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Daimler: Challenges to China Growth Plans

Stocks in this article: DAI

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage. The opinions expressed are those of the author and do not represent the views of TheStreet or its management.



NEW YORK ( Trefis ) -- Daimler (DAI), based in Stuttgart, Germany, makes the luxurious Mercedes cars. It also manufactures Freightliner trucks and other kinds of vehicles, making it the second-largest automaker in Germany after Volkswagen. In addition to automobiles, Daimler manufactures buses and provides financial services through its Daimler Financial Services arm.

Daimler markets its cars globally under the brands Mercedes-Benz, Smart and Maybach. Daimler competes globally with automakers like BMW , GM (GM), Ford (F) , Audi, Honda (HMC), Toyota (TM) and others.

China is currently the third-biggest market for Daimler, following Germany and the U.S. Daimler is betting big on the continued growth in Chinese market but several factors indicate that continued growth in Chinese market at its current rate may be unsustainable.

We have a price estimate of $63.50, which is around 14% below the current market price.

The Chinese automotive market has witnessed a decade of nearly non-stop annual sales growth of 30% or more as rising income levels fueled by a fast-growing economy prompted a surge in car purchases. China surpassed Japan to become the world's No. 2 vehicle market in 2006 and then surpassed the United States to become the biggest automobile market in 2009.

Thanks to strong government investment and incentive programs, China's vehicles market has maintained its strong growth momentum through 2009 and 2010. China Association of Automobile Manufacturers (CAAM) reported that automakers in China built and sold more cars in 2010 than in any other country annually in history. In total, they delivered over 18 million new vehicles, 32% more than 2009.

Daimler's main competitors are BMW, Volkswagen and, depending on the market segment, Fiat, Ford, General Motors, PSA, Renault, Tata Motors and Toyota. In China, Daimler works through its venture Beijing Benz Automotive Co Ltd (BBAC), with Beiqi Foton (a subsidiary of Beijing Automotive Industry Holding Co., BAIC) to build Auman trucks, and with BYD to develop electric vehicle technology.

In the first three quarters of 2010, Daimler tallied more than 101,350 units of Mercedes-Benz cars in China to represent a record year-on-year increase of 129%. Daimler is now producing two models in its venture Beijing Benz Automotive Co Ltd (BBAC), the E-Class and the C-Class. They ranked as the top volume leaders for Mercedes-Benz.

Investing in China's Future

Towards the end of 2010, Mr. Dieter Zetsche, CEO of Daimler AG, unveiled plans to invest 3 billion euros in China by 2015. This figure is three times what Daimler had invested in China before this announcement. Daimler hopes to use this investment to enhance its richest and most diverse product portfolio in the luxury sector, and sell more than 300,000 cars annually in China by 2015.

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