New model Mercedes is make or break for Daimler

The German carmaker drove the next version of its flagship Mercedes off the forecourt on May 15. Much depends on the success of the new S class. The luxury sedan might be an amazing car, but shifts in market tastes and sales problems in China may undermine its success.

Daimler launched its new Mercedes S class on Wednesday. Much depends on the luxury sedan. Its predecessor generated 5.6 percent of car sales but – according to a Breakingviews estimate – created at least twice as much in terms of operating profit. If the new S class is as successful as earlier versions, Daimler’s profit could be boosted by several hundred million euros in 2014.

The current incarnation of the Mercedes S class, sold since 2005, has reached the end of the road. The car sells in the only segment of the market where Mercedes is still ahead of BMW and Audi but sales in 2012 were 25 percent below peak years. Overall, the company trails its rivals in terms of total unit sales and profitability. If the new S class flops, Daimler’s goal to regain leadership in the premium segment by 2020 will become a pipe dream.

Initial reviews of the new S class by motor journalists are positive. Mercedes is ranked as the most innovative brand in 2012 by the Center of Automotive Management, and its models are stuffed with safety- and comfort-enhancing new technology.

If historic patterns hold, S class sales should rise to about 110,000 units by 2014. The worry is that the popularity of large SUVs has dented the market for luxury sedans. Even more problematic is that Daimler has failed to nail a key market for the S class: China. A patchwork distribution network has hobbled sales. A revamp of the structure, kicked off in December 2012, has yet to convince: in the first quarter, Daimler’s sales in China fell while rivals continued to grow. In a letter to its Chinese dealers leaked to a trade journal a few weeks ago, Daimler’s top management snubbed openly accusing them of sloth.

Daimler could do with some good news. In April, it took down a profit outlook given only three months earlier. Daimler’s new van, the Citan, received the worst crash test results in the company’s history. The Mercedes S class may be the spur the company needs and if it performs the shares, now trading on a 8.5 times forward earnings multiple, could prove reasonably priced. If it goes the other way, Daimler may find itself needing an altogether more comprehensive overhaul.

This article was initially  published as a Reuters Breakingviews comment on 14 May 2013.

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