Global Insight Perspective | |
Significance | Daimler has made a surprise decision to choose Hungary as its new Eastern European production location after Poland and Romania were thought to be the leading contenders for the investment. Daimler will also initiate a share buyback scheme that aims to reacquire around 10% of total stock. |
Implications | Mercedes is dovetailing its new Hungary facility with 600 million euro investment in its existing plant in Rastatt, Germany which manufactures the current A-Class and B-Class. The plants will manufacture an expanded range of premium compact cars, with two additional models being added to the existing A and B-Class range. |
Outlook | With the EU-wide CO2 emissions limits due to be introduced between 2012 and 2015 this is an important strategic investment decision by Daimler both in terms of profitability and model strategy. The share buyback programme will shore up Daimler's share price and the stock will either be cancelled or used in stock option plans. |
Daimler Chooses Hungary
Daimler has surprised the automotive industry after announcing that it will establish a production location in Kecskemet, Hungary, as its first European production site, despite reports that Poland and Romania were the favoured locations for the factory. In addition to the company's new Hungarian production facility, Daimler will invest a further 600 million euro (US$930.1 million) in the company's existing production location for the A-Class and B-Class model ranges in Rastatt, Germany. This secures the future of the Rastatt plant as it was forecast that production of the A and B-Class would be moved in its entirety to Eastern Europe once a location had been chosen. Instead Daimler's Mercedes-Benz brand will introduce two new compact cars that will supplement the next generation of A and B-class models. It has been reported that the next generation of A and B-class will lose their MPV-like body styles and will be styled like a more conventional hatchback (see Germany: 12 June 2008: Mercedes-Benz Developing "More Conventional" A-Class Replacement—Report). Daimler will invest in the region of 800 million euro in the Kecskemet plant and will create up to 2,500 new jobs. Representatives of Daimler and the country of Hungary as well as the city of Kecskemet intend to sign a memorandum of understanding (MoU) regarding the new plant in the coming weeks.
Speaking about the company's new model and investment strategy, Daimler CEO Dieter Zetsche was quoted as saying, "Mercedes-Benz is going to offer an even wider range of exciting premium cars—with the high levels of comfort, safety and overall quality that are characteristic for the brand—in the particularly fuel-efficient compact-car segment. Moreover, our expanded product range will allow us to tap into new customer groups and open up new market regions. We are continuously investing in vehicle manufacturing in Germany: in addition to the recently announced expansion of the Sprinter van production in Düsseldorf und Ludwigsfelde, we will now invest some EUR600 million in Rastatt for our new generation of compact cars." In the statement Daimler also said that the new family of vehicles will have "'a high level of technical integration" which will involve the modular platform system that is being introduced through other Mercedes-Benz model ranges. The four new models will also benefit from the next generation of Mercedes-Benz four-cylinder diesel engines that will debut this year and will employ the company's new Bluetec technology which generates low levels of particulate emissions.
In addition, Daimler has said it is undertaking a large-scale share buyback programme which will involve the repurchasing of 10% of its outstanding stock, the equivalent of 96.4 million shares. The shares will be bought back for the maximum of 6 billion euro and may be acquired via derivatives in order to optimise the repurchasing process. The programme will be completed by the next annual general meeting (AGM) which is due to take place on 8 April 2009. Daimler has said it is aiming to reduce the use of equity capital, which is more expensive than debt capital, in order to improve its capital structure. The shares will be later cancelled or will be used for serving of stock option plans. Daimler launched an initial share buyback programme in August 2007, repurchasing 99.8 million shares for some 6.2 billion euro.
Outlook and Implications
Daimler's investment in Eastern Europe is an important strategic step as rising raw material and labour costs continue to erode the profitability of the premium manufacturers' domestic production operations. The decision to base a major production location in Kecskemet, Hungary, will give Daimler access to a lower production cost base as well as increased access to Eastern Europe's emerging markets. At the same time, the increased investment in the Rastatt plant, and the decision to build four separate models on the same basic modular small car platform, shows that Daimler is reacting proactively to developments such as rising oil prices and the forthcoming European Union (EU) legislation that will see passenger car CO2 emissions restricted to 120 g/km, with a phased introduction starting from 2012 (see Europe: 10 June 2008: Germany and France Agree Phased-In Euro CO2 Limits).
Daimler has given no indication as to what form the two new compact cars it is adding to the Mercedes-Benz model range will take. However, a premium B-segment two-door vehicle is likely to be one of the new models, which would be a natural rival to the BMW Mini and the forthcoming Audi A1. The other car may be a compact SUV or MPV of some description. There was no comment on how production of the four models would be split between Rastatt and Kecskemet, although it is likely that the A- and B-Class will continue to be produced in Germany, with the two new models being manufactured in Hungary. The news also raises some questions about the future of the Smart brand. The company previously failed in its attempt at creating a B-segment passenger car with the ForFour. This has left Smart, with the ForTwo, as a one-vehicle brand. The expansion of Mercedes-Benz's compact car range would appear to leave Smart with nowhere to go in terms of additional model offerings within the Daimler group, and begs the questions as to whether Smart has a sustainable future with just one model (see Germany: 17 January 2008: Daimler Considers Expanding Smart Range Again).