LISBON, Portugal - Mercedes-Benz may keep A-class sales from falling by introducing a stretched version. But the A-class still won't make a profit during its first product cycle, a top DaimlerChrysler executive says.
More than E100 million was spent in development and factory modifications to produce a longer A-class. To add 170mm to the wheelbase behind the B-pillar, the tooling had to be changed for the floorpan, body side panels, rear doors, and roof section.
The investment is supposed to pay off in additional sales that will keep volume at about 200,000 units per year during the second half of the A-class' life cycle. But the additional volume won't make the model profitable over its entire first life cycle from its launch in 1998 to its phase-out in 2003 or 2004.
'If you take into account all the costs for research, development, production and marketing of a new model, you never reach profitability in the first life cycle,' said Jurgen Hubbert, the DaimlerChrysler board member responsible for Mercedes-Benz passenger cars and Smart. 'This applies to the A-class as well as to the Smart. And it also applied to the first generation [the former 190 series] of what is now our highly profitable C-class.'
While life cycle profitability on a fully amortized basis has not been reached yet with either the A-class or the Smart, Hubbert said DaimlerChrysler makes an operating profit on the A-class.
'We do have a positive contribution to our [operating] results on each car sold,' he said. 'But the profit contribution of an A-class is, obviously, not as high as other models in our product lineup.'
As it does with every model, Mercedes-Benz tries to improve profitability by tackling production costs annually and by setting ambitious cost-cutting targets for a mid-cycle face-lift.
'With the A-class face-lift, we set these goals,' Hubbert said. 'We not only achieved them, we did better than expected.'
But Hubbert declined to give specifics. 'We implemented a special group to look for improvement in every detail. We also integrated our suppliers into the process,' he said. 'Now we are a lot better than before.'
Total cost reduction achieved with the face-lift is 'at least 10 percent,' said a D/C source. The executive, who did not want to be named, said many cost-sensitive changes were made in the interior.
For example, the leather trim of the middle console of the current A-class is expensive to produce. 'We introduced that as a quick fix of complaints that the car was lacking the expected premium atmosphere in the interior,' the source said. The new-model A-class replaces the leather with aluminum or wood trim. 'These materials deliver a classy, premium touch, but are less expensive than leather,' the source said.
The profitability gap in a vehicle's first life cycle is not manufacturer specific, Hubbert said.
'It applies to everybody in the industry,' he said. 'I know of only one exception. Our Mercedes-Benz M-class [manufactured in Tuscaloosa, Alabama, USA] has already reached profitability. It was positive from the beginning.'
What was different about the M-class? 'Less investment, less production cost, [lower] labor cost in the USA, and big incentives from the state of Alabama,' Hubbert said.
'Also, we had no cost for building a new brand, as we needed to do with the Smart,' he said. 'And we had no cost for building credibility for entering a new segment the Mercedes brand is not naturally associated with, as was the case with the A-class.'