China EVs/Mercedes: pain of export push will extend beyond mass market

European auto executives who attended the recent Shanghai motor show found it a sobering experience. The event underlined how quickly China’s manufacturers of electric vehicles have improved their models. This poses challenges to higher-end European manufacturers such as Mercedes.

Of late, the strong brand and a value-over-volume strategy of the German business has worked wonders. Its share price is up 39 per cent since bottoming last July.

First-quarter results provided pleasant surprises last month. Despite input cost inflation, pricing mix and profitability held up well. Operating profits for the industrial business, which makes cars and vans, rose to €5.5bn, more than a tenth above analyst expectations. All divisions did well.

But like most western automakers, Mercedes has an exposed flank in the form of electric vehicles, which represented 15 per cent of its car sales in 2022. Tesla has been slashing its prices. The Mercedes EQB and EQA luxury EV models, which cost over €55,000, are now the priciest comparable models of any European producer including BMW and Volkswagen, according to Bernstein.

The business hopes to push upmarket with new models. Yet Ferrari, Porsche and BMW have not given up on growth, points out Philippe Houchois at Jefferies. All of them are rolling out EV models of their own.

That could leave Mercedes’ version of affordable luxury falling between two stools. Tesla’s price cuts this year hint at what could come. And it is seen as a premium marque. If Tesla cedes its pricing buffer, will Mercedes need to do the same?

Perhaps not. Optimists note that the luxury sub-brands of Toyota and Nissan have done relatively little damage to Mercedes and BMW in the US.

An EVs export push from China is inevitable, however. Everyone knows it will hit European volume producers. The subtler point is that Mercedes may be in the line of fire too. The resilience of its brand will be tested again. The company needs to speed up its electrification.