Emerging Markets: Mercedes Eyes Long Term Growth In China

Dieter Zetsche, the CEO of Mercedes-Benz, says China will become Mercedes' biggest market in the next few years. Unfortunately, while the confident CEO insists that Mercedes cars are not "expensive," he does concede that "sometimes, high value is represented by a higher price." While Mr Zetsche's comments regarding the price of his automobiles are honest, what is more telling is the confidence with which those comments were made. Over the last decade, Mercedes has maintained its competitive edge by becoming a technological leader in its field, while making calculated investments into new, emerging markets that continue to pay dividends. Mercedes continues to invest in R&D, has developed a strong brand equity, and has a strong leadership team. Unfortunately, with slowing sales in many of Mercedes traditional markets, critics have begun to question Mr. Zetsche's enthusiasm and plan. In May, new car registrations across the European Union were down almost 10% compared with the same month last year, while total sales were up just less than 2% between January and May. These figures lack promise, particularly considering how competitive the global automotive market is becoming. Thus, if Mercedes is going to continue its growth, just where is this growth going to come from?

Of course, the logical answer is China. While China's automobile sales have cooled slightly, China's new policy of subsidizing trade-ins and introduction of a new stimulus that provides a 3,000 yuan ($442.58) subsidy per unit to 71 green vehicle models (subsidies that came into effect on July 1) is expected to drive automobile purchases in the second half of 2010. This past June, China sold 985,815 units of cars, multipurpose vehicles, sports-utility vehicles and minivans in June, with a year-on-year growth rate of 18.1 percent, the lowest since last February. Despite this lag, the total sales in the first half of the year hit 6.31 million units, surging 41.3 percent over last year. General Motors, whose sales in China for the first time surpassed those in the United States in the first half, said that it expected continued sales growth in the second half, as it has been the biggest beneficiary of the Chinese government's new supporting measure for fuel-efficient cars, with 18 of its models to be listed among the total 71 models made by 16 automakers. The new measure mainly supports smaller-sized vehicles with an engine capacity of or below 1.6 liters, which reduces fuel consumption by about 20 percent in average compared with current industry standard.

According to a recent report released by consumer research company AC Nielsen, 32 percent of Chinese consumers surveyed said that they are seriously considering purchasing a car within the next 12 months. In fact, many experts believe that stimulus measures on green vehicles will greatly increase automobile sales. This increase will fuel continued robust growth, particularly as demand increases for smaller-sized fuel efficient cars in third-tier or fourth-tier cities. The growth engine will move from the coastal cities to inland regions, from big cities to rural regions in the future. In fact, it is estimated that the demand for passenger vehicles in China will reach 25 million units in 2020 and 35 million units in 2030.

Still, while China is fast becoming the world's largest automotive market, Mercedes performance in this market is lagging. China currently has about 870,000 dollar millionaires; customers, that are precisely the kind of customers Mercedes is targeting. Despite this, as Mercedes has learned over the last couple of years, selling cars in China is no mean feat, particularly because the taxes on high powered foreign vehicles remain high. In fact, Chinese consumers that purchase Mercedes top level S-Class can have to pay 20,000 euros per year or more in additional taxes. Moreover, Chinese domestic competition remains an issue. While Mercedes maintains a technological advantage, what will happen when Chinese firms emerge as viable challengers to Mercedes, BMW, and Volkswagen?

While these are all valid questions, Mr. Zetzche's confidence remains undeterred. As he noted in a recent interview, "It's a reality that the Chinese will learn better and better how to build good cars. On the other hand, we have seen the same happening with Japan decades ago. Our chance in Europe is to stay ahead, based on innovation, based on brand values and fascination around our products. And if I look at the situation today, the European industry is rather more competitive than 20 years ago." Of course this is what businesses often ends in: a bet that one manufacturer  can produce a product better than the competition. For the time being Mercedes seems to be betting successfully on China, including with the models it is making in the country. Unfortunately, only time will tell whether these bets are misplaced, or, whether the house will ultimately trump Mercedes dreams of a golden Chinese future.