x Abu Dhabi, UAESunday 21 January 2018

Reality check shakes complacent Daimler

Aabar's decision to sell its most of its stake is a serious blow for the German car maker, but it does open the door for fresh investment and a change of attitude.

Analysts in Germany believe Aabar's decision to unload part of its stake in Daimler was a sign of waning confidence in the car maker. Sascha Schuermann / AFP
Analysts in Germany believe Aabar's decision to unload part of its stake in Daimler was a sign of waning confidence in the car maker. Sascha Schuermann / AFP

The sale by Aabar Investments of part of its stake in Daimler has come at a bad time for the German maker of premium cars, which has been underperforming its rivals and could now become more vulnerable to a takeover.

Aabar announced this year that it had reduced its stake from 9 to 3 per cent, and German media reported that the company was considering a complete withdrawal from Daimler and from its stakes in the Mercedes Formula One team.

The reports came as a surprise and are a blow to Daimler's management, which is already under fire from shareholders, because the group has fallen behind its main competitors, BMW and the Volkswagen luxury subsidiary Audi in sales and earnings.

The Abu Dhabi sovereign wealth fund bought the stake for €1.95 billion (Dh9.49bn) in March 2009, providing the maker of Mercedes-Benz cars with a much-needed cash injection at the height of the global economic crisis.

At the time, the deal was widely regarded as a long-term investment that would provide Daimler with a reliable anchor shareholder. Even the German government had welcomed it as a "positive signal" for the economy.

Aabar had said as recently as last October that it remained "fully committed to its position in Daimler and continues to be supportive of Daimler's management and strategy".

The sale makes commercial sense because at the current share price of about €40, the stake is worth about €4bn, so Aabar will have approximately doubled the value of its investment in three years. But analysts in Germany are also speculating that the move reflects waning confidence in Daimler's strategy.

"Aabar have evidently lost a bit of faith or they have better alternatives," Jürgen Pieper, an auto analyst at Bankhaus Metzler in Frankfurt, told The National. "In the last three or four years, BMW and Audi have been far more impressive.

"Daimler hasn't been efficient enough, they've been doing too little with their market position and they are growing a bit more slowly than the others. The causes are technology and a lack of motivation in the workforce. I think Audi and BMW have had more momentum in recent years."

He continued: "Theoretically, Daimler could be a takeover candidate because its shares are widely distributed. They've only got Kuwait left as a large investor, with 6.9 per cent. Unlike VW, BMW, Fiat, Peugeot and Ford, they've got no big shareholder so they are vulnerable."

Even if no one takes over Daimler, the loss of a major shareholder could let in new, more demanding investors bent on pushing for change at the company.

Some shareholders have been calling on the management to sell Daimler's trucks business to focus on luxury cars.

That pressure could now grow, and Dieter Zetsche, the chief executive, could be in a weaker position to resist it.

Daimler's rivals are not just selling more cars, they are also working more profitably. Audi achieved a 12.1 per cent return on sales last year, with BMW chalking up 11.8 per cent.

Mercedes achieved just 9 per cent, even though the average price of its models is highest among the three.

Part of the reason is that Daimler's component purchasing costs are more than 10 per cent higher than those of BMW and Audi.

Shareholders have complained that Daimler's stock underperformed BMW shares by 20 per cent last year. "Daimler is good, but the competitors are better," Michael Kunert, representing a group of small shareholders, told the company's annual general meeting this month.

For decades, Mercedes was the world's biggest-selling premium car brand, but is now in third place behind Audi, which overtook it last year, and BMW, which is at the top.

All three have been riding a surge in demand for luxury brands in China, where Mr Zetsche said last week he expects the premium car market to grow by 15 to 20 per cent this year - a significant slowdown from last year's 40 per cent growth.

Mr Zetsche is demanding a lot of patience from shareholders, saying Daimler will not be able to reclaim the global number one spot on profitability and sales until 2020. Even that distant forecast has met with scepticism because BMW and Audi have been raising their own targets.

Audi said last month that it planned to achieve sales of 1.5 million vehicles before 2015, while BMW said its sales would surpass 2 million in 2016 - four years earlier than previously planned.

Nevertheless, analysts welcome Daimler realising that it has a problem and is starting to tackle it.

The rollout of new compact models by 2015, and the launch of the new version of its A series later this year should invigorate growth.

"Daimler has strong potential and will cope with the withdrawal of Aabar," says Ferdinand Dudenhöffer, a professor of business management and the director of the Center for Automotive Research at the University of Duisburg-Essen. "When the new A class comes out this year I'm convinced Mercedes will overtake Audi."

Prof Dudenhöffer says that given the size of the Chinese market, a large Chinese investor will be a suitable replacement for Aabar.

Mr Pieper also sees signs of improvement. "I think the attitude at Daimler is changing for the better. They spent a long time thinking they were the best and saw no need to make much of an effort to improve," he says. "But in the last three or four months we've been hearing the management acknowledge that it has fallen behind the competition. That realisation is the most important precondition for change."


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