“The transformation might take longer than expected,” Chief Executive Officer Ola Källenius will tell shareholders at the company’s annual general meeting on Wednesday, according to prepared remarks.
After planning to become fully electric by the end of the decade, Källenius now says the maker of the S-Class sedan will continue to make combustion-engine and hybrid vehicles “well into the 2030s,” if demand is there.
The shift follows disappointing orders for its expensive electric models like the EQS and EQE sedans, a key part of Källenius’ strategy to boost profits with top-end sales. The company’s margin sank to 9% in the first quarter, the lowest in more than two years and below its long-term range.
Mercedes isn’t the only carmaker feeling the pain of weaker demand for EVs, as governments ended lucrative subsidies and gaps in charging infrastructure continued to turn off some buyers. But the Stuttgart-based company is trailing its luxury rivals in the transition: in the first quarter, Mercedes’ EV deliveries fell 8%, while BMW saw a 41% jump in sales of fully electric vehicles at its namesake brand.
Wednesday’s tempered goals are a far cry from two years ago, when Källenius introduced his plan to focus on high-end cars, dubbed “The Economics of Desire,” in Monaco. At that point, the carmaker was still enjoying an overflow of orders in the wake of years of supply-chain disruptions stemming from the pandemic.
The goal is to increase sales of its priciest cars — AMG performance models, Maybach luxury line, G-Wagon SUV and EQS — by as much as 60% by 2026 and lift the operating margin to around 14%. Last year, however, automaking returns fell to 12.6%, and Mercedes has already cautioned that margins will fall further this year.
For car manufacturers, larger vehicles with combustion engines under the hood still command the biggest profits, with sportscar makers Ferrari NV and Porsche AG among those boasting the highest returns. And with China not phasing out sales of new combustion-engines until 2060, luxury-car makers still see potential for their legacy products in the world’s biggest auto market.
For Mercedes and BMW, more than 90% of the top-end S-Class and BMW 7-Series vehicles in China are still ordered with combustion engines, managers said at the car show in Beijing in April. Meanwhile, even heavy price cuts in China have failed to stoke demand for the EQS, the electric sibling to the S-Class.
Sticking with conventional engines, though, could also be a drag on margins and dividends, according to Janne Werning, head of ESG capital markets and stewardship at shareholder Union Investment. The company will prolong the period of investing in both combustion-engine and EV technologies, diverting resources from investors, he said in prepared remarks published ahead of the meeting.
In the two years since Källenius announced the plan to focus on high-end cars, with hopes to see Mercedes’ valuation rise, the company’s capitalization has barely budged and currently stands at €76.3 billion from €67.7 billion. Stifel analyst Daniel Schwarz said it’s still the right strategy to set Mercedes apart from the likes of Tesla Inc. and BYD Co.
“The strategy is convincing,” he said. “Mercedes is focusing on its biggest strength.”
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