Industry Trend Analysis - Daimler Plant Investment To Cement Mercedes Dominance - APR 2017


BMI View: Daimler ' s decision to construct a new passenger car plant in Russia will allow the company to strengthen its already dominant grip on the Russian premium vehicle market. The company already enjoys a strong market share in the space and its ability to avoid high import costs will allow it to compete even stronger in the coming years as the Russian market recovers.

Daimler announced in February that it will construct its first passenger car assembly plant in Russia, aiming to come online. The company will spend EUR250mn (USD264mn) on a new plant in Moscow, producing Mercedes-Benz branded passenger cars at a capacity of up to 20,000 units per year with the plant performing body work, painting and assembly operations. We had previously expected a similar announcement (see ' Daimler's Russian Investment To Leverage Returning Sales Growth ' , June 29 2016) and we now highlight the strong footing on which Mercedes-Benz will have in the Russian market.

Mercedes-Benz To Capitalize On Popularity
Luxury Light Vehicle Market Shares By Brand, %
*M-B includes Smart, BMW includes MINI. Source: AEB, BMI

Daimler's Mercedes-Benz subsidiary will be in a favorable position to capitalize from its already strong market base as it begins its production operations in 2019. Despite not having any domestic vehicle manufacturing based in the Russian market, Mercedes-Benz (including its Smart brand) has dominated the premium market with sales of 37,584 units of Mercedes-Benz and Smart cars in 2016, accounting for 27.1% of all premium brand sales. In contrast, Mercedes' key global competitors BMW and Audi lag behind at 20.7% and 14.9% market shares respectively despite boasting at least some local assembly operations. This is, therefore, a strong testament to the strength of brand loyalty to Mercedes in the country and its competitive advantage. With the addition of local assembly the company will be able to further this advantage by circumventing Russia's high duties and recycling fees on imported vehicles. This will allowing them to capitalize on its brand's popularity even further by offering more competitively priced products assembled locally.

Luxury On Its Way Up
Light Vehicle Sales By Brand Group, Units (LHS) & % Share (RHS)
Source: AEB, BMI

The company will also be able to ride on the strength of the premium market itself. Over the last nine years, premium light vehicle sales as a share of total light vehicle sales have consistently risen ( see chart above), reaching 9.7% in 2016, up from 4.2% in 2008. Russia's highest income earners have shown resilience in their spending during Russia's economic downturn which has hurt lower income groups harder and therefore hit sales of cheaper volume brands harder. This is a positive sign that Mercedes will benefit from a supportive and resilient customer base as it expands its operations further.

Broader Market Recovery A Further Support
Russia - Passenger Car Sales Forecast, Units
e/f = BMI estimate/forecast. Source: AEB/BMI

Finally we highlight that broader market recovery will also help Mercedes in expanding new vehicle sales. We forecast passenger car sales to begin recovering in 2017 growing 5% as the Russian real GDP growth turns positive to 1.4%. As recovery takes hold over the remainder of our 2017-2021 forecast period and consumers savings and real earnings stabilise we forecast average annual passenger car sales growth of 6.7% through to 2021 (see chart above).