Daimler Cutting Costs As It Braces For Less-Profitable Electrified EQ and Smart Lineups

Daimler is aiming to cut production costs 4 billion euros ($4.8 billion) by 2025 to compensate for electric cars having much lower profitability under current market conditions.

While speaking at the company’s investor day in Sindelfingen, Germany, on Monday, CEO Dieter Zetsche and Frank Lindenberg, vice president of finance and controlling Mercedes-Benz Cars, explained the business model for making EV sales profitable in the next few years.

Even with production costs cut this much, EVs are only expected to achieve half the profit margins of its equivalent vehicles running off of internal combustion engines, they said.

The company also clarified its vehicle electrification strategy. By 2022, there will be an electric version of every Mercedes model sold. That will bring the total up to at least 50 electric or hybrid models, they said.

Daimler’s Smart brand will be converting over to electric only. The Smart brand will stop selling vehicles with any internal combustion engine variants in 2020.

The German automaker’s Mercedes-Benz division will be leading the new EQ electric car subbrand, which will be the flagship for the new corporate EV strategy. The first EQ models will share the same platform with the Mercedes-Benz GLC crossover SUV and will be produced at the same factory.

The company is making about 1,000 GLCs a day, and will adjust the volume toward more EQs to meet demand. That won’t be happening overnight, with the automaker concerned about maintaining solid profits.

“In the beginning of the cycle we believe that we will have to face a significantly lower margin. For some vehicles half of the margin of the vehicles they replace,” Lindenberg said.

“We are still aiming for a 10 percent return on sales, but have to be prepared for a kind of transition, with a corridor of 8 to 10 percent,” he said.

About half of the cost cuts will come from fixed costs, research and development, and capital expenditures. The rest will come from cutting production costs.

The CEO said Daimler is considering outsourcing a lot of the EV components to cut costs.

“Our vertical integration could be reduced significantly,” Zetsche said. “In-house production is almost irrelevant to the customer.”

For now, the main challenge has been the high cost of batteries. The automaker has been investing heavily in battery factories in Germany and China with the long-term goal of bringing down the costs and making EVs more profitable.

The company expects that the purchasing costs of EVs will be comparable and competitive with traditional ICE cars by 2025. That will facilitate the transition over to EVs at a much faster rate, Daimler said.

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The EQ lineup and other Daimler electric models could become more profitable through new technologies and public interest in autonomous vehicles and new, related mobility services. Customers may be willing to pay more for these convenient features.

“You will be able to also one day have a computer chauffeur,” head of research and development Ola Kaellenius said during the investor meeting.



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