Daimler Says EVs Less Profitable Than Conventional Vehicles…Also World Is Round

2 months ago by Mark Kane 47

Mercedes-Benz EQ A Teaser

Daimler is not only preparing its manufacturing sites for new EQ electric cars, but it also looks on how to finance the transition to EVs, a reality that brings lower margins.

Mercedes-Benz Generation EQ

The German manufacturer expects that at least at the beginning, electric cars will only be about half as profitable.

One of the ways to offset lower revenues/profits will be to find savings on the cost side – some €4 billion ($4.8 billion) by 2025 according to the company is possible (€1 billion from fixed costs and €1 billion from R&D and €2 billion mainly from product costs).

Frank Lindenberg, Vice President of Finance and Controlling at Mercedes-Benz Cars (and least favorite man to all the engineers no doubt), said at an investor event in Sindelfingen, Germany:

“In the beginning of the cycle we believe that we will have to face a significantly lower margin. For some vehicles half of the margin of the vehicles they replace.”

“We are still aiming for a 10 percent return on sales, but have to be prepared for a kind of transition, with a corridor of 8 to 10 percent,”

From 2025, prices of electric vehicles should reach parity with internal combustion equivalents, the question is whether or not profit margins will then increase (or continue to fall).

smart electric drive cabrio

Interestingly, Daimler – unlike Tesla – is departing from vertical integration, and will make fewer parts in-house (which also will help to lower investment costs).  Reuters reports:

“One way for Daimler to lower costs would be to purchase a larger proportion of electric components from suppliers rather than making substantial parts of the car in-house, Chief Executive Dieter Zetsche said.

“Our vertical integration could be reduced significantly,” he said. “In-house production is almost irrelevant to the customer,” he added, noting many compact Mercedes models were sold with Renault engines, without prompting complaints.”

By 2022, every Mercedes-Benz model will have an electrified version (at least 50 hybrids or all-electric cars in total).

Recently, the smart brand went all-electric in U.S., and will eventually offer only electric cars globally by 2020, so it seems the current generation of combustion smarts, will be the last.

source: Reuters

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47 responses to "Daimler Says EVs Less Profitable Than Conventional Vehicles…Also World Is Round"

  1. James says:

    Dieter’s comments can be easily taken as, “more Chinese content”.

    I can see all ICE OEMs going to China production to increase EV margins.

    This would be a given if China proceeds on its course to mandate 100% EVs.

    1. Bacardi says:

      GM is already with you, CT6 PHEV is produced there along with some Buicks…Those who regulate get the worm…

  2. theflew says:

    Say what you want – he’s not lying. Vertical integration doesn’t save you money and could have huge risk. Also EV’s are based on a lot of commodity components. The only real innovation at this point is driving the cost of cells down and inverter efficiency. Autonomous vehicle development is big but it’s not EV only technology and can be applied to any vehicle type.

    This is the delemma legacy makers face in this transition.

    1. kbm3 says:

      The real dilemma they face is that a tech company with the brightest CEO in the world that is attracting the best talent in the world is coming after them at a furious pace.

      1. Another Euro point of view says:

        …using a kind of crowdfunding formula.

      2. Asak says:

        Considering the observed (lack of) intelligence of most CEOs that’s a fairly low bar.

    2. Bacardi says:

      Other than V.I. which is entirely separate than alternative fuels, you are correct…The lowest Spark EV’s MSRP was still double of the lowest priced ICE Spark for that MY…

      The key to profitability is to only offer fully autonomous technology to EVs…Outside of Tesla, most likely these vehicles will have expensive roof mounted equipment arrays and therefore they should be selling the fully autonomous $100K Chevy Bolt to ride sharing/fleets first as they perfect the tech…

      1. Will says:

        Paris and London are trying to ban private autonomous car because of traffic jams of cars that are not being driven by it’s owners https://t.co/gx7TnxeSd8

    3. Marshal G says:

      Vertical integration is expensive if you plan to produce car at compliance levels. When you’re all in it pays to make things yourselves, rather than leave it up to the whims of your supplier.

    4. pjwood1 says:

      Abandoning “vertical integration” is a sword whose opposite edge includes:
      -Lack of supply contracts (batteries, etc)
      -An open door for others to buy their way in, like:
      -the next Tesla
      -Deutsche Post (vans)
      -Workhorse (trucks)

      Workhorse got a bump, the other day, because it was made known how many power trains they’ve ordered from TM4. It may not be what the customer is aware of, but when a competitor gets to go to the same supplier he can then go to the customer and say, “See, we did the same thing, only cheaper”.

      1. Get Real says:

        The real problem for the legacy OEMs is that they have considerable sunk costs in their ICE technology and their mindsets reflect that.

        The auto business had become a fairly static if not stagnant industry as far as innovation as a result.

        Because they have gone so heavily into suppliers their only real IP left is in that same ICE technology that is basically going obsolete.

        In any case its a tough transition to make for the above reasons and there is undoubtedly huge resistance and pushback from many people at these OEMs to such a radical change.

        Honestly , the probable best way to make it is to start an entirely new EV only brands and resource those with personnel, technology and funding transfers while winding down the ICE side of the business.

        This is why Tesla and other new EV-only companies can get started and have many advantages in as much as they don’t have the liabilities that ICE manufacturers have.

        Of course Tesla and others have many challenges related to growth but those are good challenges to have and good opportunities as well since it allows them to do things in different ways to optimize the strengths of EVs.

      2. orinoco says:

        And with less vertical integration
        you loose opportunities to be more profitable and innovative (which would lead to more profit, too). To me it’s a declaration of bankruptcy from Daimler. Concerning the components you need to build an BEV they already lost the race and gave up.
        They try to sell their ICE cars as long as possible and then the rats leave the sinking ship.

      3. unlucky says:

        The idea of outsourcing is that the competing suppliers make things cheaper than you can because of the scale they operate on.

        With that as a background, does it really hurt you if someone else gets a good deal too? Let say you don’t outsource. It doesn’t stop your competitors from doing so. So they can still get the better deals, you’ve only stopped yourself from doing so.

  3. Jeff Songster says:

    Call a waambulance for Dieter! Wake up Rip Van Winkle time to live in the world you polluting scam diesels have created. Consequences are something capitalist enterprises are particularly bad at handling. Next they will ask for government assistance to help with this tough transition… the government faced with job losses will socialize the losses and pad the profits for the corporate psychos… sheesh. If they had only started this process in the early 90s it could have been done by now.

  4. Mo says:

    EV’s less profit margin. Tesla’s profit margin is twice of the industry’s average. Someone is lying or just inefficient.

    1. pjwood1 says:

      Even if we could impart the same altruism to Mercedes as Tesla deserves, their customers won’t “charge a car”.

    2. Some Guy says:

      Well, Tesla has an advantage: They design their vehicles from the ground up, not try to cram EV-tech into an ICE body design (which is what Daimler is intending, when they want to electrify a model but simultaneously also produce a Diesel version of it on the same line). I reckon, when consumers have the choice, they go for the EV (or PHEV) before the ICE unless the EV is deliberately made so expensive that the lower TCO will only materialize after 15 years of hard driving (kinda worried that that is what the majore OEMs are going for).

      BTW: Look at tiny Iceland, where marketshare of vehicles with plug-in option has hit 13% in August (I don’t know if there are incentives other than high cost of gasoline). Mitsubishi is in the lead, where only 18% of cars are ICE only, follwoed by Porsche (!) with <30% pure ICE…

      I wonder if they will rename the country to Evland once the majority of cars is electric…

      1. Jim J Fox says:

        Here’s a clue!

        Iceland – Built as it is on a volcano, Iceland has tapped the earth’s natural warmth to supply 85% of the country’s housing with heat. Between geothermal and hydropower, the electricity supply is 100% renewable energy.Jul 9, 2012

    3. Asak says:

      Tesla’s not even remotely close to being profitable so that’s a pretty bizarre comparison. Maybe by some cherry picked metrics their vehicles are more profitable, but in the end the bottom line is what matters.

    4. Pushmi-Pullyu says:

      Mo said:

      “EV’s less profit margin. Tesla’s profit margin is twice of the industry’s average. Someone is lying or just inefficient.”

      That isn’t a fair comparison. Until Tesla put the Model 3 into production, it made only “premium” cars. Other small auto makers which make only premium cars also average higher profit margins.

      Larger auto makers can afford to trade off a higher profit margin for volume sales of lower-priced cars. Tesla can’t afford to do that… yet. But if it keeps growing the way it has been, it should be able to do that within, I would guess, less than a decade.

    5. PeteyBoy says:

      Consider the powertrain cost (to the manufacturer) in a standard Ford Focus. Typical 2.0L NA engine $900-1000. Automatic transmission $600-700. Let’s be conservative and round up to $2000 to include other bits and pieces, exhaust, etc.

      Now look at a 60kWh battery. What’s pack cost today? Not just cells. Over $200/kWh? Let’s be optimistic and say its $150/kWh. A 60kWh pack is $9000. Let’s add another $1000 for motors, inverters, and whatever else.

      Rough comparison…battery vehicle initial cost is $8000 more than gas vehicle. For a non-luxury vehicle there aren’t enough feature options in the world to make up for this difference in cost. Luxury manufacturers can cover it because they are already starting with high margins. But future margins are certainly reduced. Tesla can cover it (COGS) because they are priced like a premium vehicle, charge a ton for options, deliver a sub-premium fit/finish (not my words, but from luxury customer focus groups), and attract customers who are willing to accept this to be part of the Tesla brand.

      Tesla’s premium-positioned vehicles (S,X) have a limited market due to price. Musk knows this, hence the Model 3. He also knows that even for Tesla, $35K Model 3s are still under water. That’s why you pay $9000 for the long-range version. $9000 for a 25kWh (?) larger battery that costs Tesla (using same assumptions above) an additional $3750. It has been estimated that Model3 breakeven price is $41K-ish. Average price of a car in the U.S. is $35K. With tax credits going away in the near future (unless extended) most companies are going to have a hard time pushing a $40k+ car on a population that spends way less than that on average, and that in the near term has no incentive to switch to electrification.

      All this is obviously the current (pun!) state of things. Battery costs are going to come down for sure. People will warm up to BEVs, and most manufacturers are recognizing the need to invest in electrification. Just look at all the recent announcements from auto OEMs! But these guys have to manage the transition smartly or face going out of business due to not turning any profit (or at least breaking even!). Can’t flip the switch today. Even if we did, Tesla couldn’t handle the volume and there would be a whole lot of people without jobs.

      In any case, I’m encouraged by MB’s words. Recognizing the need for investment and a willingness to sacrifice margins is a big step.

  5. Alan says:

    The reason there wasn’t any complaint about having Renault engines in the compact models of Mercedes is most likely because customers were not aware if it ?

    They are now though !

    Many also are not aware that a number of Audi’s have Skoda engines in them too.

    1. bogdan says:

      Wrong, Audi, Skoda, Seat, all have the identical VW engine, including DD-Software!

  6. ffbj says:

    It’s gonna be ugly, especially if you consider that the expectations of some current Tesla owners is that they will have their cars for 20 years or longer.
    So less profit and less replacement, a double whammy!

    1. spinit says:

      Then recycle or reuse large amounts of the vehicle.

    2. Asak says:

      You can already keep a gas car for 15+ years, few people do. Regardless of whether the engine is fine, the dings and wear and tear add up. You’ll never find a 15 year old car in pristine condition. I highly doubt most Tesla buyers will still be driving their car in 20 years. Maybe some are telling themselves that to try to justify the cost (which is beyond their normal price range), but in reality I doubt it holds true.

      1. Pushmi-Pullyu says:

        I suspect you’re right. The electric motor may potentially last forever, but the seats, interior, suspension systems will wear out just as fast on a Model S as on a gasmobile. Electronics don’t last forever, either.

        Those of us who don’t buy a new car every few years, those of us who don’t replace their car until the cost of major repairs begins to equal or exceed the cost of payments on a new(er) car, may tend to keep Tesla cars longer than average. But 20 years is not a realistic goal, unless people are willing to do complete replacements of seats and other interior parts, the suspension systems, and likely many of the electronic parts.

        I think even 15 years is pushing it, for those who can afford the price of a new Model S. The newer cars, with more features, are going to look more and more attractive every year to people who can afford payments on a new Model S or Model X!

  7. Mark C says:

    When you outsource a great majority of your product components, your final product is less differentiated from the competition who is using the same vendors.

    I wonder if they will get that three pointed emblem made in China, too. It will look really nice when the chrome starts peeling!

  8. David Murray says:

    I wonder which is more expensive to build at this point, a nice BEV with 200 miles of range, or a strong PHEV with 40 to 50 miles of range?

    1. Pushmi-Pullyu says:

      Good question.

      GM outsourced the entire EV powertrain to LG Chem for the Bolt EV, which might indicate they expected it to cost more than their in-house development of the Volt.

      On the other hand, GM expected the Volt to sell a lot better than it actually is, but they intentionally limited production of the Bolt EV, so they knew the latter would have a higher per-unit cost.

      So actually, GM outsourcing so much of the Bolt EV probably isn’t an indication that BEVs are more expensive to make.

  9. bro1999 says:

    You’ll be surprised how many flat-earthers are still out there.

    1. sveno says:

      and convex earthers!

      There is a cool solution however.

      Cheap, personal, electric aircraft – go see for yourself, no need to theorize 🙂

      Then we only have to worry about the moon bases 😀

      1. Pushmi-Pullyu says:

        Nah, the flat-earthers have an explanation for that. The atmosphere distorts light in such a fashion that it creates the optical illusion that the earth’s surface is curved, when you get high enough into the air.

        Of course, the entire space program is a hoax, because you can’t actually orbit the flat earth!

        Honest, would the flat-earthers lie to you?
        😀

        1. Jim J Fox says:

          FLAT- “spread out like a carpet” [rectangular?]- koran; perfect word of allah, impossible to be wrong!

  10. Tony Marco says:

    What! The world is round?? I’m sure they still think it’s flat!

    Poor Poor Daimler!

    1. Jim J Fox says:

      Sir Terence David John “Terry” Pratchett, OBE (28 April 1948 – 12 March 2015) was an English author of fantasy novels, especially comical works. He is best known for his DISCWORLD series of 41 novels.

      1. jelloslug says:

        The turtle agrees…

  11. Pushmi-Pullyu says:

    “…many compact Mercedes models were sold with Renault engines, without prompting complaints.”

    Well I’m shocked, SHOCKED I say! Why, next you’ll be telling me that today, most car buyers make buying decisions on such things as style, comfort, and luxury features… rather than on whose logo happens to be on the engine hidden away under the hood.

    /snark

    1. bogdan says:

      Of course there aren’t any prompting complaints. Renault has the best engines, unlike Mercedes…

  12. Jason says:

    Daimler needs to look at their whole business if they are only making 10% on the sale of their vehicles. Tesla has reportedly 23%, or something like that, if they didn’t plow the profit back into growth.

    In Australia the Mercedes is a luxury brand, it commands a premium price. For the same $30k car a comparable Mercedes would be more like $50k, so you’d have to be joking to show me $20k worth of manufacturing that makes the Mercedes worth that much more. Maybe they do use $20k in better materials, but I bet it is more because they have the luxury reputation and probably put $10k more into the materials and make $10k more in profit.

  13. cab says:

    A couple of years ago one of the CNET reviewers opined that electric cars tend to drive more similarly to each other than their ICE equivalents do. Indeed, I’ve noticed that myself in the various EVS/PHEVS I’ve owned or driven.

    The challenge this places before auto makers is once everything starts moving to electric propulsion, what attributes become the most salient in distinguishing one car from another. Today, Mercedes can point to their solid build, nice interiors, and some great engines. In the EV world that last one starts to disappear. Even a “lowly” Chevy Bolt is as quick as various hot hatches and in real world driving it is quicker still. The “smooth pull” of an AMG V8 is almost passe when every electric has a smooth pull and even “cheaper” ones can be at least somewhat quick.

    BMW actually had an interesting idea in the BMW i3 in that you could just tell how “light” it was compared to say a Volt or Leaf. Alas, that experiment was paired to a weirdo body style with a number of other compromises and seems to be heading down the tubes.

    Interesting times.

  14. Jim stack says:

    Oh I’m so worried their profit margin may only be 10% . Service is half of their profits and are almost none with an electric. No transmisdion, no exhaust, 2,000 less parts in the motor, no oil changes, very little brake wear.

    Mmmmmm sounds great to the planet.

  15. JR says:

    No problem for Daimler, not long ago they sold there Tesla shares for $780 million, that should be a good start!

    1. bogdan says:

      I guess Tesla is gonna buy Daimler soon.

  16. bogdan says:

    In other words:
    We give up! We will let the chinese build cars from now on. They are profitable and we are not anymore.

  17. BillT says:

    I don’t buy that EVs are inherently less profitable at initial sale or will “kill the parts and maintenance business”.

    At initial sale, the big money is made on extra features and upgrades. That is why base cars are usually thin on dealer lots.

    For modern ICE vehicles for at least most makers, modern engines and transmissions don’t need many repairs or much maintenance beyond oil changes which generally aren’t that profitable anyway. I caveat this with the trend towards turbo charging may reverse the gains in ICE durability of the last 20 years. There are plenty of other things that break/wear on cars regardless of power train such as power seats, hatches and windows plus suspensions. Plus there is the collision related repair business which won’t go away anytime soon.

    Likewise I don’t buy that ICE technology is the main differentiating factor between cars for most people. Things like the interior, ride, handling and styling matter more and ICE vs BEV doesn’t affect that.

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