BMW – Mercedes-Benz: Bitter fight for market share

By Chan Quan Min

BMW and Mercedes-Benz are natural rivals; both dominate the luxury car market and fight for the same moneyed customers. Last year for the first time ever, BMW outsold Mercedes. Can Mercedes regain its lead with a revamped product line?

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BMW and Mercedes-Benz face off in stiff competition across the world and Malaysia is no different. Last year, however, BMW managed to pull into the lead, selling more cars than any other luxury automaker in Malaysia.

A relative newcomer to the local luxury car market, BMW has grown from strength to strength in the past decade to topple Mercedes-Benz from pole position.

Proving that its win was not fleeting, BMW has managed to cling on to its hard-won market leading position for close to two years now.

Mercedes not to be outdone has taken the fight to the showrooms. The Stuttgart automaker, in an attempt to regain its crown has gone on the offensive, introducing a revamped product line this year.

There is no evidence of a price war yet between the two rivals outside of the C-segment or hatchback models. But there might be a possibility both automakers will have to resort to sacrificing their market share and fat profit margins in competing with up-and-coming Audi.

But make no mistake about it, the luxury car business is extremely profitable with both BMW and Mercedes posting excellent profits on the back of very healthy margins.

Still extremely profitable

Both BMW Malaysia Sdn Bhd and Mercedes-Benz Malaysia Sdn Bhd, locally incorporated but foreign controlled distributors for their respective brands continue to be extremely profitable, despite the new competitive environment.

BMW Malaysia is a 51:49 joint venture between Germany-based BMW AG and Sime Darby Motors. Mercedes-Benz Malaysia was also formed with a similar 51:49 ownership structure between German multinational Daimler AG and local partner Cycle & Carriage Bintang.

Despite an increasingly crowded luxury car market, the overall pie continues to grow larger, if historical trends persist, ensuring that everyone can get their fill.

In filings to the Companies Commission of Malaysia (CCM), BMW Malaysia and Mercedes-Benz Malaysia reported healthy, industry leading profits.

For the 2012 financial year BMW Malaysia reported revenue slightly lower than that of Mercedes-Benz despite higher vehicle sales, a reflection of the lower average selling prices of BMW vehicles compared to Mercedes-Benz.

BMW Malaysia’s reported revenue was just over RM1.6 billion, up 20% from the year before. However, pre-tax profit did not see the same improvement. Instead, during the same period profit fell 16% to RM242.3 million.

Regardless, BMW Malaysia’s pre-tax profit margin, based on a crude calculation of pre-tax profit against revenue, in 2012 was an industry topping 15% despite it being down seven percentage points from last year’s 22%.

Mercedes-Benz Malaysia’s margins were not quite as high, but still above that of mass-market automakers, at just above 9% and about one percentage point higher than the previous year.

The reported income statement for Mercedes-Benz Malaysia obtained from CCM showed a 10% increase in revenue from the previous year to RM1.9 billion while profit improved 30% from the previous year to RM177.1 million.

Both companies have assets exceeding liabilities and healthy cash reserves, according to their respective balance sheets.

Mercedes-Benz Malaysia reported assets totalling RM938.9 million and shareholder equity of RM279 million.

BMW Malaysia posted in its balance sheet, assets amounting to RM847.9 million and shareholder equity of RM484.7 million.

The healthy profit margins of the two entrenched rivals could give BMW and Mercedes some room to try new pricing strategies. This has not happened yet with their popular models but both companies have this year introduced new compact hatchbacks below the RM200,000 mark.

In the months and years to come, both BMW and Mercedes could do with watching their backs. While the two leading luxury automakers were embroiled in a battle for market leadership, Audi has slowly snuck up on them.

Sales of Audi cars have seen a meteoric rise since 2009, more than tripling from a low base of 435 units to touch 1,414 units for the year ending December 2012.

Reports suggest Audi is becoming a significant player in the luxury car space on the introduction of popular new models at attractive price points. Case in point the Audi A6 hybrid.

We continue to dissect the luxury car market tomorrow and introduce new players into the mix.

Big bucks from selling big cars

Yesterday, part one of this series discussed the comparatively larger profit margins enjoyed by luxury car manufacturers compared to the rest of the industry.

The market for high-end automobiles is certainly lucrative, and especially more so in a growing emerging market such as Malaysia. Over the past five years, the number of new passenger vehicles registered has grown on average approximately 4.8% per annum.

But the market for luxury vehicles has expanded even quicker still – in the double digits. Last year just under 16,400 luxury passenger vehicles were registered for use on Malaysian streets up 12% from the previous year, according to Malaysian Automotive Association (MAA) data compiled by KiniBiz.

The two years preceding 2012 saw even larger gains in luxury car sales of between 23% and 30% per annum.

This has no doubt led to an upward creep in market share for luxury cars. In  2009 only 1.87% of all newly registered passenger vehicles were luxury cars, KiniBiz noted, based on the sales total of seven popular makes. Last year this figure was much higher, at 2.96%.

The bulk of all this growth in luxury car sales has gone BMW’s way. Between 2009 and a peak in the second-half of 2012, sales of BMW vehicles went up 74%. Mercedes-Benz, the only other significant competitor to BMW grew only 52% during the same four-year period.

BMW’s stellar growth, surprisingly consistent in the past few years except for a small dip in sales during the second-half of 2011 culminated in BMW overtaking Mercedes-Benz as the top-selling luxury car make early last year.

According to MAA’s half-yearly market reports, BMW toppled the market leader in luxury vehicles, Mercedes-Benz in the first-half of 2012 and has maintained that lead ever since.

Earlier gains reversed this year

While the previous five years up to end-2012 saw luxury car makes consolidate and build up sales volume, the first-half of 2013 reversed all that.

BMW passenger vehicle sales fell 8.7% in the first-half of this year from the preceding half-year. For Mercedes-Benz the slump in sales was particularly severe, undoing five years of sales growth after shedding almost a quarter in new car registrations.

Weak consumer sentiment in the lead-up and immediately after the thirteenth general election in May had a significant impact on passenger vehicle sales. MAA’s first-half market review for 2013 reported slow growth for the first six months of the year citing macroeconomic factors.

Luxury automakers, however, should not despair. Latest sales data from the industry has confirmed sales of luxury vehicles have bounced back in the third-quarter.

Third-quarter year to date numbers sourced from company management showed an improvement in sales in the third-quarter. In terms of market share, BMW continued to take the lead ahead of Mercedes.

BMW Malaysia reported sales of 4,938 vehicles up to September while Mercedes-Benz Malaysia reported sales of 3,762 for the same nine-month period.

Mercedes-Benz faces the music; no longer number one

Mercedes-Benz has long been recognised as the nation’s foremost luxury marque. The automaker has had a storied history in Malaysia as the manufacturer of solidly built vehicles ranging from lorries to buses to sedans.

The Mercedes three-point star was first seen in this country since before independence, in 1951. And for the most part, the automaker has held pole position as the top selling luxury marque.

But since the start of 2012, and for perhaps the first time ever, Mercedes-Benz was no longer the most popular luxury car marque. That title has gone to BMW, a relative newcomer in the Malaysian market.

Roland Folger of Mercedes-Benz Malaysia, ever the good sport, admitted the loss of Mercedes’ leading position under his watch to bitter rival BMW as anticipated given the pace of BMW’s sales growth. But he was clearly not content being in second place, believing Mercedes will soon regain leadership.

Folger, the president and CEO of Mercedes-Benz Malaysia spoke to KiniBiz late July.

“At the end of last year, we did not meet our targets. Not the ones we had set for ourselves, frankly speaking,” said Folger, reluctant to reveal what those targets were.

When pressed further, Folger came clean: “One of our targets, of course, was to remain number one.”

“And we notice that, because since we are not number one anymore, everyone started talking about it,” Folger said, adding that he asked himself: “Why didn’t anyone ask me who was number one when we were number one?”

Folger managed to find humour even in losing the race. “In this discussion of who’s really market leader, of course you can look at this month by month, or a cut-off at the end of the year.”

“But we look at how many cars we have sold since we came to this country; 40,000 cars in total,” he boasted, and rightly so. “We still have more cars on the road.”

“The industry is basically defined by product life cycles,” Folger said. “So when we look at (2012), it was something that really didn’t come as a big surprise because… it’s a change of guard, the former models are being phased out and the new models are coming in.”

Folger was referring to an ongoing refresh of Mercedes’ product range this year, particularly the popular E-Class and S-Class models, and the introduction of a revamped A-Class hatchback.

Looking ahead, Folger said he recognised that there were gaps in Mercedes’ current product range. In response, Mercedes-Benz Malaysia would step up the introduction of new models to match the offerings of competitors.

Folger is challenged by competition not threatened by it. “I cherish competition. It keeps us on our toes,” he said.

Prospective car buyers in the market for a luxury vehicle today face a dazzling array of choices not available several years ago. Luxury automakers were slow to introduce hatchback and SUV (sport utility vehicles) models, corresponding to the C-segment and J-segment in industry speak, but are now embracing diverse product ranges.

Not to be left behind, Mercedes revealed mid-year a flashy new A-Class ‘hot hatch’ to extend its product range to a new market segment and price range.

Competition in the luxury compact segment is heating up with the introduction of revamped hatchback models by both BMW and Mercedes-Benz, joining offerings by other up-and-coming luxury automakers. The fourth and final part of this series explores this battle of the ‘hot hatch’.

BMW holds on to its lead

KiniBiz also managed to secure an exclusive interview with the victor, Gerhard Pils of BMW Malaysia. When asked what his thoughts were on overtaking Mercedes-Benz in 2012 as the top selling luxury marque, Pils made immediately clear his appreciation for his staff and business partners.

“We are proud and of course glad because (our market leader position) confirms our hard work and the dedication of the team and dealer network here. It’s a strong indication we have the right solution for our customers,” Pils said.

Pils was eager to share his own management philosophy, quoting his mentor Joachim Milberg, a former CEO of BMW AG and present chairman of the supervisory board.

“Our strategy is of course a growth strategy, we want to be more and more successful and (my) strategy is always based upon five pillars,” said Pils.

Pils credited the five-pillar strategy, or 5P as coined by Milberg for the success of BMW internationally.

“The first ‘P’ is for ‘product’. We have to have the product engineered and designed by the right ‘people’ in all stages of the production. And we have to have the right ‘passion’ within those people,” he said.

“We also have to have the right ‘processes’, to engineer, to manufacture and to distribute here. And of course all that at the very end is to yield – and this is important – the right ‘profits’. Otherwise we could not invest in new products, engineering and production,” he added.

Of note, an additional ‘P’, standing for ‘premium’ was the crux of Milberg’s premium brand strategy. Milberg was CEO of BMW AG from 1998 to 2006 and was credited with distinguishing the brand from other makes by concentrating solely on the premium segment.

Milberg’s premium brand strategy brought about an increase in profits of more than 400% in 2002 compared to 1999, despite the downturn in both Germany and the US, according to reports.

Within this in mind, Pils hoped to continue to grow from strength to strength. Pils proudly announced BMW’s leading share of 39% of the premium segment as unprecedented in the marque’s history in this country and he appeared determined to hold on to it.

Yesterday: The dynamics at the high end

Tomorrow: No more a duopoly for luxury cars