Mercedes-Benz will downsize its entry-level cars as part of a strategic overhaul that will direct more than three-quarters of the automaker’s investment toward its higher-end vehicles.
Mercedes unveiled its plans to major investors on Thursday, placing its pursuit of greater profitability in the so-called Top End Vehicle segment, home of the iconic G-Wagon, the flagship S-Class sedan and the high-performance AMG division.
“We are further sharpening the focus of our business model and product portfolio to maximize the potential of Mercedes-Benz even in challenging conditions,” said Chief Executive Officer Ola Kallenius in a statement. “At the heart of that is our goal to build the world’s most desirable cars.”
The strategy builds on a trend that pushed profitability to record levels during the semiconductor crisis, but the jury is out on whether it would be as effective if supply restrictions were eased and automakers returned to chasing market share. While Mercedes sold 10% fewer vehicles in the first quarter than a year ago, profits rose 20%.
Mercedes sees top vehicle sales up 60% by 2026, a jump that would help bring its operating margin to about 14% by the middle of the decade, the company said. But the automaker acknowledged that headwinds, including commodity prices, supply chain bottlenecks and broader economic risks, threaten its targets.
Variants for entry-level models such as the A-Class will be reduced from seven to four, the company said. Mercedes currently produces numerous entry-level variants, including estate and SUV models.
Mercedes will launch its next automotive operating system on an entry-level compact car and brand it flagships for affluent, tech-savvy buyers.
“We’re not chasing volume,” Mercedes-Benz Chief Financial Officer Harald Wilhelm said during a conversation with reporters. “This is entry-level luxury.”
Before the meeting, Kallenius posted a photo of a stone ax made of precious material on LinkedIn on Tuesday. Archaeologists say the piece has no functional use, but points to humanity’s abiding desire for status symbols.
“What does this 6,000-year-old jade ax have to do with our strategy?” Kallenius said, adding that he would elaborate further at the investor meeting.
Following the successful separation of Mercedes and its sprawling truck division, management is stepping up efforts to transform the inventor of the automobile to compete with Tesla. The company aims to have battery-powered models in all its segments by this year, a staging post for its ambition to sell only electric cars by 2030.
Although the automaker is Europe’s most valuable corporate brand, Tesla has a market capitalization ten times that of the Stuttgart, Germany-based company, according to consultancy Interbrand. And Volkswagen’s Porsche sports car unit would be valued at about $100 billion if a planned stock sale goes through, according to Bloomberg Intelligence. That’s comparable to Mercedes at about $74 billion.
But some analysts warn that the pursuit of more profitable luxury cars may be misguided.
“Automaker’s high margins are unsustainable and will fall significantly again when the auto market returns to normal,” Nord/LB analyst Frank Schwope said in an email.