To admit it immediately: I am a Daimler Benz victim twice over. I have driven an M-class SUV for quite a few, desperate years and suffered with the car a series of unbelievable faults and ailments, as my wife had with an A-series Mercedes Benz.
Her complaints – mysteriously opening doors and windows even when the car was parked – and multiple faults with the ‘semi-automatic’ clutch were trifle though. My car had come with a ‘louvered’ sunroof which started to leak early on to still flood my car with every rainfall a dozen repairs later, for which I was even charged once the warranty had expired. I had to fix the leaks with duct tape eventually, incapacitating the roof forever.
The lift of the rear seats broke so many times that I thought it wise to access the auxiliary seats in the back through the boot of the car. The electrical engine of the passenger seat was faulty as soon as it came from repair, making it impossible to move any of the seat components most of the time.
The engine block was originally delivered with a crack, spraying a mist of oil over the hot parts of the engine until the car and its passengers disappeared under a cloud of dense smoke. And the windscreen wipers stubbornly refused to work, no matter how often I had their electric motors changed.
Mercedes Benz’s authorised London dealership at the time, Allan Day, had a repairman racket going where I was given the choice to either wait many weeks for an appointment or pay the mechanic for a quick visit after hours so long as I paid in cash. This was during the reign of CEO Jurgen Schrempp, the first true messenger of ‘shareholder value’ in Germany.
Maximising the profits at the expense of labour, suppliers, manufacturing standards and customers was considered a virtue by Schrempp, to be expanded globally. Until Daimler Benz’s ambitions for world dominion ended in total value destruction for its shareholders too.
In 1998, Daimler spent an unbelievable $36 billion for the US carmaker Chrysler in a ‘merger of equals’ without a real concept how to profitably combine a sloppy, US-mass-market producer with a luxury car producer. Nine years later the US investment was so convincingly loss-making that Daimler had to ‘sell’ Chrysler to private equity powerhouse Cerberus Capital, paying another $650 million on top of the total loss of its initial investment when Chrysler went bust in 2009.
It must have added insult to injury that FIAT, Chrysler’s current owner, transformed the US carmaker within only a few years into a vastly profitable money spinner.
But I have suffered as a Daimler shareholder too. A couple of years back, when it became apparent that interest rates will never go up again, I tried to better my lot by buying a fixed interest instrument which promised 10 per cent per annum over the course of two years. This exorbitant yield was made possible with an embedded put-option: Instead of receiving my capital back it would make me the recipient of Daimler shares should stock drop below a certain level, €52 in that case, before expiry.
At the time shares were priced at €70 and a fall that steep seemed implausible and even a good buying opportunity should such levels ever be reached. I had also happily acquired a substantial amount of Daimler shares independent of my interest-bearing bet – in the firm yet unsubstantiated conviction that if anyone could master the challenges of the 21st century car industry it would be Mercedes Benz.
Marketing skills, brand prestige and manufacturing excellence would take care of all future road blocks. After all, Dieter Zetsche, the meticulously operating CEO, and his prudent successor Ola Kaellenius had no responsibility whatsoever for our shabby family cars.
I decided that I will stick with my Daimler shares. They might never recover
When the probability of perhaps hitting the strike price rather sooner than later became too high to be ignored I sold my shares, if at a loss. A little later I was awarded many more of them at €52, as promised. They stand at €45 today, less than half of their peak in May 2015.
After a recall of 744,000 cars because of faulty sunroofs (albeit not of my car), successive profit warnings linked to Daimler’s own ‘Dieselgate’, which necessitated provision for lengthy lawsuits and many more callbacks, and costly ventures into ‘new mobility’, which proved not more profitable than Uber, it is far from clear if we have seen the end of share price destruction.
I am not alone. Institutional investors like asset managers, index tracking ETFs, banks and pension funds hold 55 per cent of Daimler shares. Strategic investors like Kuwait’s State fund own almost 30 per cent, among them China’s carmakers BAIC and Geely – with almost 10 per cent Daimler’s biggest individual shareholder.
The share price has zigzagged over the years and has today reached the same level as in 1996. The adage that shares will win out over the long term is out of sync with Daimler. At a price/earnings ratio of 12 and a price-to-book value of 0.8, shares of Daimler AG are remarkably cheap.
They pay a dividend of more than seven per cent, which compensates for quite a lot of share price battering. With a market capitalisation of $49.4 billion, revenues of $167 billion and a net income of $7.6 billion (2018 - probably only half of that in 2019) Daimler is still a respectable enterprise.
What should worry is the wafer-thin profit margin of less than four per cent. Half of Daimler’s profits stem from sales of its Mercedes Benz passenger cars, still the preeminent luxury brand. How Mercedes will cope with steep European emission reduction targets and a cooling Chinese consumer market remains to be seen.
The permanent threat of Trump tariffs hangs over the European car industry too. The biggest unknown though is which direction cars will take in the decades to come. Car sharing, ride hailing, autonomous driving, mobility apps, traffic and environmental policies could promote or diminish the role of automobile manufactures, necessitating investments vastly exceeding the financial firepower of even the biggest car makers, even when such investments may never pay off, like Daimler’s and BMW’s all-inclusive, short-term car rental operations DriveNow and Car2Go.
Switching towards battery-driven cars is the main avenue now taken by governments and followed by most manufacturers. This might change if the roll-out of Toyota’s hydrogen-driven cars proves successful. If electric vehicles were here to stay and charging networks are meaningfully enlarged to promise accelerated sales growth for EVs, Daimler will be late to the party. It will then have to compete, or collaborate, with Chinese battery manufacturers and start-ups like Tesla which against all odds is building cars now in Germany and China. Tesla is starting to fulfil once elusive production quotas and has managed for the first time last year to produce profitably. Tesla’s cars charge faster and drive longer on a single charge than traditional carmakers’, which struggle to bridge Tesla’s head start, no one more than Daimler.
Last year I sold my M430 in London. It was admittedly not only a shabbily built car; it was also an enormous gas-guzzler, consuming 15 to 17 litres per 100km. I still liked the car. After 20 years I had got used to it. The leather upholstery had a nice glow, the engine was powerful and there was a lot of space.
I was forced to sell it by law. The car was too old to be admitted into London’s congestion charge zone and more expensive to park than newer cars. I bought a new Toyota hybrid instead, again with two more auxiliary seats in the back. The environment did not rejoice.
As I stay only a few weeks per year in the UK, the annual mileage on my car is minuscule – less than 1,500km. In contrast, the carbon footprint producing my new car is so big that I could have driven my old car another 20 years with considerably less impact on the environment than any EV, even when fuelled exclusively by wind power.
I miss my old car. I therefore decided that I will stick with my Daimler shares. They might never recover. Or they might prove that even an old dog can learn new tricks.
Andreas Weitzer is an independent journalist based in Malta. He reports on the economy, politics and finance. The purpose of his column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice or advice on the buying and selling of financial products.
andreas weitzer@timesofmalta.com