Mercedes Weathers Diesel Blow to Ease Strains of Electric Shift

Daimler AG showed signs of weathering the car industry’s diesel crisis as Mercedes-Benz withstood a consumer and government backlash over the models’ emissions to keep earnings on track for a “significant” rise this year.

Mercedes’s return on sales was roughly on par with a year ago, excluding 453 million euros ($535 million) in one-time charges for air-bag recalls and upgrades of more than 3 million diesel vehicles to resolve concerns about pollution from the fuel. The resilient margins help ease pressure on the world’s biggest maker of luxury vehicles as it pushes ahead with a 10 billion-euro project to release 10 electric autos by 2022.

“Mercedes remains the fastest growing and most confident of the big German premium brands,” Max Warburton, an analyst at Sanford C. Bernstein Ltd., said in a note.

Daimler and other European carmakers are struggling with the fallout from Volkswagen AG’s diesel-emissions cheating that emerged two years ago. Mercedes has been tainted by the scandal as German authorities take steps to reduce pollution from the technology, which is a key profit driver and important for meeting increasingly stringent carbon dioxide-emissions regulations. The financial hit from the demand reversal has been less severe than feared.

“In absolute terms, we’re selling more diesel cars,” Chief Financial Officer Bodo Uebber said Friday on a call with reporters. “In relative terms, there is a change to the downside, but it’s far less for us than what’s been reported for the overall market.”

In Germany, diesel car sales dropped 21 percent during September to a share of 36 percent, as gasoline car registrations rose 8.7 percent, according to the country’s motor vehicle office.
Spending Surge

Daimler, which is also the world’s biggest maker of commercial vehicles, reported a 14 percent decline in group earnings before interest and taxes to 3.46 billion euros for the third quarter, but still stuck to its expectation of “significantly” boosting earnings, revenue and vehicle deliveries for the year.

Daimler shares were essentially steady at 68.90 euros at 1:55 p.m. in Frankfurt trading. The stock has declined 2.6 percent this year. Investor concerns about mastering the biggest automotive-technology shift in decades have pushed Daimler, Volkswagen and BMW AG to the bottom four in Germany’s benchmark DAX Index in terms of valuation multiples.

In addition to upgrading diesel cars, Mercedes is also offering a cash-for-clunkers program to get older models using the fuel off the road and ease the risk of driving bans. Concerns about air quality in cities like Paris and Munich have also slowed the market for used cars, sparking worries about resale values and the knock-on effect on automakers’ sizable portfolios of leased vehicles. Uebber said that residual values haven’t dropped much.

The threat of a quickening decline in diesel demand has prompted Daimler and other German carmakers to accelerate development of electric cars, which will initially be a drag on profit. That ramp-up contributed to a 21 percent jump in Daimler’s third-quarter research and development spending to 2.3 billion euros, according to the company’s earnings statement.

Investments in 2017 will be “significantly” more than the record 7.9 billion-euro outlay for new technology last year, Daimler said. The company is looking to partly offset those costs and the weaker margins from battery-powered vehicles by slashing 4 billion euros from spending by 2025.

Mercedes is struggling to maintain its recent pace of rapid growth after an unprecedented expansion of its lineup. Burdened by the recall charges, the division’s earnings tumbled 22 percent to 2.15 billion euros in the third quarter as sales gains slowed to 7.9 percent from 11.2 percent a year ago. The brand’s challenges are set to increase as BMW steps up its own expansion with plans for the three-row X7 SUV and the glitzy 8-Series coupe.

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