Mercedes-Benz in early October announced that Nicholas Speeks, who now runs its Japanese operations, will become head of the company’s China business. Speeks steps into a challenging role, with Mercedes having become a laggard in the world’s largest auto market. In order to avoid underperforming in a market that will see more than 30 percent growth next year, Mercedes needs a strategic re-think..
Once one of the better performing foreign auto brands in China, Mercedes has seen its sales sputter there in 2012. Through the first eight months of the year, Mercedes’ China sales only grew 6.2 percent to 127,700 vehicles, compared with BMW’s 30 percent growth to 192,800 vehicles. The numbers do not indicate the full extent of Mercedes struggles as many dealers have been discounting 10-20 percent across all models. BMW has been discounting, too, but more in the 5-10 percent range.
Most of Mercedes problems have been self-inflicted (Mercedes’ China office declined to comment for this article). The German automaker failed to release new models at the right price points or have a cohesive brand positioning to account for shifts in Chinese consumer buying behavior. Mercedes’ first mistake was not keeping up with ultra-wealthy Chinese demands for sportier cars that they can drive themselves rather than rely on chauffeurs. Its flagship S-Series, which sells for as high as $400,000 in China because of high import tariffs, has lost its cachet, seen by many Chinese as a car for older people. That’s a problem in a country where the average millionaire is in his or her early forties, more than a decade younger than in Western markets.
“Mercedes is good if you want a driver,” one Chinese billionaire told me, “but I prefer driving myself now because it is fun.” Recently, the billionaire has bought a Ferrari, a Porsche and a BMW and is thinking about a Bentley. He won’t consider a Mercedes, which he sees as both old and cheap. Luxury buyers like him see too many Mercedes A and B class models and brick-like Viano minivans on the roads. These sell for a tenth of the S600 and cheapen the brand image.(Disclosure: My firm does not work for any of these carmakers).
In the past, Mercedes execs didn’t have to worry about reaching buyers like this tycoon. Even just five years ago, a large percentage of luxury cars went to companies, which bought them to shuttle clients and executives around. But as individual wealth creation has soared since 2007, many of the new purchases are by executives themselves. These young, wealthy Chinese want sportier rides. Driving a powerful car is the new sign of status, not sitting in the backseat of one. Buyers of the S-Class five years ago are now choosing to buy cars like Porsche Panamera, Bentley and Maserati , which only entered in the market in the last few years. Sales in China for Maserati doubled last year and China is now its second largest market. Porsche saw its sales grow 38 percent in the first half of 2012 and expects China to replace the U.S. as its largest market in 2013.
There are still wealthy Chinese who want to be driven. However, they are going up-market and buying Rolls-Royce rather than Mercedes. Rolls-Royce is poised to see record sales in 2012 due in large part to demand from China where its $1.2 million Year of the Dragon Phantom sold out.
Mercedes also missed the trend that wealthy Chinese prefer high-end SUVs over sedans and failed to release an SUV that is competitive against the Porsche Cayenne and BMW X5. In interviews with wealthy Chinese, my firm the China Market Research Group found that the majority preferred SUVs over sedans because they like the muscular feel they get when driving them and because they like to have a perch above the multi-lane traffic jams that plague most Chinese cities. Wealthy Chinese told us their most-wanted auto purchases were the Range Rover line, as well as BMW X5 and Porsche Cayenne. The cheapest BMW X5 sells in China for about $150,000 – and like most SUVs, it has fatter margins than sedans.
Demand is so strong for high-end SUVs that Porsche has a six-month waiting list to get a Cayenne and is barely discounting if at all. Mercedes rolled out the GLK SUV at the 2008 Beijing auto show but wealthy Chinese considered it too low-end at only $50,000. The M-Class, an older luxury SUV, is too boxy and plain without the handling ability of its rivals. Mercedes needs to roll-out a high-end, more muscular SUV.
Finally, Mercedes’ dealer network suffers from the worst satisfaction scores of BMW, Audi, Maserati and Porsche based on customer satisfaction surveys and mystery shopping we completed. Common complaints were that Mercedes salesmen were “unhelpful”, “unknowledgable” and “unprepared” to deal with customer questions.
Mercedes can certainly rebound in China. It still has strong brand resonance and it is likely that in the next quarter it will benefit from Chinese boycotting Japanese brands like Lexus and Infiniti. If Mercedes can release new models at different price points yet maintain a cohesive brand positioning it has a chance to return to the top ranks of luxury automakers in the world’s biggest auto market.
