Daimler chief executive Ola Källenius, right, with film-maker James Cameron in Las Vegas in January where they unveiled an Avatar-inspired Mercedes-Benz car © Bloomberg

When Daimler chief executive Ola Källenius took to a Las Vegas stage with film-maker James Cameron in January to unveil an Avatar-inspired Mercedes-Benz “that points far into the future”, executives at the century-old group’s headquarters were more preoccupied with the present.

Burdened with billions of euros in costs related to airbag recalls and alleged emissions manipulation, pre-tax profit had dropped more than 60 per cent in 2019 just as the company needed to fund its late push into electric vehicles. Then came the pandemic, plant closures and a further share price plunge.

But by the end of June, barely a year after taking the top job, Mr Källenius and his chief financial officer Harald Wilhelm had pulled off what many investors thought impossible. 

“In our worst sales quarter maybe since World War Two, we were cash flow positive,” the 51-year-old Swede told the Financial Times. “We adjusted our production so quickly that in spite of Covid-19 we lowered our inventory and had a better working capital balance at the end of June than we had at the end of March.”

A rapid recovery in China, Daimler’s largest market, helped limit losses to €1.7bn for the quarter, as did its relatively low exposure to some of the worst-hit regions, such as South America. 

Column chart of Free cash flow from industrial division* (€bn) showing Daimler's free cash turned positive despite falls in sales

After being accused by shareholders of overseeing a “lost year”, and risking big fines from Brussels by failing to significantly cut fleet-wide carbon emissions, signals of intent came in rapid succession from Mr Källenius’s boardroom.

In recent months Daimler announced it would sell its Smart plant in France; settled outstanding US “Dieselgate” cases for roughly $2.2bn; invested in Chinese battery cell maker Farasis; and launched a joint venture with Volvo to develop hydrogen trucks while shelving its ill-fated hydrogen car project. 

Unlike rival Volkswagen, which has ruled out working with tech giants to build software for its new vehicles, Daimler joined forces with Nvidia to develop autonomous driving technology. Mr Källenius told the FT the carmaker would be open to further partnerships to “gain speed, to gain technological advantage, to share risk”.

Investors have begun to believe the executive duo might be gaining enough momentum to push through the company’s long awaited cost-savings plan, which includes axing at least 10,000 jobs worldwide. 

Daimler’s Smartville factory in Hambach, France © Bloomberg

“We’ve switched from being probably one of the most outspoken critics to saying we think they can do it, said Michael Muders, a portfolio manager at institutional investor Union, a Daimler shareholder. 

Driving the optimism is a widely held hope that the coronavirus crisis will help Mercedes deal with a millstone that has hung around the three-pointed star since the era of previous boss Dieter Zetsche — a jobs guarantee that protects roughly 130,000 Daimler workers in Germany, where labour costs are high, for the rest of the decade. 

“The unions realise that they have to move, and the board realises that it has a chance to renegotiate the agreement,” said Ingo Speich, a portfolio manager at shareholder Deka. 

“In this regard it really helps to have more pressure on costs — the management got a bit of a tailwind from the crisis for such renegotiations.”

Column chart of Revenues (€bn) showing Daimler sales

As he launched Mercedes’ latest flagship S-Class saloon on Wednesday, Mr Källenius said Daimler’s restructuring was “going to have to go a little bit deeper”, although he declined to say how many more jobs would go.

He said the pandemic had “exposed the auto industry for what it is: very capital-intensive, very high break-even points — too high for Daimler, for Mercedes”, adding that the carmaker needed to “double down on efficiency”.

But he said Daimler would be able to rely on early retirement and natural attrition to slim its workforce.

“I think the last time we actually technically laid somebody off in Germany was back in the 1960s,” he said.

Nonetheless, the move that led unions to extract the employment agreement from Mr Zetsche — the establishment of a holding structure encompassing Daimler’s cars, trucks and financing arms — has cost the company €1bn. The figure is set to rise by €150m-€200m a year, according to Mr Muders, with the deal’s ultimate goal still out of sight.

“The argument was: ‘we're building a holding structure to float the trucks business’, but this never happened,” he said. Other investors have urged the company to consider listing at least a small share of the division within the next year.

For now, Mr Källenius seems more intent on moving Mercedes on from what he once branded “peak complexity”, and reducing the number of models and variants it offers.

The ultra-compact Smart brand will be moved to China, where it will be manufactured by Geely, Daimler’s largest shareholder with a near 10 per cent stake. The A-Class sedan will no longer be manufactured outside Germany.

“We will adjust the portfolio towards the highest pockets of profitability,” Mr Källenius said, adding that Mercedes was “not going to chase volume” in lower-margin compact segments and that “we are prepared to eliminate models that we don’t think meet the profitability targets”.

The Covid-19 crisis, he said, made him question: “What’s your core business? What do you invest in? What’s your competitive strength? How do you make sure that you build upon that?”

The answer is a renewed focus on the luxury brand’s traditional high-margin models, and on what could prove its breakthrough electric vehicle, after a disappointing sales start for its first modern battery-powered car.

The EQS, an emissions-free version of the S-Class due to be unveiled next year, would have a range of 700km, Mr Källenius said, well outpacing even market leader Tesla — in which Daimler once held an almost 10 per cent stake. 

Line chart of Market cap (€bn) showing Daimler's lacklustre market value

More importantly for Mercedes’ margins, the model will be the first to be built using its modular “skateboard” system.

“The moment of truth will be when they have a platform for electrification that can be used on a larger scale for more models,” said Deka’s Mr Speich. “BMW is far ahead, and VW as well.”

Daimler’s dilemma is that it must quickly gain ground in the electric race while satisfying investors used to handouts — until recently it was Europe’s sixth-biggest dividend payer.

“If Daimler was a private company, they would say: ‘no dividends, we’re doubling down on investments, and in three years’ time we will have a better business,” said Angus Tweedie, an analyst at Citi.

Contrary to many industry projections, Mr Källenius is adamant the move to electric vehicles will not destroy Daimler’s position in the car economy, and that the business will “end up with at least the same healthy margins” it has in the past.

“Now comes the heavy lifting, the transformation of the auto industry,” he said. “That’s something that is going to be with us for this whole decade.”

Additional reporting by Peter Campbell in London

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