Value Column von Hans Peter Schupp

18 JUNE 2024

Källenius won’t destroy Mercedes either

Hans Peter Schupp, managing partner of Fidecum and portfolio manager of the Contrarian Value Euroland Fund (ISIN: LU0370217092) on the risks that Mercedes is taking in the transition to electromobility and why Renault is the better alternative

Another shock for the car industry! The EU Commission has announced that from July 4, cars produced in China will be subject to hefty tariffs of up to 38 percent – in addition to the 10 percent already due. However, the satisfaction with which EPP leader Manfred Weber (CSU) took note of the decision communicated by Commission President Ursula von der Leyen to protect German car manufacturers has infuriated many car managers. There is now a threat of retaliatory measures from China, which would hit German car manufacturers much harder than the import barriers for vehicles produced in China. Well meant is not always well done!

Investors assessed the situation in exactly the same way as the car manufacturers. The share price losses following the announcement spoke a clear language. While the shares of BMW, Mercedes, Porsche and Volkswagen fell, the shares of the world’s largest e-car manufacturer BYD rose by up to 9 percent at times.

A bitter blow for Mercedes – again

For Mercedes in particular, it is once again a bitter blow. But the Stuttgart-based company has seen it all before. Hardly any other company has survived as much change in the last 40 years as Mercedes. In 1926, Daimler-Motoren-Gesellschaft and Benz & Cie. formed Daimler-Benz AG under pressure from the banks. This was no love match. The company prospered, but failed with its take over plans of BMW due to resistance from small shareholders and BMW dealers.

A transformation from a profitable car manufacturer to a mobility group was then planned under the aegis of Edzard Reuter (CEO 1987-1995). He wanted to turn the automobile company Daimler-Benz into an „integrated technology group“ and bought MTU, Dornier, AEG and Messerschmitt-Bölkow-Blohm as well as a stake in Fokker. However, almost all of his investments resulted in a total loss.

Unsuccessful „Wedding in Heaven“ and „Bullshit Castle“

This was followed by Jürgen Schrempp (CEO 1995-2006) with his „marriage in heaven“. In a nutshell, his philosophy was „The sun should never set on the Daimler empire“. But also: German management must be paid American salaries. He implemented the latter very successfully. His merger with Chrysler and the investment in Mitsubishi Motors cost the Group billions again. Dieter Zetsche, who was initially derided as a „cowboy“, did a very good job from 2006 to 2019. He focused on the automotive business and quietly streamlined the company. The corporate headquarters in Stuttgart-Möhringen, which his predecessor referred to as the „Bullshit Castle“, was closed. Mercedes – or Daimler AG at the time – was a very profitable car manufacturer under his leadership.

A belly landing for Mercedes EQS, EQE – and Ola Källenius“

Since 2019, the current boss Ola Källenius has now been in charge. He first created a new name and a new logo. Daimler AG became the Mercedes Group and Mercedes Benz LKW became Daimler Truck AG. This confusion of names alone has secured his place in the company’s genealogy. He floated the lower-margin business with heavy trucks and buses on the stock exchange in order to focus „100 percent“ on the business with luxury cars and vans of the brand with the three-pointed star. Now every customer can see at a glance in the annual report how overpriced the cars are. And: his goal was to sell nothing but electric cars by the end of the decade. A bold step, because until then the Mercedes S-Class was one of the most profitable cars in the world. Like a game of roulette „rien ne va plus“, Källenius, the former board member for e-mobility who had been promoted to CEO, bet everything on this card. Initially with great success. The new flagship became the EQS. But the result was: „A belly landing for Mercedes EQS, EQE – and Ola Källenius“ was the headline in Auto Motor Sport, one of the leading German car magazines. And financial magazine Manager Magazin followed up with „Back on track – Mercedes is heading back into the world of combustion engines“. The fact that the EU is now spitting in the Stuttgart company’s China soup is hardly worth mentioning.

Renault: Cleverly positioned and highly profitable

Against this background, we are glad to be invested in Renault. The Group continues to focus very cleverly on combustion engines, knowing well that only CO2 emission-free engines will be permitted in the EU from 2035 onwards. A joint venture was founded with the Chinese manufacturer Geely to develop and produce hybrid and combustion drives in the joint company „Horse Powertrain Ltd.“ and, if necessary, to shut down the business silently. The high research and development expenditure for e-mobility is also being carried out by a subsidiary called Ampere. The original idea was to float this company on the stock market. Due to good cash flow forecasts from the traditional automotive business, the IPO was no longer necessary.

This shows once again that our investment approach, which has been tried and tested for more than 25 years, involves looking for undervalued companies with understandable business potential. We invest like an entrepreneur looking for business opportunities, even if this means going against the prevailing market trend. And Mercedes does not currently fit into this philosophy.

Translation for convenience only!

About the author: Hans Peter Schupp is a managing partner of Fidecum AG und the portfolio manager of the Contrarian Value Euroland Fund.