Daimler Braces for Higher Mercedes-Benz Diesel Costs in Germany

(Bloomberg) --

Daimler AG warned of a further crackdown on Mercedes-Benz diesel vehicles in Germany and boosted provisions for legal and regulatory costs that already crimped profit last year.

The country’s motor industry watchdog, KBA, is likely to rule that other vehicles made by the luxury brand were also “equipped with impermissible defeat devices,” Daimler said Friday in its annual report, referring to banned software designed to bypass emissions tests.

Daimler has temporarily halted delivery and registration of some models, according to the report. It boosted total provisions to 30.7 billion euros ($33.2 billion) from 23 billion euros, with potential liability and regulatory costs more than doubling to 4.9 billion euros. The shares fell as much as 2.3% in Frankfurt trading.

The German manufacturer also said complying with stricter emissions rules in some countries will be difficult.

The carmaker’s move indicates trouble ahead for its diesel cars. Daimler took a massive earnings hit in 2019 and slashed its payout to investors to the lowest level since the financial crisis, blaming an 870 million euro fine by German prosecutors and costs related to reducing diesel-car emissions. The penalty coincided with record spending to boost its electric-car lineup and expand software operations. Daimler is also putting aside 2 billion euros for restructuring costs.

Facing Penalties

Chief Executive Officer Ola Kallenius has acknowledged in recent months that meeting Europe’s tougher emission targets will be a challenge in the next two years because consumers may not move away from choosing combustion engines fast enough.

Under the bloc’s rules, carmakers face penalties if the average of the total passenger vehicles they sell exceeds a level of CO2 emissions. Mercedes-Benz, which makes large-cylinder gas and diesel guzzlers in addition to battery-run models, plans to make use of so-called super credit incentives on electric and plug-in hybrid models to lower its average.

Daimler’s supervisory board has created a six-member special committee to focus on legal affairs “against the backdrop of the complexity of the emissions- and antitrust related proceedings,” it said in the report.

Coronavirus

The automaker could face a total of more than 1.5 billion euros in fines in 2020 and 2021 for missing European CO2 limits, according to BloombergNEF estimates. To avoid such penalties, electric vehicles sales must account for about 10% of total deliveries in the region by 2021, compared with about 2.8% last year.

The company’s average fleet emission in Europe was 137 grams in 2019, well above the 95 grams per kilometer stipulated by the rules that start taking effect this year and gradually get tougher by the end of 2021.

Daimler also flagged potential economic disruption from the outbreak of the coronavirus in its largest market, China. Risks “may not only affect the development of unit sales, but may also lead to significant adverse effects on production, the procurement market and the supply chain,” Daimler said in the report. Last week, CEO Kallenius said it was too early to quantify the financial fallout.

To contact the reporters on this story: Christoph Rauwald in Frankfurt at crauwald@bloomberg.net;Karin Matussek in Berlin at kmatussek@bloomberg.net

To contact the editors responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net, Tara Patel, Anne Pollak

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