The New Mercedes Is a Mix of Tesla and Ferrari

(Bloomberg Opinion) -- Volkswagen AG caused consternation recently with a poorly executed joke about changing the company name to Voltswagen. Daimler AG is doing similar but isn’t kidding around. As part of a plan to boost its market value by spinning off its trucks unit, the German giant intends to change its corporate title to Mercedes-Benz.

Superficial stuff like this matters in the meme-stock era — Mercedes is a more evocative name — but this week the company’s first non-German boss, Ola Kallenius, showed there’s more afoot in Stuttgart besides purely cosmetic change.

First, in a slick multi-continent digital presentation, the 51-year-old Swede unveiled the new EQS luxury sedan, the first battery-powered Mercedes built on a dedicated electric-car platform. The refined and well-executed vehicle might finally pose a more serious challenge to Tesla Inc. and new entrants like Lucid Motors Inc. A few hours later Mercedes followed up by announcing preliminary first-quarter profits that far exceeded analyst estimates.

Rather than wilting under the pressure of phasing out combustion engines and shifting to electric, the German automakers are hitting their stride. They can’t print money as easily as Tesla does by issuing new shares, but their cash flows from selling luxury cars are doing the job nicely.

New model launches are ten a penny in the car industry and they all claim to be the greatest thing since the wheel was invented. The EQS is quite important, though. A battery-powered counterpart to the Mercedes flagship S-Class saloon, the EQS offers a glimpse of the company’s potential once it stops tooling around with polluting petrol and diesel engines and makes a proper attempt to marry luxury with clean technology. The good news — for Daimler investors, if not for Tesla’s Elon Musk — is that a range of up to 770km (478 miles), fast charging, a  massive digital display and a plush interior make a compelling package.

Unlike earlier tepid efforts, new battery models from BMW AG and Volkswagen’s Audi such as the i4 and e-tron GT also look much more like the real deal. All three big German automakers expect that by 2030 electric vehicles will comprise around half their sales.  They’re also ploughing billions into developing proprietary vehicle software systems, an area where they still lag some way behind Tesla.  

Investors have taken notice. Daimler, Volkswagen and BMW have together added tens of billion euros in market value this year. Tesla’s 2021 gains are far more modest and the stock has slipped from its January peak. Even retail investors, who often instinctively mock Tesla’s challengers, have cottoned on to the merits of German “Technik.”

Right now gasoline and diesel models still drive the German carmakers’ bottom lines, although that is supplying the vast sums of cash needed to develop electric vehicles. Thanks to surging equity markets and wealthy people’s increased savings during the pandemic, the affluent classes are in the mood to spend, especially in China. Low inventories and production bottlenecks caused by the global chip shortage have reinforced auto companies’ pricing power, notes UBS. The German trio will earn a combined 28 billion euros ($33.5 billion) of net income this year, according to the Bloomberg analyst consensus.

But valuations are a still a long way short of potential, especially when compared with Tesla. Its German rivals’ shares sell for less than 10 times forward earnings; at Musk’s company the multiple is 169 times.

Tesla’s focus now is on making its vehicles more affordable. Because of the German carmakers’ high fixed costs, it wouldn’t be wise for them to follow. Ferrari NV shows there’s another path to a princely valuation: The Italian marque’s exclusivity has been rewarded with a price-earnings multiple more in line with a luxury fashion house than a metal basher. The Italians won’t, however, have a fully electric vehicle until 2025.

Kallenius aims to strengthen the luxury appeal of Mercedes by beefing up and electrifying its exclusive sub-brands: AMG, Maybach and the “G-Class” off-road vehicles loved by plutocrats and celebrities.  

This cherry-picks the best of Tesla’s and Ferrari’s approaches, but it will count for nothing unless Mercedes can consistently deliver best-in-class profit margins, something it’s struggled with in the past. Judging by this week’s performance, it’s on the right track.

Daimler’s target includes plug-in hybrids

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.

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