Mercedes Planning Cut Costs

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Mercedes-Benz said the upcoming launch of its EQ electric vehicle family could mean it may not meet its profit margin target in the midterm. The automaker said it will launch a $4.8 billion cost-cutting program to counteract the expected pressure.

Mercedes CFO Frank Lindenberg said the brand would trade off some of its profits in the short term in exchange for higher sales of electric cars to meet increasingly stringent emissions regulations in the future.

They will be aiming for a 10 percent return on sales, but they are prepared for a corridor of 8 percent to 10 percent.

The comments confirm suspicions by a bearish capital market that traditional carmakers with a legacy combustion engine business will suffer decreasing profitability during a transition to a zero-emissions future.

Daimler’s flagship passenger car brand estimates up to 25 percent of its luxury sedans, coupes and utility vehicles will be electric by 2025, including the upcoming EQ-C midsize utility that debuts in 2019.

Roughly three-quarters of these EVs will substitute more profitable combustion engine versions.

The electric vehicles will have lower margins at least in the beginning of their life cycle even though Mercedes-Benz is confident that they can close the gap.

Mercedes will introduce its third “Fit for Leadership” efficiency program, dubbed FfL 4.0, which referring to the planned savings. Completed at the end of 2014, the first program was designed to cut costs by around $2.4 billion while the second “FfL Next Stage” had no quantitative target.

Mercedes widened its first-half operating margin to 10 percent, up from 6.7 percent a year ago, when results were burdened by special effects such as the Takata recall.

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