Mercedes and BMW Hit Hardest by Slump

Germany's premier automakers have been hurt more than rivals by declining sales of luxury vehicles and a shift to smaller cars

By Dietmar Hawranek

Daimler's executive board has moved offices within the southwestern German city of Stuttgart a number of times over the years. They first relocated across town from the district of Untertürkheim to the higher-lying district of Möhringen. A few years later, they returned to the valley. Then recently the top executives had to transfer from their high-rise office building there to the former company museum.

But wherever the company's senior management goes, a fog of rumors always follows them. And at the moment it is billowing thicker than ever.

Dieter Zetsche, the company's mustachioed CEO, is even allegedly due to be replaced soon—apparently by the current chairman of the supervisory board, Manfred Bischoff. And the more the managers whisper in backrooms, the more often they meet other colleagues who have already heard the rumor. For some people that even counts as a confirmation that the gossip is true.

Rumors are spreading faster than ever in Stuttgart these days. The giant carmaker Daimler (DAI) is not doing well. Car sales have declined by almost 18 percent, while truck sales have plummeted by around a half. The company reported losses of €2.4 billion ($ 3.5 billion) for the first six months of this year.

Zetsche has introduced a savings plan aimed at reducing costs by €4 billion a year. But he still hasn't been able to come up with conclusive answers to key questions. Can the premium carmaker Mercedes-Benz survive alone, or does it need a partner? And how long can Daimler continue to compensate for the drop in sales by relying on government-sponsored "short time" programs which support workers on reduced hours? If sales don't pick up soon, the company will have a surplus of 25,000 employees on the payroll, according to internal calculations. Will the carmaker have to close plants and lay off thousands of workers?

Hard Hit

The global economic crisis has unnerved Daimler, a carmaker which had grown accustomed to success. It is difficult to compare the current downturn with previous sales slumps. One difference is the introduction of a government "cash for clunkers" scheme designed to support the auto industry—but which almost exclusively benefited high-volume carmakers. But that's only part of the story.

Up until now, premium producers like Mercedes-Benz have had an easier time weathering economic storms. This time around, the luxury class is the hardest hit. Sales are also collapsing at brands like Bentley, where sales are down by 50 percent, Rolls-Royce (minus 41 percent), Porsche (minus 25 percent) and BMW (BMWG.DE) (minus 18 percent).

There are multiple reasons why the luxury segment is suffering so badly. Many customers can no longer afford a luxury model, partly because companies have reduced bonus payments for executives, partly because fewer models are being ordered as company cars and also because many managers have lost their jobs.

And there are other consumers who are simply no longer willing to spend so much money on a car. Times are changing and drivers' relationships with their cars are evolving, according to a study conducted by the PricewaterhouseCoopers consulting firm. The automobile is increasingly being seen as a means of transportation—and less as a status symbol.

Downsizing Trend

Until recently, customers always wanted to move up to a larger class when purchasing a new car, but now the opposite is true. Mercedes-Benz purchasers are ordering an E-Class instead of an S-Class luxury sedan, or a compact executive C-Class instead of a larger E-class. A similar development can be observed at BMW, with serious consequences for the carmaker.

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