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Global Economy

With pure luxury to more profit

Entering the luxury class – that's what the Mercedes driver should do when he opens the door. The company wants to focus on the luxury business in the future. There is more money to be made in this area as the profit margins are significantly higher. Margin instead of mass is the strategy of Mercedes boss Ola Källenius. However, the future of Mercedes Benz should also be fully electric – "where market conditions permit," according to the company.

More rich people, more luxury cars

The annual report shows that luxury cars sell well. In 2021, Mercedes saw a sales record with the top-end vehicles, which include Mercedes-Maybach, AMG, G-Class, S-Class, GLS and EQS.

The company cites the increasing number of wealthy people worldwide as a reason for focusing on the luxury segment. "This also increases our potential sales opportunities – this applies not only to Asia, but also to Europe and the USA. We have anchored in our strategy that we want to grow profitably by realigning the portfolio with a focus on the three product categories of top-end luxury , Core Luxury and Entry Luxury", the company told tagesschau.de.

The focus is on growth in the high-margin Top-End Luxury and Core Luxury segments. More than 75 percent of the investments are planned for the top two segments. "In addition, this segment is more resilient and crisis-proof in historical comparison. This is how we protect our company and our jobs – even in challenging times," it says.

Expand luxury, thin out entry-level models

The top category, the "Top-End Luxury", includes Maybach, AMG and the G-Class. A category below in the "Core Luxury" is located among other things, the E-Class. And in the entry-level category, which is now called "Entry Luxury", the focus should be on four model variants – with a higher positioning than today. The company is keeping a low profile when it comes to the price of the entry-level model in the future. It will provide information on the pricing of future vehicles in due course.

The current entry-level models include the A and B classes. According to the "Handelsblatt", both classes are to be discontinued in the next few years. When asked by tagesschau.de, Mercedes Benz neither wanted to confirm nor deny this and said: "We will provide information about our future products in due course." Traffic expert Stefan Bratzel from the Center of Automotive Management (CAM) considers this step likely: "If you follow a luxury strategy, you also have to increase the entry-level segment, otherwise you'll have volume models again. The A and B-Class belong to the entry-level segment."

Most recently, there was concern at the Rastatt site as to how things would continue there. Among other things, the A and B classes roll off the assembly line there. At the end of June, Mercedes Benz announced that although the number of body variants would be reduced, the sales volume and plant capacity utilization would remain unchanged. From the year after next, the factory in Rastatt will be building models based on a new electric platform. So the location remains for the time being, as does the luxury strategy.

The profit margin on luxury cars is bigger

"At the moment, the luxury strategy has great advantages. Big cars bring big profits," says traffic expert Bratzel. "The currently scarce components can be distributed to a few vehicles, and the demand is high. In addition, rising raw material prices and costs for innovations in the higher price segment can easily be passed on to the customer."

"BMW, Mercedes and Audi, all three are positioning themselves in the direction of 'luxury'," says Stefan Reindl from the Institute for the Automotive Industry. For these premium manufacturers, small and micro cars are not attractive in terms of margins. "This is especially true for battery electric vehicles. The batteries are expensive – when they are installed in small cars, the profit margin is much smaller than in luxury vehicles."

Other manufacturers continue to rely on small cars

But there are manufacturers who go a different way and continue to rely on small cars: including VW, Toyota, Renault or the car company Stellantis. "There will certainly also be offers for inexpensive vehicles in the micro and small car segment in the future. However, the supplier market will consolidate significantly, because large quantities are necessary for the commitment in these market segments to pay off for the individual manufacturers," says Reindl. "You can see that, for example, with the Stellantis car group, which owns 14 brands, including Fiat, Citroen and Peugeot. Here, vehicle platforms and battery modules can be manufactured in large quantities for the different brands. So in the future there will be fewer manufacturers, but they will dominate the market in terms of quantities clearly dominate."

In addition, the standardization of the products in these market segments will become even clearer than in the past. "There could be a 'technological thinning out' of small and micro cars – precisely because of the currently still expensive electrification of drives in the direction of pure electric cars. In other words, cars to get from A to B without frills," says Reindl.

"Socially Disastrous"

For Weert Canzler from the Berlin Science Center for Social Research, a luxury strategy is absolutely understandable from a business point of view. "Societally it's disastrous. With the focus on the luxury segment, you don't have to focus on the major social challenges. The focus is on the luxury horse and no longer on small, economical cars. There are gigantic amounts of Electricity is needed, insane resources are used for batteries," criticizes Canzler.

This raises the question of how to achieve electrification on a large scale. And: "How does the connection with renewable energies look like?" According to Canzler, this is a great opportunity from an economic point of view. "And that won't be addressed if I only focus on the luxury segment."

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