Zetsche wants Mercedes back on top of global premium sales
Rivals BMW and Audi have other ideas
Like a bright white spaceship, 325 feet long, 230 feet wide and just under 40 feet high, Audi's lavish new pavilion will be impossible to miss this week at the 64th Frankfurt auto show. But that's all part of the plan. The Volkswagen AG subsidiary invested more than 10 million euros, or about $14.4 million, to secure its largest ever presence -- just over 75,000 square feet of exhibition space -- at Germany's biennial megashow.
Why spend so much just to show off 30 new cars? The answer is easy: Audi wants to outdo its rivals.
It won't be easy. Daimler AG traditionally turns its stand-alone Frankfurt exhibition hall into one of the world's biggest Mercedes-Benz showrooms. There, Mercedes has 102,257 square feet of display space spread over three floors to exhibit 65 Mercedes and two Maybach models. But then there is BMW -- tops in sheer space, with 107,639 square feet of exhibition area, where it plans to show 56 models.
Bigger, better, bolder.
The epic clash among Germany's premium-car heavyweights always reaches a new level when the three meet at the world's biggest automotive circus. But something feels different -- something larger is at stake.
With ambitious plans for model proliferation, higher volume targets and increased production, the three automakers are laser-focused on topping each other.
But they also face a growing number of new threats.
The race to be this year's global leader in premium-car sales is as tight as ever with Audi poised to pass Mercedes in full-year sales for the first time. If that happens, Mercedes will drop to No. 3 in the global premium brand ranking. It has been No. 2 since being knocked off the top spot by BMW in 2005.
All three brands increased global unit sales in the first half of the year. Mercedes' sales were up 10 percent to 610,531; Audi ended the half with an 18 percent gain to 652,970; and BMW brand was No. 1 with an 18 percent rise to 689,861.
Daimler CEO Dieter Zetsche is not happy about Mercedes' decline. He has vowed to be more aggressive.
"Some of our competitors are now growing faster and more profitably than we are. We can't be content to be in a solid second or even third place: We are Daimler. We should be far ahead of the pack! And if that requires something that we don't currently have, then we'll identify and develop it," Zetsche said in a letter to Daimler employees in July.
When asked about the letter, Zetsche told Automotive News Europe: "Our goal is to be No. 1 in profitability and sales in the premium segment."
And he wants that to happen by 2020 -- at the latest, sources said.
Zetsche's rivals are equally committed.
"We are clearly looking forward rather than over our shoulder," BMW sales boss Ian Robertson told Automotive News Europe. "We have the clear objective to stay the most successful premium manufacturer."
Audi CEO Rupert Stadler also has set his sights on the No. 1 spot.
All three companies have ambitious financial targets. BMW aims for a profit margin of 8 to 10 percent, as does Audi. Mercedes' profit-margin goal remains 10 percent, a target set in early 2008 as part of Daimler's so-called Go for 10 strategy. The carmaker also said at the time it wanted to be world champion in 10 disciplines including security, comfort, design, quality, service, eco-friendliness and efficiency. The wide-ranging goal has drawn criticism.
"The Mercedes brand sways between too wide of a spread of values. And for too long it has neglected its claim as the No. 1 premium-car ranking," said Karl-Heinz Kalbfell, a 36-year industry veteran who worked with BMW, Mini, Rolls-Royce, Alfa Romeo and Maserati before becoming a consultant for brands such as Lotus.
The next big year: 2020
Zetsche declined to reveal volume targets of the attack plan for Mercedes. "The next step is to support our claims with goals for volume," the CEO said. "We will talk more precisely about our milestones later."
The year 2020 also is important for BMW.
By then, BMW plans to sell 2 million BMW, Mini and Rolls-Royce brand cars annually, according to its Strategy Number ONE plan launched in 2007.
Media reports say the automaker is working on an even more ambitious plan that has it topping 2 million sales in 2016 and achieving a volume as high as 2.6 million by 2020. This would include some 400,000 Minis and multiple-thousand Rolls-Royce sales, according to the reports.
Robertson admitted that something new is being devised. "We are currently reviewing our Strategy Number ONE objectives," he said. "We are asking ourselves: What do we now need to ensure the next step? We will crystallize some of that in the near future and work out more concrete definitions."
Audi CEO Stadler also is aiming higher. He recently announced that Audi plans to sell 2 million units annually by 2020, adding that the automaker will reach 1.5 million sales by 2014, which is one year ahead of schedule.
The real goal is even more ambitious. Audi purchasing boss Ulf Berkenhagen recently told the company's 200 most important suppliers that the automaker wants to push its 2012 sales to more than 1.6 million units -- almost double its total volume in 2005. For 2013, the outlook is 1.7 million. The sources added that Berkenhagen asked the suppliers for a buffer of an additional 15 percent above the 1.7 million.
Audi declined to comment about the volume number.
But even if it comes up short of those goals, one former auto executive is impressed with Audi's quick rise.
"Twenty years ago, Audi wouldn't have even made the list of Prestige Three," former General Motors product czar Bob Lutz told Automotive News Europe.
To make the big gains in unit sales, the three automakers will expand their lineups.
Said Zetsche: "We will introduce a wide variety of additions to our product portfolio. By 2020, we will bring out at least 10 models, like the new compacts and the CLS Shooting Brake," a low-slung sporty station wagon.
The new compacts that Zetsche mentions are the second-generation A- and B-class models that will be underpinned by a new platform called MFA, or Mercedes Front-wheel-drive Architecture. The current two-car lineup will grow to five to include a coupe to rival the BMW 1-series coupe, an SUV aimed at the BMW X1 and Audi Q3 and a shooting brake. With the MFA architecture, Daimler hopes to double sales of its entry-level models to 400,000 in the midterm.
Other planned additions to the Mercedes lineup include new variants of the next-generation C class such as a cabriolet, due in 2015, as well as a coupe version of the M-class SUV called the MLC that could arrive in 2015.
Coming in early 2013 is a new generation of the S-class flagship. The current S class is the oldest model among the German rivals in the upper-premium segment. That usually means declining sales, but with a global volume of 66,500 units last year, the S class outsold the recently renewed BMW 7 series (65,800) and Audi A8 (16,700).
BMW makes a big switch
BMW also has big plans to expand its lineup.
Sources told Automotive News Europe that the automaker soon will add the 2-series cabriolet and coupe as successors to the 1-series convertible and coupe. A similar strategy is planned for the 3-series model line, where the next-generation coupe and convertible variants will become the 4-series line.
"A lot of additional models are to come," sales boss Robertson added.
According to company sources, those include the so-called 6-series (four-door) Gran Coupe, which is due in 2012, and a GT version of the 3 series planned for 2013.
The biggest contributor to BMW's future portfolio will be its so-called Untere Fahrzeugklasse, or UKL, architecture. The German name means "lower vehicle class."
"With the UKL alone, there will be six to nine new models in the coming years," Robertson said without giving more details.
The fwd architecture is for smaller BMW and Mini brand models, starting with the next-generation Mini hatchback due in 2013. Other UKL derivatives include a small minivan and sporty compact wagon, sources say.
Due in 2017, the first BMW to use the architecture will be the next-generation 1 series, which will become the brand's first fwd model.
It's a change that worries former BMW executive Kalbfell.
"It is a clear risk that BMW is trying to expand the brand to smaller segments instead of leaving that territory to Mini," he said. "It is a threat that they want to give up the unique sell position of rear-wheel drive. That will be a stress-test for the relationship with core customers."
Robertson said UKL models are BMW's answer to growing demand for smaller-sized premium models, especially among customers in fast-growing, densely populated markets.
Meanwhile, Audi CEO Stadler said he wants to increase the number of products offered to 50 from 42 by 2020. If that number sounds high it's because of the way Audi counts its models. If variants such as the high-performance R versions of its traditional models are subtracted, Audi has 21 models today, not 42.
True new additions planned for the model family include the A9 Coupe (2015), which will compete against the Mercedes CL, and the Q6 (2014), which will target the BMW X6.
The addition of the new vehicles is forcing the German automakers to seek ways to boost production by expanding plants or building new ones.
A key part of Zetsche's growth plan is Daimler's new plant in Kecskemet, Hungary, which will have a capacity of 100,000 units when it starts producing the next A- and B-class cars in early 2012.
Daimler sources say Zetsche is looking at ways to expand the Hungary factory and would like to add production of the C-class coupe and the so-called MLC derivative of the M-class SUV to Mercedes' U.S. plant in the second half of the decade. The U.S. plant currently makes the GL-, M- and R-class SUVs.
And Daimler is mulling an additional plant in China. When asked about expansion in the world's largest auto market, Zetsche said: "We are continually in growth mode. In China, there are more than 120 billionaires and about 670,000 millionaires. Until they are all driving the S class, we still have things to do."
Audi is the best-positioned premium brand in China, which will be the automaker's single-biggest sales market as of this year. "We have to expand our current capacity of 300,000 units in the next few years," Audi CEO Stadler said. "It took Audi 22 years to sell the first 1 million vehicles. We'll sell the second million in just three years, between 2011 and 2013."
Audi, like Daimler, has a plant in Hungary. The Gyor factory, which opened in 1993, is about to be expanded.
Audi's plant problem
Audi's biggest weakness compared with its German rivals is that it is the only one without a factory in North America. This disadvantage is one reason why Audi sells about one-third as many cars in the United States as the BMW brand, which is on track to pass Lexus to become that market's premium-car sales leader for the first time in 12 years.
Audi's biggest competitive advantage in the race to be global premium-sales leader is that it is part of the massive VW Group. Audi is getting Q3s made at sister brand Seat's underused plant in Martorell, Spain, while Skoda's factory in India also assembles Audis for the local market.
A look at Audi's structure shows it has the fewest employees and plants of the three German luxury brands. But as industry veteran Lutz said, it can do more with less because it is "able to dilute a lot of the enormous basic development costs over the worldwide volume of VW, Skoda and Seat."
While being part of a huge organization has worked for Audi, attempts by BMW and Daimler to grow through acquisitions failed miserably.
BMW's bid to integrate the UK-based Rover group was a financial disaster. The same can be said for the so-called "marriage in heaven" that Zetsche's predecessor, Juergen Schrempp, arranged between Daimler and Chrysler. That union failed, as did Daimler's stake-holdings in Mitsubishi Motors Corp. and Hyundai Motor Co.
Today, BMW and Daimler are more interested in strategic partnerships. They cooperate with each other -- without major success -- on the joint purchase of some parts. Each brand also has a partnership with a French automaker. BMW's alliance is with PSA Peugeot-Citroen and Daimler has teamed with Renault.
But risks remain.
"The long-term enemy is oversupply," said Lutz, who has held key jobs at GM, Ford, Chrysler and BMW. "When everyone has a German prestige car on a $350-a-month lease, uniqueness, desirability, owner pride and resale values go down."
BMW marketing boss Robertson sees things differently.
"The global car market this year will be around 70 million vehicles and the premium segment will be somewhere around 5 million vehicles, so it is still a small percentage of the overall car market," he said.
For premium brands, it also will become harder to stand out from fast-improving volume brands such as Volkswagen and Ford.
Said Lutz: "The German premiums are facing the problem of technical differentiation from increasingly excellent volume producers using the same premium chassis and engine solutions."
Some experts also fear that the German premium brands risk diluting their image and margins by dropping down into volume segments. "You cannot stretch premium endlessly -- neither in terms of segments nor in terms of volumes," Kalbfell said.
This year, the Audi A1 will account for about 10 percent of Audi's total sales. "If you take the A3 into account, 25 percent of all sales are with small and compact cars. This will dilute the profit," said Ferdinand Dudenhoeffer, who heads Duisburg-Essen University's center for automotive research.
Kalbfell also warned against trying to play follow the leader. "Audi has a profile of a copier -- a successful one, but still a copycat," he said. "They have to develop their own profile and get out of the slipstream of Mercedes and BMW."
Dudenhoeffer supports that thesis: "Audi has not managed to present real innovations in recent years, but lost its technology advantage promised in their marketing slogan Vorsprung durch Technik [advancement through technology]. This becomes obvious when you look at electric mobility or car-sharing solutions."
The rest of the pack
What risks do Audi, Mercedes and BMW face from outside Germany? Not many, as global sales volumes are small at competitors based in the United States, Japan, Sweden and the United Kingdom.
Henner Lehne, global director at market research firm IHS Automotive, said the German premium brands will account for two-thirds of all global premium-car sales this year -- and this won't change in the midterm. "The race for premium-market leadership will only be decided among the Germans," Lehne said.
Combined sales of Japan's premium brands -- Lexus, Infiniti and Acura -- will not even add up to half of the 2011 Audi sales, according to an IHS forecast. The most successful non-German brand is expected to be Volvo, with estimated 2011 global sales of 424,500 units. Other competitors, with estimated 2011 sales, include: Lexus (385,400), Cadillac (200,900), Acura (150,000), Alfa Romeo (143,500), Infiniti (137,000), Porsche (118,500) and Jaguar (52,600).
As prestige is strongly connected to profitability, Daimler's Zetsche indicates that a 10 percent margin might not be the end goal for his company. "If greater potential in the industry should emerge, we will develop it," Zetsche said, with a wide grin on his face.
His smile must have frozen after he heard that Stuttgart neighbor Porsche recently achieved a profit margin of 21 percent.