Pulling Mercedes Out of a Chinese Ditch

February 4, 2014 Leave a comment

Pulling Mercedes Out of a Chinese Ditch

ABHEEK BHATTACHARYA

Updated Feb. 2, 2014 7:03 p.m. ET

Mercedes-Benz may be one of the world’s most recognizable car brands, but it has had trouble getting noticed in China. Now, Mercedes is moving to change that.

Much will depend on how the German brand’s China partner makes use of new capital. China’s state-owned BAIC Motor plans later this year to raise about $2 billion in a Hong Kong share sale, according to The Wall Street Journal. Daimler, DAI.XE -0.59% which owns the Mercedes brand, manufactures and markets luxury cars through a joint venture with BAIC and owns 12% of the Chinese auto company.

Daimler has much to repair in China. Until recently, it was selling cars through two distribution networks that competed against one another. Its after-sales service scored poorly in surveys by J.D. Power, while analysts say the cars were too richly priced and then had to be heavily discounted. On top of it all, Mercedes is often viewed as an old person’s car, unlike the more fashionable BMW BMW.XE 0.00% or Audi, NSU.XE -0.19%says Macquarie’s Janet Lewis.

Mercedes sales were essentially flat in 2012 and increased only half as fast as rivals in 2013, otherwise a blockbuster year for Chinese autos. Its share of the luxury market slumped to 15.5% in 2013 from 20.3% in 2011, as Audi and BMW tightened their grip, according to LMC Automotive.

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To change its stuffy image, Mercedes is set to launch 13 new or refurbished models in the next two years, including a sedan and a compact SUV that should attract younger consumers.

BAIC’s IPO also will help. The Chinese car maker will use the share-sale proceeds to shore up its balance sheet, says a person familiar with the matter.

This may help BAIC put more money into the Daimler joint venture. That means localizing more production to bring down costs and boost Mercedes’s China margins, which are about half those of BMW.

The good thing about coming from behind is that there is upside for Daimler investors. China’s contribution to Daimler’s overall revenue was just 9.4% in 2012. BMW generated double that.

Even getting halfway to its competitors’ exposure to China will give Daimler investors a better ride.

 

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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