Mercedes Counts on Cheap Cars to Drive Growth

24/7 Wall St.

Daimler, the parent company of Mercedes, posted good third-quarter earnings. Unfortunately for the car maker, the improvement was made largely on the back of sales of its cheapest cars. The plan to go "down market" is a dangerous one, because it pits Mercedes against a number of competitors that have developed modest-priced autos, and developed them well, for years.

As part of its quarterly data, the company reported:

Mercedes-Benz Cars once again achieved a record level of unit sales in the third quarter of 2013. Total sales by the car division grew by 14% to 395,400 units. Third-quarter revenue grew by 8% to €16.5 billion, and EBIT of €1,200 million was significantly higher than the prior-year result (Q3 2012: €973 million). The division’s return on sales was 7.3% (Q3 2012: 6.4%).

Additionally:

The new E-Class and in particular the new compact cars will make major contributions to the expected growth in unit sales. The models of the A-Class and B-Class and the new CLA are very popular in the market.

While the E-Class sits in the middle of the Mercedes price range, these others are at the very bottom of the price points the Germany manufacturer charges for its models. Recently, in American, Mercedes has aggressively marketed the CLA as an affordable product that retails below $30,000 ($29,900 to be precise).

In the $30,000 to $40,000 range, Mercedes vehicles become part of a pool of competitive models from the world's largest car companies. General Motors Co. (GM) has had its greatest luxury success in years with the Cadillac ATS. Ford Motor Co.'s (NYSE: F) highest end Taurus falls into the same price range, as do several models marketing by Toyota Motor Corp. (TM) luxury division Lexus and the Honda Motor Co. Ltd. (HMC) Acura brand. Even Hyundai, which usually targets the car market at below $30,000, has two models, the Genesis and Equus, aimed at luxury buyers. Mercedes's mortal enemies, BMW and Audi have cars at similar price points as well. The low end of the luxury market is littered with well-designed cars with brisk sales made by the largest car companies in the world. All of these manufacturers have almost limitless marketing budgets and nearly endless manufacturing capacity.

Like every large car company in the world. Mercedes defines itself by unit sales. However, the more down market the company goes, the greater the chance of failure. This part of the auto sector is packed with companies better able to sell low-priced luxury vehicles in great volume.

View Comments (14)