Monday, 4 March 2013

Daimler CEO to unveil his last-chance CLA compact



EMBATTLED Daimler AG boss Dieter Zetsche will this week defend his strategy - and his job - by unveiling a new Mercedes seen as key to the premium carmaker’s turnaround.

In his first major appearance since the board shortened his contract last month, Zetsche will be looking to the CLA compact to fix Daimler’s chronic underperformance in small cars, as well as his own management record.

Both objectives face long odds. Zetsche, 59, is on notice that Europe’s luxury laggard must narrow the gap with BMW and Volkswagen AG’s Audi by repairing a botched China expansion and winning new buyers for an expanded range of minis and subcompacts.

“Getting China right is critical, and Mercedes also needs to appeal to younger clients - which is why new vehicles like the CLA are very important,” said Barclays analyst Michael Tyndall.

“The question is whether management now has the mandate and the wherewithal to realise the opportunities.” The CLA, which debuts at the Geneva car show on Tuesday, is a test of Daimler’s ability to shake off a stuffy brand image partly blamed for Mercedes’ failure to keep pace with its two main competitors.

Its premiere closely follows the February 21 board decision to trim Zetsche’s mandate to three years from the expected five and swap the manufacturing and truck division heads, in a move seen as improving both men’s CEO prospects.

Under Zetsche’s seven-year reign, Daimler stock has broadly flatlined - up 6 percent on the period - while BMW advanced 87 percent and VW’s share price incre0ased fivefold.

Earnings goals have been repeatedly scrapped as Mercedes failed to match rivals’ scale and efficiency in smaller cars, or their advances in China. Daimler’s underlying profit fell 10 percent last year and is seen flat in 2013.

“The pressure is on for Zetsche to deliver on his strategy and close the gap with Audi and BMW,” said Stefan Bratzel, head of the Centre for Automotive Management at the University of Applied Sciences in Bergisch Gladbach, Germany.

Daimler’s pledge to reclaim the global premium crown by 2020, underpinned by a savings plan seen as vague, has “no credibility” so far beyond the CEO’s likely tenure, according to DWS, Germany’s biggest retail fund manager.

The company has yet to recover from misjudgments in China, the world’s most important growth market, whose luxury car sales are set to overtake the United States and reach 2.7 million vehicles by 2020.

Mercedes suffered badly last year from competition between its two Chinese distributors, which ran rival advertising campaigns featuring different film stars and slashed prices on models including the flagship S-Class.

Late in 2012, Zetsche named a senior executive to head the China business and announced a merger of the two sales arms, more than a year after acknowledging the problems.

“The demand side may be harder to fix,” analyst Max Warburton at brokerage Bernstein said. “The shine seems to have gone out of their brand - the S-class price cuts harmed their image and consumers seem less enthusiastic.” Mercedes opened 22 Chinese dealerships in the four months to January, according to Morgan Stanley, while BMW added 45 to reach 343 - increasing its lead to 101 outlets.

Daimler is “falling yet further behind ... despite claiming to be on a push to accelerate dealer expansion”, said Stuart Pearson, author of the bank’s research.

The China debacle is counted by some longstanding observers among signs that Zetsche is occasionally out of touch with conditions on the ground.

“People accept that he’s very astute,” said another autos specialist at a major investment bank. “The doubt is whether he’s getting the right information to manage the business - it just doesn’t feel like management has a firm grip on the data.” Under Zetsche, who heads both the Daimler group and the Mercedes-Benz business, the company has struggled to rein in undisclosed losses in smaller cars, understood to have reached 500 million euros ($650 million) at the Smart division.

The Mercedes A- and B-Class were barely breaking even prior to the smaller model’s relaunch last year on a new front-wheel drive platform known as MFA.

With the more versatile architecture, Mercedes is moving on from its outmoded minivan aesthetic to roll out the sleeker CLA, followed by an SUV, increasing potential sales by as much as 50 percent, according to UBS estimates.

“Where they really failed against BMW is in the smaller car segments,” said Philippe Houchois, a London-based analyst at UBS.

Zetsche nonetheless showed resolve in managing Daimler’s 2007 demerger from Chrysler and reinvesting in Mercedes, Houchois said. “For all the misgivings, he hasn’t been a complete failure.” The CLA shown in Geneva, along with a series of other launches, gives him a chance to show what Mercedes can do with a refreshed lineup in 2015, Houchois added.

“Zetsche’s ambition is probably to leave with his head high, having delivered.” With 8.6 billion euros in operating profit recorded for 2012, Daimler is “neither a restructuring case nor a turnaround story”, company spokesman Florian Martens insisted.

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