Global Economics

VW Usurps Daimler's Automaker Throne


As the downturn punishes the maker of Mercedes cars and trucks, mass-market German rival Volkswagen is executing better

No one can accuse Dieter Zetsche of embellishing the situation at Daimler (DAI). For months, the company's CEO has used every opportunity to make it clear that anything other than a massive drop in 2009 sales figures would be a surprise.

Already at the annual shareholders' meeting in early April, Zetsche hinted that the auto manufacturer's skid would at least extend into the middle of the year. He acknowledged his mistake in perhaps not curbing production quickly enough in light of sharply declining orders, and he explained how he planned to lead the company out of the crisis.

But that still changes nothing about the miserable first-quarter results Daimler released on Tuesday. What's causing the most trouble for the Stuttgart-based company is sagging demand for cars. In the first three months of 2009, sales of cars of the Mercedes-Benz and Smart brands have sunk by more than 25 percent and, compared to last year's figures, sales of commercial vehicles have dropped by 39 percent. Even more dramatic is the 58 percent dip in the sales of delivery vans. In total, the company only sold 332,300 cars and commercial vehicles in the first quarter—or 34 percent fewer than it did a year ago. At the same time, corporate sales contracted by 22 percent to reach only €18.7 billion ($24.8 billion).

Still, there is one question that Zetsche has avoided answering in all of his appearances: How could Daimler slide so deep into the crisis while its competitor Volkswagen (VOWG.DE) (for example) has broken record after record?

Company representatives have tried to explain this question away. The economic crisis has affected producers of luxury and mid-size vehicles, they say, more than it has hurt firms making compact cars. As they see it, the main reason is that Volkswagen has benefited from Germany's scrapping bonus—a €2,500 premium paid by the government to owners of autos that are nine years or older to trade them in and purchase new vehicles—more than other carmakers. But more than anything they will tell you that the two automakers can't be compared because one is a luxury brand based in Stuttgart, and the other is a mass-market producer in Wolfsburg.

Of course the Daimler folks are in no way trying to bash VW. It's just that they have such a hard time accepting that the company is setting the new industry standard. In the minds of the Daimler crowd, the most important thing is the traditional hierarchy in the automobile-manufacturing industry—which, of course, has always placed them on top.

VW Prevails in Direct Comparisons

In reality, though, if you compare the two companies, this traditional view no longer holds much water.

Take the question of premium brands. Several years ago, the Volkswagen subsidiary Audi caught up with Daimler. Audi cars in every class can hold their own against comparable Daimler models. And when it comes to the issue of workmanship, Audi has even improved on Daimler, which was once master of that domain. And Volkswagen has nothing to be ashamed about here either. The Phaeton luxury sedan has been maligned and unsuccessful, but from a technical point of view, it is in no way inferior to Mercedes' S-Class. The only thing that pulls the S-Class out in front of the Phaeton is its prestige factor.

Attributing Volkswagen's success to the scrapping bonus is nothing more than a lame excuse. "If a customer wants to buy an A-Class (Daimler) vehicle, he can also use the scrapping bonus for that, too," says Jürgen Pieper, an auto industry analyst at Bankhaus Metzler. Pieper adds that only 3,000-4,000 Daimler vehicles have been purchased using scrapping-bonus certificates.

In Pieper's view, VW actually succeeded in wresting the leading position from Daimler long ago. He likewise believes that VW and Audi should now both be considered premium brands. To prove his point, Pieper merely points to the prices people are now willing to pay for Volkswagen models.

But even on other scales, Volkswagen still rates better than Mercedes. By producing vehicles in higher lot numbers, for example, and employing sophisticated strategies to use the same parts in different models, Volkswagen reaches economies of scale that make its business more profitable than Daimler's. Under these circumstances, despite a drop in sales, Audi remained in the black while Daimler sank deeper in the red.

Then again, if you compare the two companies' offerings in the commercial vehicle category, Daimler once again falls short. It's true that VW's Swedish subsidiary Scania saw a greater drop in sales than Daimler did—41 percent to 39 percent, respectively. But the Swedes still managed to transfer some thin profits to Wolfsburg, while Stuttgart could only report losses.

A Consolation Prize for Mercedes

For now, we'll still have to wait and see if the saving measures that Daimler plans to implement will help it catch up with VW. In the coming months, Daimler Chief Financial Officer Bodo Uebber hopes to generate €4 billion in savings, half of which will come in personnel costs alone.

The plan envisions reducing work hours by about 9 percent without wage adjustment for employees who have yet to be affected by short-time working schemes. Likewise, wage increases stipulated by the current wage-bargaining agreement will be pushed back from May to October, and short-time workers will give up a portion of the extra pay allowances that had been granted in returning for agreeing to the scheme. In return, Daimler has pledged to employees that it will avoid more operational layoffs until 2010.

But Daimler has one consolation: The pole position in commercial auto manufacturing isn't set in stone. In the past, Volkswagen has also been forced into drastic reorganizing measures—whether owing to failed model policies or because inflexible structures prevented suitable levels of return. In the middle and long term, Daimler has another advantage: When it comes to key technologies, such as cutting-edge engines, Daimler has a considerable lead in terms of know-how.

Zetsche absolutely refuses to relinquish this advantage. Though the company is determined to tighten its belt, it will do everything it can to make sure that the budget for developments in this area remains untouched.


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