Published on December 9th, 2020 | by Benjamin Schulz0
Is the Future of Mercedes Either Tesla or LVMH ?
December 9th, 2020 by Benjamin Schulz
In an article from earlier this year, we speculated that “Mercedes and BMW need to adopt the Tesla tech platform” to survive. Since then, the stock prices of both Daimler (up from 37.4€ to 57.9€ billion) and BMW (up from 54.7€ to 73.53€ billion) have improved, but they were again outperformed by Tesla (236.8€ to 529.7€). In other words, they are doing even worse relatively speaking then they were a few months ago.
Other pure next-gen (EV) companies like Nio and Xpeng underline this development — since they’re younger, their sustainability remains to be seen though.
This pattern is likely going to persist. Both Mercedes and BMW have outdated products, an outdated tech platform, a lot of stranded assets, and have nowhere near the resources of their competition to ever have any hope of catching up again. It’s like a horse-drawn carriage trying to compete with a Ford F-150. A nice upholstery isn’t going to make up for the difference in a tech race.
To dive deeper, let’s look at one of these companies. Focusing on Mercedes (but the same goes for BMW), the company offers enormous brand reach, customer loyalty, volume, story, passion for excellence, and potential once it successfully establishes a way to transition into the new age. Mercedes was traditionally a manufacturer of engines, and a producer of cars, and that’s how the company justified its margins — and if the company can’t produce value and competitive advantage in the manufacturing of engines, it has to re-invent itself.
Mercedes CEO Ola Källenius already signaled that he understands the company can’t compete on tech any more and is basically giving up on the core development of the electric age, like batteries and self-driving tech, while focussing on brand and luxury image. Which is fine — there is no need to develop a platform which won’t be able to compete with the best. So, on which hopefully competitive tech platform can the next Mercedes generation be built?
There seem to be 5 possible scenarios:
- One option is for the Chinese owners (Geely is currently somewhere around 10% ownership) to keep increasing their share, eventually putting Mercedes on their own tech platform. This is a scenario the German HQ and many customers won’t find particularly enticing. Also, it decreases the willingness of the German state to bail out Mercedes by whatever means at any moment — which right now is still guaranteed.
- The brand could be bought by a luxury conglomerate like LVMH, which can certainly run a purely electric global brand, knows how to sustain a luxury image, and could outsource all tech development and maintenance to third parties. This would probably end up with Mercedes on the Volkswagen tech platform. LVMH is valued at *5 revenue, so it seems quite tempting from the LVMH perspective to get a hold on Mercedes passenger cars making 80–90 billion euros of revenue per year, even if they sacrifice a considerable portion of this. On a good day, this could double the market cap of LVMH.
- The brand could be bought by Tesla and transitioned to the Tesla platform. Through this, Tesla gains another 2.2m car sales in similar segments per year — ultimately, after transition costs, producing a very similar margin. Although it would come with a lot of headache, it would substantially increase the premium car revenue and market cap of Tesla. Those numbers are obviously very speculative, but I’d estimate it would add +250 billion euros over 5 years in market cap and cost less. And save enormous amounts of CO2.
- Mercedes cuts a very savvy deal — a cross investment to get onto the Tesla tech platform while retaining somewhat independent ownership of its brand and becoming a minority shareholder in Tesla. Something like Tesla owning 25% of Mercedes, and Mercedes owning 5% of Tesla — maybe with a nice loan from the regional state increasing it to 10% ownership in Tesla. Think of the old example of running MacOS (or iOS) while not being an Apple phone or computer. This would have been a very feasible and intelligent option, especially going back a few years when Mercedes could have become a 25% owner of Tesla. Likely, this won’t happen, as it hasn’t happened yet — for a lack of imagination on the Mercedes side. Since Tesla by now won’t and doesn’t need to compromise on development and doesn’t need the minority shareholder capital (quite the opposite), it’s soon too late for this option. Although, it’s not impossible, as Volkswagen and even Ford show that, with capital, existing factories (like the Zwickau Volkswagen plant and the Ford Cologne plant) can be re-purposed. This option is our favourite — as it would leave the complexity to transition fast with Mercedes while allowing them on the world’s most modern tech platform. Also important: this would lower the cost of capital for Mercedes again — as they’d remove the tech risk.
- Or Mercedes begins to build on the Volkswagen MEB platform like Ford does — essentially becoming an independent Audi. It’s difficult to see how the brand could stay independent in the long term like this, though.
As an activist, I believe Scenario 3 or 4 could bring the world a little faster to using less CO2, giving us more electrified cars sooner — and each of those options creates a beautiful example of new and old world cooperation. Nobody really profits from Mercedes’ failed attempts to build compelling next-gen cars in large volumes. And Elon Musk mentioned Tesla is open to non-hostile takeovers of other automakers in a recent interview.
I do believe we’re going to end up with LVMH, though, by 2024 (okay, this is provocative), since Tesla likely won’t find it attractive in the near term to take on the strong company culture of a legacy carmaker like Mercedes or BMW and prefers to build its own infrastructure at a very high speed. If Tesla wants another seemingly insurmountable challenge, and Mercedes wants to be a leader in the 3rd century of cars, cooperating on tech and getting creative with the ownership structure would be an exciting option.
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