when Covid-19 was on the rampage. “Online will be an additional channel and behaviour patterns will also change to an extent with people spending more time at home. Customers will be comfortable if they are safe and secure, which means having their cars preferably delivered outside their apartments,” he had said.
The pandemic had clearly contributed in no small way to Indian customers’ paranoia of visiting dealerships which had paved the way for “contactless experience” and online consulting“ for everything, right from technical to commercial”. Even while conventional buying patterns will return eventually, Schwenk said the convenience of buying online from home would also gain traction.
As he put it, Covid-19 would only “accelerate trends” like work-from-home as well as digital launches of cars. Similarly, marketing “and other elements” could be rebooted with no agencies involved during launches. “All this will give us the learning on how to move forward. It will challenge the way we have worked in the past and also to find a balance,” said Schwenk.
Getting back to the global strategy, Mercedes has also articulated its intent to take the lead in electric with four new EVs based on its upcoming large-car electric vehicle architecture. The EQS luxury sedan will be the debut entrant in 2021 with an electric range of more than 700 km, followed by the EQE, EQS-SUV and EQE-SUV. AMG, Maybach and G will also go electric. From 2025, says Mercedes, ‘multiple further models’ will be added to the electric vehicles portfolio on the second all-new dedicated electric platform, the Mercedes-Benz modular architecture (MMA) designed for compact and medium-sized cars. ‘Leadership in electric drive and proprietary car software will be essential for our future success,” states the company.
Mercedes is only too aware of the huge challenges involved in achieving these goals since they will involve a direct fallout on cost structures and manpower. It has indicated that significant ‘short-term cost reduction and cash preservation’ measures are being implemented in the form of capex and R&D, fixed /variable costs (internal and external) as well as capacity adjustment and powertrain transformation.
This will take place by way of reduction of platforms / portfolio, and vehicle complexity; reduced spending on conventional powertrain and highly standardised EV architectures.
On the human capital front, headcount has reduced by 3,800 in just 8 months to 169,600 while there has been a gradual increase in exit packages which have doubled to 1,100 in just two months between June and August 2020. ‘Personnel cost reduction targets continued through to 2025,’ states Mercedes as part of the effort to reduce fixed costs.
Given the sharper focus in the new strategy, it is perhaps fair to infer that there will be more such exits happening in order to ensure that a lean and mean organisation is in place to take on new tasks and challenges. How all this will pan out in an already stressed out global environment of jobs loses and salary cuts remains to be seen.Other measures to reduce fixed costs will include adjustment of production capacity; structural change in marketing and sales; and ‘sustainable implementation’ of Covid-19 learnings (travel, consulting, facility management).
This feature was first published in autocar Professional's October 15, 2020 issue.