February 7, 2014 / 4:03 PM / 4 years ago

Daimler sees new compact cars, S-class limo lifting performance

FRANKFURT (Reuters) - Daimler (DAIGn.DE) is relying on new compact cars and its S-Class limousine to bring a step change in productivity and pricing, and to fix its China business, Chief Executive Dieter Zetsche said on Friday.

Chairman of Daimler AG and Head of Mercedes-Benz cars Dieter Zetsche speaks during the press preview day of the North American International Auto Show in Detroit, Michigan January 13, 2014. REUTERS/Joshua Lott

The maker of luxury limousines, offroaders and hatchbacks is aiming to raise the average return on sales at Mercedes-Benz Cars to 10 percent, from 6.5 percent in 2013 and 8 percent in the fourth quarter, to close the profitability gap with rivals.

The launch of a rejuvenated range of models including a C-Class sedan, the CLA compact coupe, the A and B-Class compact hatchbacks and the top-of-the line S-class limousine puts Daimler in a sweet spot to raise profitability, Zetsche said.

“The overall target of 10 percent means more in good times, we are well on our way to hitting these targets,” Zetsche told analysts, referring to a “medium-term” target.

BMW and Audi, both of which have yet to publish full-year results, last reported a quarterly automotive operating margin of 9 and 9.4 percent respectively.

Profits will rise with the rollout of new cars that use a high proportion of common parts thanks to Daimler’s modular front-wheel drive architecture and its new its rear-wheel-drive architecture.

“The main thrust definitely is product,” Zetsche said, noting that Mercedes is about to launch the C-Class midsize premium car, its biggest volume selling model, using the rear-wheel drive architecture.

This will allow Daimler to reduce production costs per model by a double digit percentage amount, and to increase the speed of production, Zetsche said.

Production of the C-Class has started at Daimler’s plant in Bremen, Germany and will be expanded to factories in China, South Africa, and the United States in what amounts to the most ambitious product rollout in Daimler’s history.

Daimler also plans to add to its range of compact cars by introducing the GLA compact offroader, which uses the same architecture as the A-Class and B-Class cars, and which will have higher margins than previous models, Zetsche said.

Demand for new products including the CLA compact coupe is high enough to allow Daimler to raise sales without any heavy discounting, a tactic which tends to erode margins.

Daimler will also seek to improve the profitability of its subcompact SMART city car, which the German carmaker is developing on a joint platform together with Renault’s Twingo.

“SMART was a major source of losses in the beginning years. We have made some significant adjustments,” Zetsche said.

Daimler’s next SMART is set to be launched this year but may not achieve the return on sales of 10 percent like its premium-segment sister brand Mercedes, he said.

He also highlighted signs that an overhaul of its China business was gaining traction.

“The biggest element of our profitability gap remains China, where we were in a pretty poor condition in comparison to our peers,” Zetsche said.

Daimler refocused its Chinese operations in March, merging its sales activities for imported and locally made Mercedes-Benz cars into a joint venture company in an effort to clamp down on discounting.

It used the introduction of a facelifted version of the new E-Class sedan in China to cut the level of discounting in half while at the same time almost tripling sales volumes.

“We see the next opportunity with the C-Class this year. It is basically with the C and E-Class where we had the problem,” Zetsche said.

Inventories of the old C-Class are low, he said, a factor which should help create pent-up demand for the next version.

Reporting by Edward Taylor; Editing by Louise Ireland

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