Mercedes-Benz: A-Class for poor(er) people won't make us money, it is time for electric Maybachs!

Daniel · Oct 17, 2020 04:00 PM

What a time to be alive if you like your Mercedes-Benz affordable, compact, and ‘youthful’ (read: non-uncle). You have the A-Class in hatchback, sedan, and if you are in China, long-wheelbase form.

 

Need more space? Mercedes would be too happy to offer you the B-Class, or GLA SUV, or GLB SUV. Want something more stylish? Try the CLA four-door coupe or CLA Shooting Brake.

Even if you are card-carrying, Elon Musk-believing, environmentalist Mercedes will be wooing you with EQA and EQB all-electric versions soon enough.

Not only have these junior-Benzes like the A-Class, CLA-Class, and GLA-Class made the Mercedes brand cool with a younger demographic, but it has also brought the company a lot of new sales. So much so that Mercedes-Benz’s compact model range reportedly made up a quarter of the company’s deliveries last year.

Sells well, but profit is too low for Mercedes to keep every model

Mind you, sales don't necessarily equate to profits. The mainstream compact car market is known for its wafer-thin margins, and despite the sales numbers, Mercedes might not be making much money off it. Hence, the number of niche models Mercedes had to create from the A-Class' MFA2 platform.  

It is little wonder why Japanese premium brands like Acura, Infiniti, and Lexus stuck to rebodying or rebadging existing models, instead of really committing themselves to a bespoke A-Class competitor.

Recently Mercedes-Benz’s chairman Ola Källenius was reported to have told investors that the company wouldn’t be “prioritising resources going forward” in developing its range of affordable compact models. He reasoned that it is a segment that Mercedes “should not become a competitor of the volume makers”.

Ola Källenius wants to sell less cars, and focus only high quality customers, the truly wealthy buyers

This doesn’t mean that Mercedes is going to axe its compact model range any time soon. Rather the company would likely let the model range run is course while it looks to divert its resources elsewhere.

So where is the company headed? In the investor conference, Källenius outlined his direction by renewing its “focus on luxury” and reshape its products to “deliver a true luxury experience”. And that vision of luxury will be underlined by a focus on the premium luxury segment and electrification.

In other words, Källenius is bidding goodbye to the A-Class' market and shifting its focus towards the real money makers. Big sedans, limousines, and SUVs such as the E-Class, S-Class, and GLE/GLS. Ultimately moving the brand's centre towards Bentley and Rolls-Royce's space. 

Mercedes’ backtracking on its compact car strategy can be traced back to former CEO, Dieter Zetsche. Zetsche was largely responsible for spending big in diversifying Mercedes-Benz’s car offerings. However, in doing so he had spread the company too thin, especially producing duds like the failed X-Class pick-up.

In addition to that, Mercedes’ 2019 profits have taken a nosedive. Initially drained by its massive investments into electric powertrains its finances took a further hit by the legal costs from the fallout of Europe’s diesel emission scandal.

But Zetsche is out and Källenius is in. New boss, new rules, and Källenius don’t think that watering down the brand to pursue segments like the mainstream compact car is the way to go. It may be popular, but he knows where the wind is blowing.

To Källenius, brand popularity does not guarantee profits.  

In the Reuters report, Källenius is right in observing that “the premium luxury segment has above-average growth”. With car ownership in developed nations past saturation point and falling, coupled with bureaucrats curbing car ownership, lower-income people are steadily avoiding car ownership. The future it seems will be less about quantity and more about quality.

Källenius states that part of the company’s new direction is to increase the profit margins of its products. And the last place one would find that is in the mainstream compact car market. 

Electric cars too might sound counterproductive to Källenius goal to drive profits. As mentioned before, electric cars aren’t very profitable at the moment, however, in the long-term that might change.

Over here electric cars might be a rich man’s curio, but over in Europe, where the climate policies are going into overdrive, it is a big deal. Furthermore, with the trend of local municipalities banning fuel-burning engines, electric models are likely to be the product for Mercedes to sell in the future.

Tally up the cost of all-electric drivetrains and the budget-considerations of compact models, and you can see why Mercedes needs to go upmarket, rather than appeal to the masses. For a luxury brand like Mercedes-Benz, making a loss in the lower end of the market doesn’t make sense from a business and brand-building perspective.

Compact electric cars like the MINI Cooper SE, Mazda MX-30, and Honda e has to balance affordability with range. Despite having reams of consumer behaviour data to back up claims that 200km of range is more than enough, range anxiety is still a limiting factor to electric car ownership. And you can have customer anxiety if you are a luxury brand!

This is why Källenius’ “Electric First” strategy is kicking off with a flagship model in the form of a new all-electric limousine and SUV under the EQS guise. This will also be followed up by an all-electric EQE sedan and SUV.

The electrification strategy will also spread to Mercedes’ sub-brands. The AMG range is expected to feature electrified drivetrains, Maybach is set to “double in size” with electric vehicle offerings, and so too will the new G-Class derived sub-brand feature volt-driven models.

By 2025, around the time when the current compact model range is reaching its sunset years, Mercedes will introduce a new Mercedes-Benz Modular Architecture from compact and mid-size models. This new platform will feature more electrified models, though don’t expect it to be competing against the likes of the Volkswagen ID.

Mercedes isn’t just changing its model range. The company is also evolving its business model. In selected countries, Mercedes has begun offering its EQ electric car range online instead of having customers go through the traditional sales method of buying from a dealer.

Reports state that this direct sales business model will be expanded to all models if proven to be successful. More recently, Mercedes’ direct sales experiment seems to be garnering promising results. With COVID-19 restrictions affecting dealership foot traffic, there has been a noticeable uptick in online sales as customers take their car shopping online.  

If Mercedes-Benz’s corporate structure was akin to a monarchy, Källenius isn’t just a prince maintaining daddy’s status quo. Instead, he is overturning it with a revolution. Seeking to enact a full-scale reset of the company’s business, outlook, and product offering.

 

Fittingly Källenius’ vision of the future starts by panning back to the product that had made Mercedes-Benz name great. Top of the line luxury limousines, performance cars, and SUVs. Sorry budget-conscious folk, but that is how the industry will move on, so long and thanks for all the sales!

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